As the domestic stock market contracts, securities firms are moving to expand their investment banking (IB) businesses on the back of capital strength. While small and midsize securities firms are entering the commercial paper market one after another and competing to raise funds, large full-service investment firms are increasing IB funding through integrated managed accounts (IMA). Analysts say Korea Investment & Securities Co., which has taken the lead in the IMA market, needs to both raise its operating return and prove asset soundness to keep its top position.
According to the financial investment industry on the 19th, IMA operators such as Korea Investment, NH Investment & Securities, and Mirae Asset Securities have recently been launching IMA products one after another. Korea Investment & Securities Co. last week raised a 200 billion won IMA No. 7 product. Since launching its first IMA product in Dec. last year, it has introduced six products through Aug. this year, and IMA commitments have increased to about 2.8 trillion won. NH Investment & Securities also launched a short-term IMA product, “N2 IMA1 short-term No. 1,” in a 100 billion won offering on the 29th of last month and closed it early. As of the end of June, NH Investment & Securities’ IMA commitments were 514 billion won.
An IMA is a product in which a securities firm pools customer funds, invests in IB assets such as corporate loans, acquisition finance, and corporate bonds, and pays returns based on performance. Commercial paper is a short-term financial product issued by a securities firm on its own credit that pays principal and the agreed return at maturity. Both products share the feature of raising customer funds for use as IB funding. Under current rules, the combined funding limit for IMAs and commercial paper is up to 300% of equity capital.
Securities firms are expanding funding tools such as IMAs and commercial paper to increase resources for IB. In the securities industry, the scope of business and funding limits vary by equity size and licensing requirements. Capital expansion not only boosts loss-absorbing capacity but also leads to IB expansion and additional revenue generation.
In particular, the scale of equity supply determines competitiveness in the IB unit. Shin Seung-hwan, an analyst at NICE Investors Service, said, “The IB segment of the domestic securities industry has grown around relatively profitable, standardized businesses such as arranging project finance (PF),” and added, “The more standardized the business, the greater the impact of capital strength—being able to supply large-scale funds for underwriting and credit facilities—on competitiveness.”
In fact, securities firms’ IMA and commercial paper funding has been increasing. According to the Korea Financial Investment Association’s electronic disclosure system, the combined IMA trust balances of the three securities firms—Korea Investment, NH Investment & Securities, and Mirae Asset Securities—stood at 3.4898 trillion won as of the end of June, about triple the 1.1542 trillion won at the end of Dec. last year. Over the same period, commercial paper outstanding was 55.9291 trillion won, up about 9% from 51.2743 trillion won at the end of Dec. last year.
As stock trading slows, the importance of IB is growing. When stock trading declines, brokerage revenue centered on commission income can fall, so securities firms need to diversify revenue sources such as IB. According to the Korea Securities Depository (KSD), the average daily securities settlement amount in the third quarter this year was 35.4 trillion won. That is down 16.5% from 42.4 trillion won in the second quarter.
Cho A-hae, an analyst at Meritz Securities, said, “With the contraction in the domestic average daily transaction amount, brokerage profit will be sluggish,” adding, “However, securities firms that have secured relatively stable capital strength through commercial paper and IMA licenses can enhance profit competitiveness through IB, venture capital, and proprietary investments.”
The continued entry of small and midsize securities firms into the commercial paper market is also cited as a reason for large firms’ expansion of IMA businesses. Following Samsung Securities and Meritz Securities receiving commercial paper licenses from the Financial Services Commission, Kyobo, Hanwha Investment & Securities, and Woori Investment & Securities are also seeking to meet licensing requirements by boosting equity capital and other measures. As competition in the commercial paper market intensifies, the yields that must be offered to investors rise, increasing securities firms’ operating burden.
For Korea Investment & Securities Co. to maintain its lead in the IMA market, the key is to raise not only funding volume but also operating returns. Because it must pay principal and returns to customers, returns generated from operating assets need to exceed funding and operating costs to produce real profit.
Korea Investment & Securities Co. is currently operating IMAs in relatively stable assets such as corporate loans, corporate bonds, and acquisition finance. In contrast, competitor Mirae Asset Securities is investing in a variety of IB assets, including corporate loans and acquisition finance, as well as unlisted corporations and venture capital (VC). Korea Investment & Securities Co.’s second-quarter return this year is known to be 1.1% relative to net worth, while Mirae Asset Securities’ is around 3.8%.
Beyond profitability, the soundness of operating assets and actual recovery performance are also factors to check. Because IMA licensing and product launches only recently got into full swing, long-term operating records and cases of investment recovery have not been sufficiently accumulated. Analyst Yoon said, “Since IMAs received concentrated approvals starting at the end of last year, operating track records and recovery results have not yet been sufficiently accumulated,” adding, “Rather than judging competitive position solely by initial funding growth or short-term profit contribution, what matters are net profitability after funding costs, the maturity structure and soundness of assets and liabilities, and actual recovery performance.”
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