Financial authorities in South Korea are set this month to grant investment-banking licenses to local equity firms and allow short-term corporate lending, but concerns are emerging as that it might undermine the firms’ financial stability.
The authorities are reportedly making final touches to their three-month screening process to grant licenses as part of the push to foster big investment banks. Investment banks in excess of 4 trillion won ($3.5 billion) in equity capital will be eligible for short-term corporate lending, such as by commercial paper issuance.
The business approval is expected to give four firms -- Mirae Asset Daewoo, NH Investment & Securities, KB Securities and Korea Investment & Securities – the chance to boost their capital by some 34 trillion won by 2020, according to an estimate by a local credit appraiser Korea Ratings.
However, some experts claimed short-term debt instruments might “add pressure on the firms’ financial leverage.”
Ahn Na-young, a chief researcher at Korea Ratings, wrote in a report on Sept. 26 that the firms would mainly buy corporate bonds and finance real estate projects, considered relatively high-risk, with the fresh capital.
“The high-risk investment would increase at a fast rate, outpacing that of revenue, (after the start of the business),” Ahn wrote. “(This) will put pressure on the firms’ credit level in the short and mid-term.”
Local securities firms have been increasingly turning to IB businesses for years as their revenue from stock brokerage commission fees gradually declined.
The new short-term financing business will trigger a “paradigm shift” in the Korean market, Ahn added.
The Financial Services Commission has said it strengthened measures on the large equity firms’ capital stability, citing a new regulation on the minimum proportion of liquid assets to debt and an increase in the allowance for uncollectible debts to the level of commercial banks.
Moreover, the volume of large equity firms’ working capital far outweighs that of liabilities, Song Byung-kwan, an official at the FSC, told The Korea Herald, calling it “a buffer.” The FSC also required the firms to set up an internal system to control the risk, he added.
Securities firms awaiting FSC approval say new business will diversify the channel for capital inflow.
“Previously a securities firm conducted IB business such as mergers and acquisitions within limited capital and leverage,” an industry source told The Korea Herald.
Financial authorities have been seeking to nurture homegrown giant investment banks by helping local securities firms broaden their activities.
To allow financial institutions with capital worth more than 4 trillion won to offer underwriting services to corporates, the FSC revised in May enforcement decrees of the Financial Investment Services and Capital Markets Act and their regulations on financial investment business.
In the beginning, five firms had applied for the certification, including Samsung Securities, the fourth-largest in net equity.
Samsung failed to meet the eligibility, as its largest shareholder Samsung Life Insurance stood in the way.
Holding a 29.4 percent stake in Samsung Securities, Samsung Life Insurance is 0.06 percent owned by Lee Jae-yong, vice chairman of Samsung Electronics, who has been on trial for bribery, resulting in the financial authorities’ decision to halt the process for Samsung Securities’ approval on Aug. 7. Lee was sentenced to five years in prison later in August. The insurer was also slapped with disciplinary measures in March on unpaid suicide benefits.
The other four firms have been pushing due process to gain the FSC’s approval. Mirae Asset Daewoo and Korea Investment & Securities have created a new team dedicated to short-term bonds, while in NH Investment & Securities and KB Securities the existing department dealing with investment banking business will take charge of the underwriting services.
Local securities firms with net assets of over 8 trillion won are allowed to deal with investment management accounts, but none of the securities firms in Korea meet the criteria.
Mirae Asset Daewoo had the largest net equity, 7.15 trillion won as of the second quarter, while the fifth-largest Korea Investment & Securities held 4.22 trillion won, just over the criteria for the short-term bond business.
This came after the nation’s top financial regulatory body in 2013 granted securities firms with capital of over 3 trillion won permission to extend credit to corporations in a bid to encourage mergers and acquisitions.
By Son Ji-hyoung