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S&P cuts outlook on Mirae Asset Securities, Korea Investment & Securities

By Choi Ji-won

Published : March 8, 2024 - 17:20

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The headquarters of Standard and Poor's in New York. (Getty Images) The headquarters of Standard and Poor's in New York. (Getty Images)

S&P Global Ratings on Thursday lowered the outlook for two major Korean asset management firms, Mirae Asset Securities and Korea Investment & Securities, from "stable" to "negative."

The agency kept their long-term issuer credit ratings at BBB and short-term ratings at A-2.

The negative outlook reflects the agency's concern that property risks could strain the asset quality and profitability of Korean securities firms over the next one to two years.

"Headwinds in the domestic and overseas property markets will exert downward pressure on Korean securities firms," noted S&P.

S&P highlighted significant credit risks from overseas alternative investments, particularly in real estate markets in the US and Europe, where office vacancy rates have recently surged.

The agency estimated Korean securities firms have about 30 percent of their total shareholders' equity invested in risky overseas markets, especially in the US and Europe.

Domestic real estate project financing within Korea adds more pressure, according to S&P. Securities firms' exposure to real estate project financing mainly comes from guarantees on short-term asset-backed investment instruments. The companies could face underlying credit and liquidity risks if these projects fail and the instruments are not rolled over.

S&P predicted that the Korean housing market, which experienced a roughly 10 percent decline in prices, is unlikely to recover significantly in the near future. Given the rapid price increases in prior years amid low interest rates, the government is unlikely to implement measures to boost the market at this stage, the agency added.

Potential compensation expenses arising from the possible mis-selling of equity-linked securities may weigh on profitability, it added. Local regulators are currently investigating the issue following heavy losses for retail investors.

For Korea Investment & Securities, S&P warned of a further negative outlook due to additional property risks stemming from other subsidiaries of the company's parent group, Korea Investment Holdings.

S&P revealed that Korea Investment & Securities reported a return on average assets of about 0.8 percent in preliminary financial results last year, similar to the prior year but lower than its 1.6 percent average in 2019 to 2021. Mirae Asset Securities' return on average assets dropped to 0.3 percent last year from 0.7 percent in 2022 and 1 percent in 2021.

The agency stated it may lower the ratings of the two companies if property market risks further escalate, materially damaging the asset quality and profitability of Korean securities firms.