Why prime broking ambitions may cost Korea's big five
The five largest Korean securities companies have indicated that they will apply to their regulator for approval to participate in the creation of onshore prime broking.
This forms part of a broader effort in which securities houses are redefining themselves as Western-style investment banks.
An amendment to the 2009 Capital Market Consolidation Act allows domestic securities companies to engage in investment-banking activity as early as June next year.
To do so requires paid-up capital of W3 trillion ($2.7 billion). This amendment is not yet law, but is expected to be passed by the National Assembly by the end of this year.
As securities firms turn themselves into investment banks, one of the most attractive aspects of the transformation is expected to be prime broking.
The government is cheer-leading this move of providing finance and custody to hedge funds, since it regards establishing an onshore industry as key both to making Seoul an important financial centre, as well as boosting domestic financial players’ cross-border ambitions.
As a result, Korea’s biggest securities firms are now in the midst of capital-raising exercises by offering new shares to the public.
Deals are expected to come from Daewoo Securities, Hyundai Securities, Korea Investment & Securities, Samsung Securities (which has previously spoken to AsianInvestor about its prime broking intentions) and Woori Investment & Securities.
The biggest capital increase is expected to come from Daewoo Securities, which is reportedly raising its capital base from $2.4 billion to $3.7 billion. By going well above regulatory requirements, Daewoo is signalling its intent to become the dominant player in servicing hedge funds.
Woori and Hyundai are said to be raising around $570 million each for their securities arms, while Samsung is raising $370 million and Korea Investment & Securities is planning to issue new stock worth $720 million.
Second-tier brokerages such as Daishin Securities, Hana Daetoo Securities, Mirae Asset Securities and Shinhan Investment, are not expected to increase their capital size. Rather they will exploit smaller niches.
Hana Daetoo, for example, has taken the lead in providing advisory services to local institutional investors regarding overseas hedge funds. However, these players will lack the ability to become fully fledged investment banks.
On the other hand, the onshore hedge-fund industry remains theoretical, and it is likely to take years for it to generate the kind of revenues required to justify huge capital increases.
Either these new investment banks are going to find new, untapped and sizeable sources of revenue, or their profitability is going to suffer, possibly for a number of years.