M&A wave to sweep S. Korean brokerage sector

South Korea's brokerages, faced with a stagnant run on the local stock market and falling profitability, are set to witness a series of mergers and acquisitions bringing seismic change to the sector's landscape, industry watchers said Friday.

This week, Woori Investment & Securities Co., the country's leading brokerage by asset, received bids from potential buyers, and a slew of other brokerages, including major players Hyundai Securities Co. and KDB-Daewoo Securities Co., are also expected to look for buyers in the coming months, as their owners who are saddled with mounting debts are seeking to sell them to improve their financial status.

"Many agree that an overhaul of the industry is in the offing," said Jo Sung-kyong, an analyst at KTB Investment & Securities. "The sale of Woori Investment may trigger such a move."

The industry is being pressed to regroup, as too many small and money-losing brokerages trigger increased competitions and thus eat into their profitability over the past decade.

"In a nutshell, the industry is so crowded and many players are losing money," said Kang Jong-man, a researcher at the Korea Institute of Finance. "That's why consolidation is much needed for the industry."

   Currently, there are 62 brokerage houses operating in the country, a sharp rise from 36 in 1997. And the number of employees in the sector rose to some 42,000 from about 34,000 in 2000, according to Kang. "That's so crowded given its domestic size," Kang said, adding that the number of brokerages should be reduced to around 30.

The sector's crowdedness has led to a sharp drop in their profitability as they cut brokerage fees to woo more retail investors.

South Korean brokerage houses heavily depend on retail brokerage fees, which chalk up about half of their income, but over the past few years, stock-trading volume has been on the decline.

Data compiled by the Financial Services Commission (FSC), the country's financial regulator, show that the average commission rate stood at 0.093 percent in 2012, sharply falling from 0.099 percent in 2010, 0.12 percent in 2008 and 0.21 percent in 2000.

Their return on equity also dropped to 1.2 percent in the second quarter of the year, from 3 percent in 2012, 7.7 percent in 2010 and 17 percent in 2000.

Their profitability also sharply deteriorated, according to the data. The combined net income of the 62 brokerage firms reached 252 billion won (US$238 million) in the April-September period, down 62.6 percent from a year earlier. They close their books on March 31.

Of the tallied firms, only 36 players went in the black during the cited period, logging a combined net profit of 443.7 billion.

Adding to their worsening balance sheets is the bearish run on the local stock market. The country's key stock index, the KOSPI, closed at 1,975.65 points on Thursday, little changed from the 2,031.10 tallied in the first trading session of this year.

The turnover on the main bourse came to 958.7 trillion won through Tuesday this year, the lowest since the 848.4 trillion won tallied in 2006. Last year's stock turnover reached 1,196 trillion won.

The stock turnover had stayed above the 1,000 trillion won mark since 2007, reaching 1,410 trillion won in 2010 and 1,702 trillion won in 2011.

The daily turnover needs to hover above the 6 trillion won level to help keep them afloat, according to market watchers. But this year's daily share turnover ranged from 3 trillion won to 5 trillion won.

"Retail investors are breaking away from the stock market as their balance sheets are not in good condition due to rising apartment rental costs," said Lim Soo-kyun, an analyst at Samsung Securities. "Also, a fall in share turnover becomes a drag on their profitabilities."

   Analysts said the consolidation drive for the industry also may get a further boost from government's efforts to facilitate mergers among players. This week, the FSC unveiled a set of measures to encourage local brokerage firms to grow as an investment bank that can compete globally.

The FSC's steps this time are not new. It rolled out a similar version in 2011 to help create what it calls "the Korean version of Goldman Sachs," in an ambitious step to becoming a financial hub in Asia.

Under the measures, a brokerage house would be allowed to apply for an investment banking license should its merger or acquisition raise its equity capital by 500 billion won to more than 2.5 trillion won. Previously, the threshold for the license was 3 trillion won. Also, a securities firm that makes a certain level of M&A would be eligible to enter new businesses such as running pension fund trusts or private equity funds, the regulator said.

Currently, the country's top five brokerage houses by asset -- Woori, KDB-Daewoo Securities, Samsung Securities Co., Korea Investment & Securities Co., and Hyundai Securities -- were designated as an investment bank in October this year.

Some analysts said the eased regulations, which take effect next year, may serve as a catalyst to facilitate much awaited consolidation moves but would have a limited impact on the industry.

"I am somewhat skeptical about whether such measures would prod players to move into that direction (of mergers and acquisitions), because the industry's situation is so bad," said Chung Kil-won, an analyst at KDB-Daewoo Securities.

Analysts said conditions for consolidation appear to be perfect, but whether players will really move toward consolidation is a different matter.