An increasing number of domestic asset management and investment advisory service companies are faced with capital erosion and inevitable restructuring due to weakening profitability, according to the Financial Supervisory Service and the Korea Financial Investment Association.
Securities companies have been downsizing their units and staff levels as the global slowdown has weighed down their brokerage and investment banking businesses.
Financial regulators are expected to clean up and shut down those firms with an alarmingly high capital erosion rate, or give those with potential for survival a deadline to improve their capital base, as regulators did with mutual savings banks last year, analysts and industry sources suggested.
A higher capital erosion rate signifies trouble for firms as capital reaches negative territory, meaning that they will have nothing left in terms of funds to stay afloat, one analyst explained.
Regulators generally demand a company in danger of capital erosion to lower its rate to under 50 percent.
An FSS official said, “Things are not looking so good for asset managers.” The number of companies generating losses increased to 33 in the fiscal year ending in March 2013, from 26 a year earlier.
The gap between the numbers of profit-generating firms and those incurring losses is further widening, the official said, adding that it would be up to the Financial Services Commission to overhaul and weed out poor ones from profitable ones.
A media report said that companies with poor financial statuses could emerge as sale candidates.
The number of executives at asset management firms over the fiscal year decreased by 34 to some 4,620, while investment advisory services companies let go 41, leaving about 1,380 executives.
About 44 percent of 84 asset management firms are facing capital erosion as they continue to generate losses, and 54 percent of 150 advisory companies are suffering from impaired capital.
Companies such as RG Energy Resources Asset Management and Frontier Asset Management show an erosion rate of above 50 percent, an alarming threshold that would seemingly be intractable for revival.
Meanwhile, the securities industry downsized by more than 1,250 to 42,800 executives over the fiscal year.
This is unprecedented given that hiring has been strong even during the global financial crisis of 2008. The industry has not given as many pink slips as in this period since 2005 when the number of executives at securities companies decreased from 31,049 to 30,167, according to KFIA and the FSS.
By Park Hyong-ki (
hkp@heraldcorp.com)
