Lawmaker proposes M&A incentives to restructure securities industry

South Korea should encourage local brokerage houses to seek more mergers and acquisitions (M&A) by offering incentives and foster investment banks with diversified asset businesses in a bid to reorganize the faltering financial market, a ruling party lawmaker said Thursday.

South Korean brokerage houses have been in a prolonged slump due to decreasing brokerage fees stemming from slow trading on the stock market.

Out of 62 brokerage houses, about 10 have been put up for sale in the local M&A market since last year, but only a few deals have been struck due to the prolonged market slump.

Rep. Kim Jong-hoon of the ruling Saenuri Party said financial authorities and policymakers should come up with a set of measures to boost M&As and create an alliance between securities firms as part of a large-scale industry restructuring.

"About 60 securities firms basically have the same business model that feeds on brokerage fees, without specialized strategies," Kim said in an interview with Yonhap News Agency at his office. "If brokerage houses cannot make a profit, they should exit the market, but even rescinding their licenses is not easy due to regulations. M&As are needed to prevent brokerage houses from going out of business and causing financial damage to consumers."

The securities industry reported 109.8 billion won ($106.7 million) of net operating loss during the April-December period last year, industry data showed, going into the red for the first time in 11 years. Twenty-eight firms reported a deficit due to decreasing brokerage fees from the sluggish local stock market.

The stock market remained much the same early this year.

Securities firms' return on equity, an index measuring corporate profitability, was a mere 0.8 percent in the first quarter of this year. ROE gauges a company's profitability by showing how much profit it generates with the money shareholders have invested.

In a bid to rejuvenate the local market, Kim submitted a bill in February that calls for lowering the minimum equity capital qualification to be qualified as an investment bank from 3 trillion won to 2.5 trillion won.

Investment banks mainly focus on large and complex financial transactions such as mergers and acquisitions and corporate reorganizations, having also retail operations for small and individual customers.

Under current law, only the top five securities companies in terms of equity capital received licenses for investment banking business.

Kim, the former trade minister who led the negotiation for a free trade agreement with the United States, said the bill is aimed at encouraging the industry-wide restructuring and help brokerage houses find new sources of profit other than basic brokerage services in the extended era of low growth.

Local brokerage firms are only allowed to do prime brokerage services with Korean hedge funds. A hedge fund is a private investment fund aimed at taking profits in the short term.

They are banned from corporate lending unless they are involved in a deal with a company to manage its initial public offering (IPO) or M&A.

An approved investment bank can offer a bundled package of investment services, ranging from asset management to lending and consulting to big institutions or financial firms, including foreign players or pension funds.

"There is still negative sentiment over M&A, considering buyout firms as looters. However, capital market professionals have changed a lot compared to the past," Kim said, taking an example of U.S. equity firm Lone Star, which took profits when it acquired debt-laden Korea Exchange Bank in 2003.

Jung Yoo-shin, the head of the state-run Korea Venture Investment Corp, also said the financial authorities and policymakers should make M&A easier to develop the financial market and boost entrepreneurship.

"Korean financial companies have tapped into the overseas market in the last three decades, but none of them were successful," Jung said. "Various M&A tools are needed to grow new start-ups and restructure industry sectors that have different life cycles."

Securities companies' overseas expansion has been passive due to the lack of human resources, global networks and large-scale financing capability. In their wealth management business, securities firms failed to increase their market size due to banks and insurance companies with strong sales channels. (Yonhap)