New plans for mega investment banks expected to alter financial landscape

[THE INVESTOR] South Korea’s financial industry is headed for a seismic change as the government has mapped out detailed plans to foster mega investment banks here.

Experts said the move could lead the country’s major brokerages to bolster their balance sheets through capital increase as well as mergers and acquisitions in a bid to meet the requirements to offer investment banking services.

On Aug. 2, the nation’s top financial regulator Financial Services Commission announced measures that enable big brokerage firms with a certain amount of equity capital to provide specialized services for companies in raising financial capital. 

Under the plan, securities companies will be categorized into three groups according to the size of their capital -- 3 trillion won (US$2.70 billion), 4 trillion won and 8 trillion won -- and subjected to varying levels of services they can offer to their customers.

An official at a major securities company said that brokerages will start to scale up their capital sizes competitively in order to take bigger benefits that the government will offer to bigger investment banks.

“Expansion of equity capital can be done by various ways including issuance of Coco bonds and selling new shares. It won’t be that hard,” he said.

Currently, only two brokerage houses Mirae Asset Deawoo and NH Investment & Securities are with equity capital of more than 4 trillion won. The former’s capital stands at 6.7 trillion won while the latter at 4.5 trillion won.

Those with capital exceeding 3 trillion won but less than 4 trillion won include Samsung Securities, Korea Investment & Securities and KB Investment & Securities which is set to merge with Hyundai Securities this year.

Hi Investment & Securities, a midsized firm with equity capital of 700 billion won, which has been put up for sale, could become an M&A target for local peers seeking for an instant capital boost, the official said.

Under the plans, securities firms with more than 4 trillion won but less than 8 trillion won capital will be allowed to issue promissory notes to raise capital. Promissory notes will be limited to 200 percent or less of the company’s capital. However, the securities companies will be required to use 50 percent or more of the raised funds for giving loans to corporations.

Securities firms with 4 trillion won or larger capital will also be allowed to provide foreign exchange services to corporate clients.

Those with capital exceeding 8 trillion won will be allowed to offer investment management accounts to private investors. The funds invested in the accounts will then be used to provide corporate loans. In addition, those falling in the top category will be allowed to offer real estate-backed securities, which can then be used to take out loans.

By Park Han-na (hnpark@heraldcorp.com)