Kospi Rally Leaves Brokers Behind as Profits Drop: Korea Markets

South Korean brokers are missing out on a rally that sent the nation's benchmark stock index to its highest level since 2011, as slumping trading volumes contribute to the weakest profits in eight years.

Samsung Securities Co. (016360), the country's biggest brokerage by market capitalization, and five of its local peers are valued at the lowest levels since at least 2007 after falling an average of 15 percent in Seoul this year. Industry earnings have shrunk to the smallest since the first half of 2005, while trading on the Korea Exchange (KOSPI) fell to a six-year low, data compiled by Bloomberg and the Financial Supervisory Service show.

South Korean securities firms have cut almost 2,000 jobs and closed more than 10 percent of their branches as individuals pull money from the stock market for the fifth-straight year. Midas International Asset Management Ltd. and KTB Asset Management Co. are avoiding the shares as growing competition among 62 registered brokers adds to the pressure on profits.

"We're not buying any brokerage stocks," Heo Pil Seok, the chief executive officer at Midas International, which oversees about $6.4 billion, said by phone on Nov. 6. "I don't plan to hold any for the next 10 years or so, unless I see real change like industry restructuring."

The Kospi rose 0.1 percent to 1,986.71 at 11:42 a.m. in Seoul, after falling 2.7 percent last week. The benchmark index for South Korea's $1.2 trillion stock market had rallied 16 percent from this year's low in June through Oct. 30 as rising exports sent economic growth to the fastest pace in almost two years.

Volumes Shrink

Trading has declined even as stocks advanced. The 100-day average value of shares changing hands on the South Korean bourse dropped to about 4 trillion won ($3.8 billion) on Nov. 8, within 0.5 percent of the lowest level since June 2007, data compiled by Bloomberg show.

Individual investors, who account for about half of equity trading, have pulled a net 4.3 trillion won from stocks this year as the highest rental costs since at least 1986 and growing household debt curb discretionary spending.

Competition among brokers has intensified after South Korea's National Pension Service, the nation's biggest investor, scrapped the minimum 0.15 percent fee it pays brokers in July, saying they need to "write down" commissions. The fund had about 410 trillion won of assets as of August.

Profit Slump

Earnings at domestic and foreign brokerages operating in South Korea shrank to 565.2 billion won in the six months ended June, about a third of the level reported two years earlier, FSS data show. That's the smallest figure since the industry posted a 294.9 billion won profit in the first half of 2005.

"Brokers have failed to showcase any kind of profit-making measures for investors to dive in," said Park Jae Hong, the chief money manager at Brain Asset Management, which oversees $4.2 billion from Seoul.

Samsung Securities is valued at about the same level as its net assets, an 18 percent discount to the MSCI All-Country World Financials Index, the biggest gap since February 2007. Daewoo Securities Co. (006800), the second-largest brokerage by market value, has a multiple of 0.8, while Woori Investment & Securities Co. trades for 0.6 times book value, according to data compiled by Bloomberg.

Equity volumes may rebound by the first quarter of next year as improving consumer and investor sentiment spurs South Koreans to return to stocks, according to Barclays Plc.

Cost Cuts

The Bank of Korea's gauge of consumer confidence rose in October to the highest level since May 2012 and the won gained 4.5 percent versus the dollar in the past three months. The nation's 10-year note yield has increased 34 basis points, or 0.34 percentage point, to 3.51 percent this year.

"There's a high chance that local individual investors will come back," Chanik Park, the Seoul-based head of Korea equity research at Barclays, said by phone on Nov. 7.

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The industry is also relying on costs cuts and new investment-banking licenses to boost profits. Brokerages cut more than 4 percent of staff in the year ended June as they shut local branches, according to FSS data. Samsung Securities, Daewoo Securities and three other brokerages won approval from the Financial Services Commission to offer products including loans on Oct. 30.

'Bad Memories'

Samsung Securities is counting on investment-banking revenue and its prime brokerage business to help it get through this "crisis" period, the company said in an e-mailed response to questions from Bloomberg News. Daewoo Securities said it's expanding in overseas markets, while Woori Investment (005940) declined to comment before its planned earnings announcement on Nov. 14.

It will take time for new businesses to have a meaningful impact on brokerage earnings, said Lee Jin Woo, a Seoul-based fund manager at KTB Asset Management, which oversees about $6.7 billion. Banks are a better bet for investors seeking to benefit from South Korea's economic growth, Lee said.

Net income at Samsung Securities will probably drop 45 percent this year and Daewoo Securities may post a 59 percent decline, according to the average of analysts' estimates compiled by Bloomberg.

"I once had my hopes up," Lee said by phone on Nov. 7. "I only have bad memories when it comes to brokerage shares."