SK securities houses to differentiate via wrap accounts amid stiff competition

The South Korean Financial Supervisory Service (FSS) wants to encourage securities firms without a competitive edge to exit the market. The FSS made the announcement in its business plan report which was submitted to the national executive policy council.

The news follows the M&A vitalisation plan which the Financial Services Commission (FSC) announced last year as local securities firms’ over-reliance on brokerage business has led to a decrease of their net profits year on year in a highly competitive market environment.

As a result, securities houses such as Samsung Securities and NH Investment & Securities have moved from selling low-margin transaction based business to selling customised investment solutions, so-called wrap accounts, instead.

Wrap accounts are a consolidated financial account for assets management which invest in a portfolio of structured products including equity linked securities (ELS), derivatives-linked securities (DLS), bonds, ETFs and funds.

Wrap accounts have become more popular as a financial instrument because they tend to achieve higher returns than the publicly offered products. According to the Korea Financial Investment Association (Kofia), the entrusted wrap accounts, operated wholly by the securities firms, saw their remaining balance reach KRW68.7tn ($66bn) by the end of January, while they were at about KRW 55tn ($52.8bn) last year. The remaining balance of the customised wrap accounts was KRW 2.5tn ($2.4bn) by the end of January.

“The brokerage business has accounted for 60% to 70% of the whole business in the last ten years, now it has been down to 50% on average and for some securities firms it is even down to 30%,” Chang Hun Lee, deputy head of business management at NH Investment & Securities said.

According to Lee the main reason for this change is that the profits earned from the brokerage business in the past are now shifting to the asset management business, including the management of wrap accounts, as the commission for selling off-the-shelf products such as ELS and DLS has been greatly reduced due to the tight competition.

“At the same time, we are seeing more profits earned from sales and trading where we execute trades with our own capital and on behalf of our clients’capital,” Lee said. “In the future, we expect to diversify our profit model by being the prime brokerage and to focus more on investment banking services.”

At Samsung Securities, a spokesperson told SRP that following the restructuring the company will leverage its asset management department, which includes wrap accounts and retirement pension related services.

On April 11, Woori Financial Group and NH Financial Group have agreed to merge through a stock purchasing agreement. Pending approval from the FSC, the new firm, which will operate under the name of NH Woori Investment & Securities, will have KRW4.3tn ($4bn) of its own capital and total assets of KRW37tn ($35.5bn).

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SK securities houses to differentiate via wrap accounts amid stiff competition