South Korea’s small and mid-sized brokerages posted earnings growth at only half the pace of the top 10 firms despite a buoyant domestic stock market, highlighting a widening gap in the industry.
Analysts say small and mid-sized brokerages need to build investment banking (IB) competitiveness targeting growth companies, anchored by lean teams of specialized professionals, to narrow the divide with their larger rivals.
According to the Financial Supervisory Service’s electronic disclosure system on the 25th, 14 brokerages ranked 11th to 25th by equity capital — excluding Shin Young Securities, which has a March fiscal year-end — reported combined first-quarter net profit of 467.3 billion won. That marked a 58.7% increase from 294.4 billion won in the first quarter of last year.
The performance lagged the earnings improvement at major brokerages. Over the same period, the top 10 brokerages posted net profit of 4.33 trillion won, up 113.7% from 2.03 trillion won a year earlier. As a result, the net profit gap between the 10 large brokerages and the 14 small and mid-sized firms widened from 6.8 times to 9.27 times. Major firms monopolized the gains from brokerage commissions, wealth management (WM) and retirement pensions driven by the bull market.
Among the small and mid-sized brokerages, three of the 14 saw net profit decline from a year earlier. Hanwha Investment & Securities (003530) reported first-quarter net profit of 19.1 billion won, down 48.7% from 37.2 billion won a year earlier. iM Securities and Bookook Securities (001270) saw net profit fall 20.6% and 29.9% year-on-year, respectively.
Experts attribute the gap to the Korean securities industry’s failure to develop IB competitiveness in financing for small and medium-sized enterprises and merger and acquisition (M&A) advisory services. Capital-based IB segments such as acquisition financing, initial public offerings (IPO) and bond issuance have produced strong results over the past 20 years, but the nature of the business has inevitably shaped an industry structure centered on large comprehensive financial investment firms.
The Korea Capital Market Institute, in a recent report titled “Business Models and Competitive Strategies of U.S. Small and Mid-Sized Investment Banks” — based on a comprehensive survey of U.S. small and mid-sized brokerages with 50 or more employees — said Korean small and mid-sized brokerages should seek a path forward by expanding advisory services in M&A, management strategy and finance.
Advisory services generate fee-based revenue with low volatility while serving as the foundation for long-term client relationships that extend into the equity capital market (ECM), private capital raising, acquisition financing and restructuring-related finance. Attracting top-tier specialized professionals and building research capabilities focused on small-cap stocks or specific sectors is essential, the report said.
“U.S. small and mid-sized IBs are characterized by a capital-light structure, building their business around specialized professionals rather than capital investment,” said Lee Suk-hoon, senior research fellow at the Korea Capital Market Institute. “Since most focus on wholesale business, retail brokerage and wealth management — which require extensive branch networks, personnel and back-office operations — account for a small share.”