Brokerages that posted record first-half results are expected to see their third-quarter earnings slow sharply. Brokerage revenue is shrinking as domestic stock trading turnover falls. Higher market rates and greater stock market volatility are also expected to add valuation losses in trading.

According to the financial investment industry on Monday, combined third-quarter consolidated controlling shareholder net profit for five firms, including Samsung Securities, Korea Investment Holdings, Kiwoom Securities, Mirae Asset Securities and NH Investment & Securities, is forecast at about 1.063 trillion won. That would be down 44.9 percent from a year earlier and down 76.6 percent from the previous quarter. It is also about 30 percent below the market forecast of 1.5221 trillion won.

The biggest driver of the slowdown is a decline in trading turnover. Average daily turnover in the domestic stock market in the third quarter was 52 trillion won, down 41.7 percent from the previous quarter. Turnover in overseas stocks also fell 30.7 percent from the previous quarter to $124.9 billion. Brokerage commission revenue is also expected to fall 34.0 percent from the previous quarter.

The trading business, which had lifted brokerage earnings in the first half, also lost momentum.

The yield on the three-year government bond rose to 4.0 percent at the end of September from 3.7 percent at the end of June. With stock market volatility also rising, valuation gains and losses on bond and equity investment assets worsened.

Average daily turnover in exchange-traded funds in the third quarter also fell 18.5 percent from the previous quarter to 23 trillion won. Profit related to liquidity providers is also expected to slow.

Investment banking is also expected to have a limited role in supporting earnings. Underwriting and arrangement fee income in the third quarter is estimated to fall 17.9 percent from a year earlier. IPO and mezzanine markets were weak due to tighter rules on duplicate listings, among other factors. Higher market rates also led more companies to opt for bank loans instead of corporate bond issuance.

Results are expected to diverge by company.

Samsung Securities' third-quarter consolidated controlling shareholder net profit is expected at 361.5 billion won. That would be up 16.9 percent from a year earlier but down 26.0 percent from the previous quarter. Brokerage and wealth management fee profit and loss are each estimated to fall about 40 percent and 32 percent from the previous quarter, and trading profit and loss is also expected to fall 32 percent.

Korea Investment Holdings is expected to post the largest net profit among the five at 432.1 billion won, but it is forecast to fall 35.9 percent from a year earlier and 56.6 percent from the previous quarter.

Brokerage and wealth management fee profit and loss are expected to fall 42 percent and 61 percent from the previous quarter, respectively. Trading profit and loss is also expected to drop due to bond valuation losses from higher rates.

Kiwoom Securities is estimated at 338.7 billion won, up 5.2 percent from a year earlier but down 50.2 percent from the previous quarter. A decline in brokerage fee profit and loss and valuation losses on securities are expected to weigh on results, while ETF liquidity provider-related profit is expected to support earnings in part.

NH Investment & Securities is forecast at 339.5 billion won, up 19.9 percent from a year earlier but down 30.7 percent from the previous quarter. Brokerage and wealth management fee profit and loss are expected to fall 39 percent and 35 percent from the previous quarter, respectively, and trading profit and loss is estimated to drop 37 percent due to valuation losses on bonds and illiquid assets.

The biggest variable is Mirae Asset Securities. Its third-quarter consolidated controlling shareholder net loss is forecast to reach 408.8 billion won. The forecast reflects estimates of about 765.6 billion won in valuation losses that factor in a fall in the share price of its SpaceX investment and the average exchange rate, among other items.

Other forecasts also estimate SpaceX-related valuation losses at around 700 billion won. Even excluding Mirae Asset Securities, brokerages' net proprietary trading profit and loss and other profit and loss are expected to fall 19.7 percent from a year earlier. That suggests the third-quarter slowdown cannot be explained only by a one-off factor at a single company.

Some recovery is possible in the fourth quarter, but if trading turnover stays at current levels, a slowdown in core business profit could continue.

At the end of September, customer deposits stood at 105 trillion won, well above the 2021 average of 66 trillion won. That leaves room for trading turnover to recover if the stock market stabilises and investor sentiment revives.

A financial investment industry official said brokerages are also paying attention to the fact that their earnings resilience has improved compared with the past as they expanded equity capital and diversified funding tools such as short-term notes and investment management accounts. The official said earnings volatility driven by rates and trading turnover is unavoidable in the short term, but profit recovery could also be faster than in the past if market conditions improve.