[DigitalToday reporter Oh Sang-yup] Competition among securities firms to bolster equity capital is spreading quickly, centred on large brokerages. That is because more businesses directly link a bigger capital base to expanding revenue sources, including integrated investment management accounts (IMA), short-term notes, investment banking (IB) and the supply of venture capital. The gap between large firms and small and mid-sized firms is expected to widen further.

According to the financial investment industry on June 30, KB Securities decided on June 26 on a 1 trillion won rights offering. It is an additional capital increase following 700 billion won in support from KB Financial Group in February.

Once the offering is completed, KB Securities will have received a total of 1.7 trillion won in capital injections this year alone. Its equity capital is expected to rise to the mid-8 trillion won range. As it surpasses 8 trillion won, the equity-capital requirement for IMA operators, it has become more likely to be mentioned as the next IMA candidate after Mirae Asset Securities, Korea Investment & Securities and NH Investment & Securities.

Changes are also expected in competition over securities firm rankings. KB Securities could rise to the industry’s No. 4 tier after NH Investment & Securities, overtaking Meritz Securities and Samsung Securities, which had been in the No. 4 group. It would mean KB Securities’ presence could grow in the competitive landscape for mega investment banks.

This year’s capital-raising trend among brokerages was first started by Korea Investment & Securities. Korea Financial Group decided in January to participate in Korea Investment & Securities’ 1.5 trillion won rights offering.

Korea Investment & Securities is already a mega brokerage with equity capital in the 10 trillion won range. The additional capital increase is largely aimed at cementing its leading position in short-term notes, IMA and IB. A larger equity base can further expand its capacity for large deal underwriting, corporate credit provision and venture capital investment.

Woori Investment & Securities also decided in April on a 1 trillion won rights offering. Woori Financial Group will fully support it. Once completed, Woori Investment & Securities’ total capital will increase to about 2.2 trillion won.

Woori Investment & Securities is setting a goal of becoming a comprehensive financial investment business operator by 2030. Its equity capital remains small compared with large firms, but whether it receives additional capital support is seen as a medium- to long-term growth variable as Woori Financial Group pushes to strengthen non-bank businesses.

In June, NH Investment & Securities decided on a 400 billion won third-party allotment offering for NH NongHyup Financial Group. NH Investment & Securities was designated in March by the Financial Services Commission as a comprehensive financial investment business operator with equity capital of at least 8 trillion won, securing a foundation to conduct IMA business.

Not only large firms but also small and mid-sized brokerages joined the capital-raising line-up. Hanyang Securities decided on a 50 billion won third-party allotment offering for its largest shareholder, KCGI No. 2 Private Equity Fund Limited Partnership (KCGI PEF).

The combined size of confirmed rights offerings by securities firms’ headquarters this year totals about 4.65 trillion won: 1.5 trillion won for Korea Investment & Securities, 1.7 trillion won for KB Securities, 1 trillion won for Woori Investment & Securities, 400 billion won for NH Investment & Securities and 50 billion won for Hanyang Securities.

The purposes and financial strength behind capital increases vary widely. Large firms can use expanded capital to grow high-profit businesses such as IMA, short-term notes, corporate finance and acquisition finance. Small and mid-sized firms, by contrast, have a stronger focus on securing the minimum capital needed to defend financial soundness and pursue new businesses.

Shinhan Investment Corp and Hana Securities did not carry out rights offerings this year. As the two firms received regulatory approval for short-term notes businesses at the end of last year, they are expected to pursue a strategy of expanding funding capacity through short-term notes rather than immediately boosting equity capital sharply.

The separation of industrial and financial capital is also acting as a backdrop to brokerages’ capital competition. With restrictions still in place on industrial capital injecting large sums directly into financial companies or controlling them, securities firms’ capital increases are heavily influenced by whether financial holding companies provide internal support.

For this reason, how much capital bank-affiliated financial holding companies allocate to their securities units is emerging as a key variable in the competition for mega IBs.

The financial sector believes discussions on easing the separation of industrial and financial capital could, over the long term, expand room for brokerages to broaden new businesses and external cooperation. In the short term, regulatory easing is less likely than equity capital size and holding-company support capacity to act as the factors that determine competitiveness.

Behind brokerages’ push to raise capital is a structure in which equity capital size determines business scope. IMA is a business that integrates customer deposits and invests them in assets such as corporate finance, and it requires equity capital of at least 8 trillion won. Equity capital size is also a key criterion for comprehensive investment business and mega IB licences.

An increase in stock market turnover is also raising the need for capital increases. When stock trading rises, demand for credit provision also grows. Credit provision limits are linked to equity capital, so brokerages with bigger capital can secure more capacity in retail operations as well.

The industry sees securities sector competitiveness being reshaped around equity capital and funding capacity. For bank-affiliated financial holding companies, securities subsidiaries are also a core axis for expanding non-bank profit bases.

With limits on inflows of external industrial capital under the separation framework, whether financial holding companies provide additional capital support to affiliated brokerages is expected to remain a variable in future ranking competition.

By contrast, small and mid-sized firms could face pressure simultaneously in licensed businesses, funding costs and credit-provision capacity. If large firms expand IB, wealth management and retail operations based on their increased capital, areas where smaller firms can differentiate themselves are likely to narrow further.

An official in the financial investment industry said, "Recently, the securities industry has a structure in which the larger the equity capital, the different the businesses it can do and the scale of risk it can bear." The official added, "Large firms are pre-empting growth businesses through capital increases, while small and mid-sized firms could see their foothold narrow further without specialised strategies."