South Korean securities firms are emerging as key profit drivers for financial holding companies as domestic stock market turnover surges.

The financial investment industry estimates average daily turnover in the domestic stock market in the second quarter at about 89.6 trillion won, up 28.6 percent from the first quarter, it said on Sunday.

In May, average daily turnover in domestic shares, combining the Korea Exchange (KRX) and NextTrade (NXT), topped 106.2 trillion won, surpassing 100 trillion won for the first time. Average daily turnover in exchange-traded funds also rose 84.0 percent from the previous month to 30.4 trillion won.

Rising turnover directly lifts securities firms' brokerage fee income from domestic shares and ETFs. Wealth management fee income also rises when customer deposits and sales of investment products such as funds and wraps increase. Expanded margin trading also supports higher interest income from credit provision.

Securities firms under financial holding groups have emerged as a major pillar of group earnings since the first quarter. Combined net profit in the first quarter for NH Investment & Securities, KB Securities, Shinhan Investment Corp, Hana Securities and Woori Investment & Securities came to 1.23 trillion won, more than double from a year earlier.

By company, NH Investment & Securities posted net profit of 475.7 billion won, up 128.5 percent from a year earlier. KB Securities earned 347.8 billion won, up 93.3 percent, while Shinhan Investment Corp made 288.4 billion won, up 167.4 percent. Hana Securities posted 103.3 billion won, up 37.1 percent. Woori Investment & Securities also increased to 14.0 billion won from 1.0 billion won a year earlier.

In the second quarter, NH Investment & Securities is expected to be the most direct beneficiary of rising turnover. Its second-quarter net profit attributable to controlling shareholders is forecast at 468.5 billion won, up 82.5 percent from a year earlier. That would be down 1.5 percent from the first quarter but about 20 percent above the market forecast of 390.5 billion won.

Brokerage fee income is expected to reach 510.4 billion won, up 27.6 percent from the previous quarter and 214 percent from a year earlier, marking a quarterly record. Product operation profit is estimated at 220.0 billion won, down 18.7 percent from the previous quarter due to factors including bond market volatility.

KB Financial Group's second-quarter net profit is forecast at 1.97 trillion won, up 13.0 percent from a year earlier, for a record quarterly performance. The group's net fee and commission income is expected to rise 30.7 percent to 1.35 trillion won, helped by higher securities brokerage fees.

Bond valuation losses from rising government bond yields may limit growth in non-interest income. Group credit costs are forecast to fall 20.0 percent to about 524.0 billion won, reflecting base effects from a year earlier when additional provisions tied to real estate were booked.

Shinhan Financial Group's second-quarter net profit is forecast at 1.72 trillion won, up 10.8 percent from a year earlier. Group fee income is expected to rise 34.9 percent to 1.03 trillion won. Improved fee income at Shinhan Investment Corp from rising market turnover is expected to support the group's non-interest income.

Shinhan Investment Corp's annual net profit is also estimated to rise to 898.0 billion won this year from 382.0 billion won last year. As the brokerage and operation segments account for a larger share, sensitivity of earnings to market interest rates and stock price fluctuations may also increase.

Hana Financial Group's second-quarter net profit is forecast at 1.28 trillion won, up 9.2 percent from a year earlier. As Hana Securities' brokerage fees rise by nearly 30 percent from the previous quarter, the group's net fee and commission income is expected to increase 13.5 percent to 781.0 billion won.

Group credit costs in the second quarter are forecast to rise 45.9 percent from the previous quarter to 346.0 billion won, reflecting a reassessment of corporate credit risk and about 50.0 billion won in additional provisions tied to a specific company.

Woori Financial Group's securities subsidiary earnings are improving, but group net profit is not expected to rise from a year earlier. Second-quarter group net profit is forecast at 917.3 billion won, up 51.9 percent from the previous quarter but down 1.9 percent from a year earlier.

Woori Investment & Securities' annual net profit is expected to rise to 136.0 billion won this year from 28.0 billion won last year. A bigger contribution from non-bank earnings is positive for Woori Financial Group, which has a high reliance on banking, but its absolute profit size remains small compared with other financial holding groups' securities units.

In the second half, the key question is whether turnover holds at current levels. Sharp market swings can increase trading in the short term, but may lead to losses from proprietary trading and derivatives operations, and increase forced liquidations in margin trading and unsettled receivables. The possibility of additional provisions tied to real estate project finance sites and reassessments of corporate credit risk also remains.

A further variable is the government's move to tighten rules on single-stock leveraged products. The government decided to temporarily suspend new listings and advertising and raise the basic deposit requirement from 10 million won to 30 million won in cash.

Trading units are also set to expand from the current 1 unit to 20 units from November after a system overhaul. If individual trading in related products contracts, growth in ETF turnover could also slow somewhat.

Seunggeon Kang (강승건), an analyst at KB Securities, said higher stock market turnover is expected to improve financial holding companies' non-interest income by boosting fee income at their securities subsidiaries. He said operation profit and the size of provisions can vary depending on fluctuations in stock and bond markets.