Key Takeaways
Securities firms and asset managers surpassed the record-high earnings they had set in the first quarter of this year, doing so again this quarter. Posting consecutive quarterly earnings records is an unusual feat, yet the stocks of the companies involved showed little reaction. Looking at why earnings and stock prices diverged reveals both the quality issues behind this quarter's earnings and structural problems in how the brokerage industry sector is valued.
What Happened
Major domestic securities firms and asset managers reported another all-time-high quarterly earnings result this quarter. Given that the previous record had already been set just one quarter earlier, in Q1, this latest record goes beyond a simple surprise — it could be read as a signal that profitability across the industry sector has structurally improved.
However, the market's reaction after the earnings releases fell short of expectations. The fact that stock prices barely moved, or only edged up slightly, despite record-breaking figures, only sharpens investors' underlying skepticism toward this industry sector.
Background and Context
The key driver behind securities firms' improved earnings is brokerage commission income and trading (proprietary trading) profit and loss. Under this structure, an increase in market trading volume translates directly into earnings through retail clients' brokerage fees, and analysts attribute much of the recent improvement to a rise in turnover during the current market environment. The problem is that this revenue source is heavily dependent on market volatility and carries a strongly one-off character. When trading volume falls, earnings fall at the same pace.
On top of this, the securities and asset management industry sector has failed to fully shake off its low-PBR trap even after the Corporate Value-up Program was introduced. Even when earnings improve, if the market doubts the sustainability of those earnings, multiples fail to expand. The current gap between earnings and stock prices stems precisely from this point.
Impact on the Market and Stocks (Tickers)
- Kiwoom Securities — With a high proportion of retail brokerage business, it benefits most directly from rising trading volume, but by the same token, its earnings volatility is also most exposed when volume declines.
- Mirae Asset Securities, Samsung Securities, NH Investment & Securities — With relatively larger investment banking (IB) and wealth management (WM) businesses, these firms rely less on trading income, leaving room for re-rating in terms of earnings quality.
- Korea Financial Group (Korea Investment & Securities) — Having delivered earnings through a diversified financial portfolio, the key point to watch is whether its performance proves more sustainable than gains driven simply by trading volume.
- Asset managers — If earnings were lifted by growth in assets under management and performance fees, a downturn in the stock market could trigger a sharper reversal through fund redemptions and declining assets under management.
Investor Checkpoints
- Trends in average daily trading value on the KOSPI and KOSDAQ — Next month's exchange data will help gauge whether this earnings strength is sustainable.
- Each securities firm's guidance for next quarter's earnings and the weight of its trading segment — Watch whether the share of non-trading income, such as IB and WM, is rising.
- Dividend and share buyback/cancellation disclosures tied to the Value-up Program — A concrete indicator of whether the low-PBR discount is truly being shed.
- The status of contingent liabilities and loss processing related to real estate project financing (PF) — Worth checking whether the risks that previously eroded earnings have been fully resolved.
Outlook
On the optimistic side, if trading volume holds at current levels and earnings from IB and overseas subsidiaries continue to improve, the market will eventually have no choice but to re-rate these stocks' valuations. A track record of two consecutive quarters of record earnings is not something to dismiss lightly.
On the other hand, if this quarter's earnings are simply a byproduct of a base effect driven by a volatile market, earnings could slow noticeably next quarter once trading volume normalizes. The fact that brokerage stocks failed to rally on these results can also be read as the market already pricing in this risk. Next quarter's trading volume and the composition of trading-segment earnings will settle this debate.
This article was automatically summarized and analyzed based on the original news report. View original (Yonhap News Securities)
