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2016 Mar/03
A Comparative Analysis of International Operations among Korean and Asian Security Firms
Survey Papers 16-02
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- Research Topic Financial Services Industry
- Summary
- The decrease on market turnover ratio in Korea due to enlarging institutional investors in the stock market and heavy dependence on intermediation lowered security firms’ profit. In order to overcome this harsh situation, they struggle for other profit sources rather than intermediary, and their attention are on investment banking and foreign operations.
This paper focuses on investment banking service among security firm’s international operations since domestic IB service is growing and foreign funding demand is getting cumulated as foreign operations of domestic firms increase. In order to analyze international service of security firms, the service category of IB is divided into Cross-border IPOs in ECM, foreign currency denominated bond issuance in DCM, and Cross-border M&A in financial advisory.
In order to review the role of local security firms, Asian countries such as Japan, Malaysia, Taiwan, Singapore are covered for the analysis, and the market weight of the firms in those four countries are not negligible at all. The market share of local firms in foreign currency denominated bond issuance is more than 20 percent, and local IPO of foreign firm is mainly served by local firms. In the cross-border M&A, local security firms have sufficient market share when local firms are potential buyers.
Some of the active security firms in Asia discussed here are DBS in Singapore, CIMB in Malaysia, and Yuanta Securities in Taiwan. DBS launched into Greater China and Southeast Asia and its share in Greater China is over 29.7% of total profits. CIMB drives in the ASEAN countries, and merged RBS’s Asian division. In the case of Yuanta securities, it launched foreign branch in Hong Kong and Mainland China as strategic region, and searching for firms for merge.
Next, security firms in Korea made inroads into foreign market mainly in Hong Kong and China, and made small portions of profits in prop trading and intermediary in Hong Kong markets. By operation, domestic security firms covered only 6.4% as a organizer in the foreign denominated bond issuance. On the other hand, domestic firms organize foreign firms’ IPO in the Korean market, while global IBs mainly lead foreign IPOs of domestic firms. This is mainly due to lack of the knowledge and experience in the foreign markets. In the case of cross-border M&A advisory, domestic security firms actively engaged when doemstic firms are potential buyers since they have more information on the firms than global IBs.
To evaluate the capacity for international operations, domestic security firms are still behind their competitors in risk analysis since their analysis capacity is limited to global asset allocation, and economic analysis in U.S. and China. Also, domestic firms do not have enough resources to prop trading in terms of total assets to GDP, or tier 1 capital. For network construction with potential buyers in the foreign country, domestic security firms are constrained due to the small number of branches relative to their global competitors.
Considering those factors described above, it can be concluded that the followings are indispensible for enlarging international operations. First, they should posit regional milestone for international expansion. Second, domestic security firms need to specify detailed target in foreign denominated currency bond issuance such as DCM operation rather than the whole organizer at the first time. Third, Korean security firms need to focus on foreign firm’s local IPO since it does not require additional resources. Finally, security firms need to have solid links with Korean firms with intention to buy foreign firms in cross-border M&A advisory operations.