▶ On April 8, the Financial Services Commission (FSC) disclosed plans to adjust the net operating capital ratio (NCR) system as part of its larger plans to revitalize the capital markets. Since the system was introduced in 1997, the market environment
has changed considerably, and NCR is no longer an accurate representation of financial stability at brokerages. As such, the FSC has announced a three-part plan to improve the system: 1) changing the calculation method, so the ratio will reflect net
capital compared to legally required capital, 2) introducing a consolidated NCR, and 3) expanding the scope of net operating capital and adjusting risk coefficients.
▶ We believe this change will further widen the gap between large and smaller brokerages, as larger players will be able to increase risk retention. Furthermore, the gap in capital regulations between brokerages and insurers will narrow. Over a shortterm
horizon, the plan should bolster earnings. 1) Brokerages: Korean hedge fund should gain traction, as investments and credit offerings by institutional investors should increase. (Credit offerings by individual investors may also increase, but this is unlikely considering the purpose of the plan) 2) Investment banking: M&A capabilities at major brokerages should improve significantly. There will be a general expansion of operations across IPO, bond issuance, M&A and PEF-related undertaking.
3) Trading and principal investments should also be revitalized, as more mid-risk, mid-profit products can be issued (e.g., ELS, DLS, etc.). Furthermore, idle cash can be invested in funds.
▶ Prominent brokerages should see more benefits: Samsung Securities over long term, Daewoo and Hyundai over short term. It should be noted that transparency in management disclosures will become increasingly important. Since large
brokerages can increase risk retention, the quantity and quality of the information disclosed to investors should also increase accordingly. Under the IFRS system, which grants higher autonomy to managers, companies should develop methods to help
investors understand the information. Under the current information delivery system, it would be difficult to convey management visions.
*Source: Korea Investment & Securities Co.