Small Brokerages Hit Hard by FX Losses Amid Won's Plunge

Korean securities firms are suffering hundreds of billions of won in foreign exchange losses as the won-dollar exchange rate has surged in the second half of this year. Small and mid-sized brokerages with limited hedging capacity due to their smaller operations are bearing the brunt of the impact.

According to Financial Supervisory Service electronic filings on January 4, Kyobo Securities recorded 40.7 billion won in foreign exchange transaction losses on a consolidated basis in the third quarter of this year. The amount nearly matches its operating profit of 40.6 billion won for the same period. Net profit came in at 30.8 billion won. The losses were largely attributable to book valuation losses on foreign currency-denominated products such as equity-linked bonds (ELBs) triggered by the exchange rate surge. "These are not realized losses, and most foreign currency-denominated products are hedged, so there is no major problem," a Kyobo Securities official explained.

LS Securities also posted a net foreign exchange loss of 10.6 billion won in the third quarter. The burden is significant given that its operating profit for the period was a loss of 700 million won and net profit was only 2.9 billion won. "Foreign currency translation losses increased as the valuation of foreign currency liabilities rose due to exchange rate appreciation," LS Securities said. "Looking only at foreign exchange gains and losses, we realized gains of 2.7 billion won on a cumulative basis through the third quarter."

Shinyoung Securities likewise recorded a net foreign exchange loss of 16.8 billion won for the same period. This amounts to about half of its third-quarter operating profit of 36 billion won and net profit of 30.2 billion won. Foreign exchange losses more than doubled from 12 billion won the previous year to 28.4 billion won in the third quarter.

The exchange rate surge is more damaging to small and mid-sized brokerages. With smaller operating profits and limited internal hedging capabilities, sudden exchange rate fluctuations directly impact their earnings. "As the exchange rate shock spreads through foreign currency borrowings and bond issuances, smaller firms with insufficient hedging capacity are more vulnerable," a financial investment industry official said.

Large brokerages were not immune to exchange rate volatility either. Mirae Asset Securities (006800.KS), which has the largest overseas asset exposure in the industry, recorded the industry's biggest decline with 69.7 billion won in foreign exchange transaction losses on a consolidated basis in the third quarter. While it has the financial capacity to absorb the shock with third-quarter operating profit of 222.8 billion won and net profit of 343.8 billion won, the situation remains concerning as exchange rate increases continue into the fourth quarter. "The exchange rate surge affected the valuation of overseas assets and overseas subsidiary capital," a Mirae Asset Securities official said.

Shinhan Investment Corp. (016360.KS) also recorded 51.1 billion won in foreign exchange transaction losses. This is not a small proportion compared to its third-quarter operating profit of 144.1 billion won and net profit of 100.5 billion won. Hana Securities (016360.KS) suffered a cumulative net foreign exchange loss of 54.6 billion won through the third quarter. The company was heavily impacted by foreign exchange losses of 279.8 billion won on a consolidated basis in the third quarter of this year.

In fact, domestic securities firms' net profit in the third quarter was 2.4923 trillion won, down 357.9 billion won from the previous quarter's 2.8502 trillion won. The decline was largely due to foreign exchange-related profit and loss swinging from a 707.5 billion won surplus to a 210.4 billion won deficit as foreign currency liability translation gains deteriorated.

Securities firms' foreign exchange losses are expected to continue as volatility persists in the fourth quarter, with exchange rates climbing to the 1,470 won level. When exchange rates rise, foreign exchange risk exposure and credit risk related to foreign currency assets expand, potentially worsening the net capital ratio (NCR) particularly for brokerages with substantial foreign currency liabilities. Smaller firms with limited capital are more sensitive to NCR declines from exchange rate surges, which could restrict leverage operations and constrain new business initiatives.