South Korea may merge Daewoo Securities Co. (006800) and Woori Investment & Securities Co. (005940) to leapfrog Samsung Securities Co. and spark takeovers in the brokerage industry, the head of the Financial Services Commission said.
“South Korean brokerages lack the scale to become globally competitive,” Kim Seok Dong, chairman of the regulator, said in an interview on April 5. “We’ll encourage industry consolidation through mergers and acquisitions and reduce regulation so they can expand into new businesses.”
Kim, 57, who started his three-year term on Jan. 3, said the nation needs a small number of dominant and competitive investment banks to serve the local financial market and to support South Korean companies in large overseas projects. Contractors for nuclear power plants and urban development projects would be more successful if they had a big South Korean investment bank to work with, he said.
“Creating a bigger securities firm would be a promising first step as we have little knowledge and experience in international deals,” said Chang In Whan, chief executive officer at KTB Asset Management Co. in Seoul, which oversees the equivalent of $11 billion. “Government-led mergers of Daewoo and Woori may trigger industry-wide consolidation.”
A merger of the two firms is “one of the options,” said Kim, who added that he is seeking views from the industry, academic experts and policy makers about how to strengthen South Korean securities companies.
Kim said South Korea’s first big brokerage is likely to appear within his term as head of the regulator. He also said the nation needs to attract financial-industry experts from abroad to bolster skills at local securities firms.
Daewoo Securities rose 0.2 percent to 23,150 won at 10:28 a.m. in Seoul trading and Woori Investment slipped 0.2 percent to 20,600 won. The benchmark Kospi index fell 0.2 percent.
“South Korea is competitive enough and experienced enough to do these projects,” Kim said. “What we’re lacking is how we can support them through finance.”
The FSC is reviving efforts to sell Woori Finance Holdings Co. (053000), the parent of Woori Investment, after the government halted a plan to divest its 57 percent stake in December due to a lack of interest from buyers. Woori Investment is South Korea’s third-largest securities firm by market value, trailing Daewoo Securities, the second biggest, and leader Samsung.
Daewoo Securities is controlled by KDB Financial Group Inc., a state-owned company that’s also slated for privatization. KDB plans an initial stock sale this year and the government aims to sell an unspecified number of shares by May 2014.
The FSC wants to remove regulatory barriers to investment-banking growth and provide incentives for brokers to enter into new businesses, Kim said, without specifying which rules will be eliminated as the discussions are ongoing.
The commission also plans to ease restrictions to allow domestic investors to create hedge funds, he said. Kim has vowed to overhaul capital-market rules as part of President Lee Myung Bak’s pledge to make the financial industry more competitive.
South Korean builders may win more than $70 billion of overseas orders this year, the Transport Ministry estimates.
The nation also aims to build 80 nuclear reactors overseas, worth $400 billion, by 2030, according to the Ministry of Knowledge Economy. South Korea’s failure to reach an agreement last year to build a nuclear plant for Turkey was due to the “low funding capability” of its financial industry, lawmakers including Lee Sung Nam of the opposition Democratic Party said at the time.
Asset growth at the National Pension Service also underscores the need for larger securities firms in South Korea, Kim said. The government-run fund is the country’s biggest investor with 324 trillion won of assets at the end of 2010, a figure that it estimates will climb to 488 trillion won by 2015.
Large brokerages would create a “virtuous circle” by enhancing profits from overseas projects and utilizing the country’s growing wealth, Kim said. “I expect South Korea to become a financial power with these efforts.”
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