Top Korea Broker Fights Volume Drop With Funds-to-IPOs

Source: Kiwoom Securities Co.

Kiwoom Securities Co. Chief Executive Officer Kwon Yong Won. Close

Kiwoom Securities Co. Chief Executive Officer Kwon Yong Won.

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Source: Kiwoom Securities Co.

Kiwoom Securities Co. Chief Executive Officer Kwon Yong Won.

Kwon Yong Won, the chief executive officer of South Korea’s top stockbroker, is facing up to being an underdog again.

After building his online brokerage, Kiwoom Securities Co. (039490), from a startup with less than 10 employees in 1999 to the nation’s No. 1 trader by transaction value, Kwon is expanding into the money-management and investment-banking businesses.

The change of tack underscores a tumble in Korean equity trading that’s eroding profits in the brokerage industry as the strongest won since 2008 spurs locals to seek higher returns abroad. It also means Kiwoom, the nation’s leading broker for nine straight years, will be testing its mettle once more against larger and older rivals such as Daewoo Securities Co. (006800) and KB Asset Management.

“Kiwoom already has a strong online-user base, which is definitely positive when expanding into new projects like asset management,” Huh Nam Kwon, the chief investment officer at Shinyoung Asset Management in Seoul, which oversees about $8.8 billion, said by phone on June 24.

The brokerage purchased Woori Asset Management in February, made a profit from stock underwriting last year for the first time and will move into a new building it bought from Deutsche Bank AG’s Korea unit in August, Kwon said in an interview at his office in Seoul.

Dominant Trader

Kiwoom gained 2.6 percent at the close in Seoul trading, its biggest jump since June 11. The benchmark Kospi index rose 0.8 percent to the highest level since May.

The Kospi had slipped 0.6 percent this year through yesterday as the won’s strength weighed on exporters, overshadowing four consecutive quarters of accelerating economic growth. Asia’s fourth-largest economy expanded 3.9 percent in the first quarter as the central bank held interest rates at the lowest level since 2010 for a 13th straight month through June.

Kiwoom accounted for about 13 percent of the nation’s equity trading by value in the first three months of this year, according to a regulatory filing on May 15. That’s more than double the 5.5 percent average for its five biggest rivals.

The company, which has a market value of $921 million, posted a 26 percent gain in net income during the three months to March 31 from a year earlier, according to data compiled by Bloomberg. That compares with an average 20 percent drop at 62 South Korean brokerages during the period, according to Financial Supervisory Service data.

Online Broker

Kiwoom, the first online-only Korean brokerage when it was founded 15 years ago, overtook rivals by cutting out the cost of maintaining branches while offering lower trading fees, according to Michael Na, a Seoul-based analyst at Nomura Holdings Inc. The firm says it still charges the lowest commission in Korea at 0.015 percent.

“Major brokerages didn’t really pay much attention to us as they thought we were just serving a small, niche market,” said Kwon, 53, who previously worked at Korea’s Ministry of Trade Industry and Energy for 13 years.

The brokerage’s falling stock price suggests investors are skeptical the expansion will pay off. The shares have lost 23 percent in the past year, versus a 7.7 percent gain in the Kospi. (KOSPI) Its five biggest listed competitors have dropped an average 8.2 percent during the same period.

Kiwoom should focus on online broking instead of expanding into new businesses, according to Sean Chang, a Seoul-based analyst at Samsung Securities Co.

Job Cuts

“For a re-rating of the stock, it needs to provide a clear vision of where the company is headed,” Chang wrote in a May 16 report.

Kiwoom’s brokerage business is coming under pressure as volumes slump. The 200-day average value of shares changing hands on Korea Exchange fell to 3.8 trillion won ($3.8 billion) last month, the lowest level in seven years, according to data compiled by Bloomberg.

Local brokerages reduced their number of branches by about 10 percent from a year earlier to 1,477 as of December and cut their workforces by 6 percent to 40,243, the FSS said in February. The companies recorded combined losses of 109.8 billion won in the nine months through December, according to the FSS.

Market Share

The won’s 5.2 percent gain against the dollar in the three months ended June, the biggest increase among 31 major currencies tracked by Bloomberg, has boosted the appeal of overseas investments. Korean individuals sold a net $375 million of Kospi index shares so far this year while lifting holdings of overseas securities to $13.1 billion at the end of May, the most since October 2010, according to the Korea Securities Depository.

Kiwoom is seeking to both maintain its lead in trading and find new growth outside its main business. In April, it became the first brokerage to sign an agreement with Kakao Corp., allowing users of the country’s most-popular mobile messaging service to trade stocks through Kiwoom.

The company has held its market share in stock trading above 13 percent in the past year amid the slump in volumes. It was 6.3 percent eight years ago.

The firm arranged six initial public offerings last year, and bought Woori Asset Management for 75.5 billion won. The purchase has boosted Kiwoom’s total assets under management to 21 trillion won from 1.1 trillion won, making it the country’s eighth-largest private money manager.

“The company seems capable of providing new products,” said Song Chi Hoon, a researcher at Woori Finance Research Institute in Seoul. “While maintaining its cost efficiency, it has good potential to expand into new areas.”

Kiwoom plans to underwrite at least six stock offerings this year and could be arranging as many as 20 a year by 2016, according to Kwon. Its investment-banking unit has increased staff to 50 from about 15 in 2009 and may boost headcount by another 20 percent to start a private-equity business.

“We plan to continue launching new businesses,” Kwon said. “The challenging spirit, which is what defined Kiwoom from the very beginning, is still very much alive here.”

To contact the reporters on this story: Sharon Cho in Seoul at ccho28@bloomberg.net; Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editors responsible for this story: Michael Patterson at mpatterson10@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net Allen Wan

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