Brokerages rattled by Samsung Electronics and SK hynix plunge... “Brokerages’ exposure to leveraged investing has overtaken real estate finance” [fn Market Watch]

[Financial News] It has emerged that credit extended by domestic securities firms, as a share of their equity capital, has surpassed their exposure to real estate finance. The structure of brokerages’ credit-related risk exposure, which they have been managing in response to distress in real estate project financing (PF), is changing amid a stock-market boom. In particular, margin loans concentrated in just two stocks, Samsung Electronics and SK hynix, exceed 9 trillion won, making asset-quality management amid increased stock-market volatility a new challenge.
According to a report titled “Behind the Stock Market’s Sharp Swings,” released by NICE Investors Service on the 15th, the ratio of credit exposure to equity at the 29 securities firms under review stood at 60.4% at the end of June this year. Real estate finance exposure was 54.1% over the same period, 6.3 percentage points lower.
Credit-related exposures at securities firms had until then been weighted more toward real estate finance. But since 2022, real estate finance has contracted under the burden of higher interest rates and an expansion in troubled projects, while credit extensions surged from the second half of last year on the back of a booming stock market. As a result, from the end of March this year, credit exposure as a share of equity began to surpass real estate finance exposure.
Total credit extended across the securities industry surged 42.2%, from 45 trillion won at the end of June last year to 63.9 trillion won at the end of June this year, reaching an all-time high.
The balance fell after a sharp stock-market decline in July, but the combined total of margin loans and loans secured by deposited securities still stood at 59.7 trillion won at the end of September. That was about 15 trillion won more than at the end of June last year.
Researcher Seo Jae-won pointed to the growing concentration of margin loans in semiconductor stocks as a risk factor. At the end of September, semiconductor-related loans totaled 10.4 trillion won, or 31.1% of the 33.4 trillion won in total outstanding margin loans. A total of 9.2 trillion won was concentrated in Samsung Electronics and SK hynix alone, equivalent to 27.5% of all margin loans.
With margin loans, the assets purchased with the borrowed funds also serve as collateral, so a fall in share prices simultaneously erodes the value of both the investment and the collateral.
However, analysts say the likelihood of large-scale losses on the scale of the past Youngpoong Paper incident is limited, as Samsung Electronics and SK hynix have large market capitalizations and high trading volumes, and their investors are diversified.
Researcher Seo said, “The expansion of credit extensions has also affected brokerages’ funding structures.”
Electronic short-term bond issuance by the securities firms covered by NICE Investors Service rose sharply from 11.6 trillion won at the end of last year to 28.7 trillion won at the end of June this year. Increased margin lending and increased demand for margin in derivatives trading also contributed, but analysts say brokerages partly relied on short-term borrowing to meet their increased funding needs.
Small and midsize brokerages, in particular, tended to become more reliant on electronic short-term bonds because they had fewer funding options than larger firms.
The correlation between changes in credit extended and electronic short-term bond issuance, as calculated by NICE Investors Service, was 0.38 for small and midsize firms, higher than the 0.11 for large firms. However, the related funding risk was assessed to have eased somewhat as the volume of electronic short-term bonds declined after August.
He said, “If a sharp fall in share prices and lower trading volumes delay forced liquidations, losses could exceed investors’ margin deposits,” and assessed, “Even if risks across the sector as a whole are limited, individual brokerages with inadequate risk management could see a relatively significant impact on their earnings.”
 
[email protected] Kim Hyun-jung Reporter