Foreign securities companies sacrifice profits for market share

02-Nov-2019 Intellasia | Dau Tu Chung Khoan | 6:02 AM Print This Post

Among five foreign securities companies with chartered capital of over one trillion dong, four companies clearly show their acceleration in the race to gain market share with the leading group, even willing to make losses in the brokerage segment to achieve the purpose.

Contrary to the trend of declining brokerage revenue over the same period of the domestic securities company group in the third quarter of 2019 due to the impact of the plummet of market liquidity, financial statements of foreign securities companies including Mirae Asset Securities Company Limited (MAS), KB Vietnam Securities Joint Stock Company (KBSV) and Yuanta Vietnam Securities Company (YSVN) all show strong growth trends in the third quarter. However, it is worth noting that brokerage services of all three companies record losses.

A separate report from MAS, a member of Mirae Asset Securuties (South Korea), said that brokerage revenue in the third quarter of 2019 reached 46.6 billion dong, up 80.6 percent over the same period in 2018.

Revenue grew strongly but expenses increased even faster with an increase of 105 percent, reaching 56.3 billion dong, making brokerage activities of MAS in the third quarter of 2019 lose 9.7 billion dong, increasing the losses of the segment after nine months to 29.8 billion dong.

The strong increase in revenue but negative profits is also the situation recorded in the brokerage segment of KBSVa member of KB Financial Group Korea.

Particularly in the third quarter of 2019, its brokerage revenue was 23.6 billion dong, nearly doubling compared to the same period, however, cost of goods sold (COGS) also increased to 93 percent, reaching 30.9 billion dong. In nine months, while brokerage business earned 61 billion dong for KBSV, revenue was 77.8 billion dong.

At YSVN, the situation has not improved. Brokerage revenue was 16 billion dong in the third quarter of 2019, doubling over the same period, but it was not enough to pay professional costs of up to 25.9 billion dong. In nine months, YSVN’s brokerage activity saw a loss of 30.6 billion dong.

In the group of foreign securities companies with chartered capital of over one trillion dong, KIS Vietnam Joint Stock Company (KIS) and Maybank Kim Eng Securities Co., Ltd (MBKE) are the two names that recognise black profits.

However, contrary to the strong breakthrough of MAS, KBSV and YSVN, brokerage revenue of KIS only increased by 3.7 percent. At MBKE, operating revenue has decreased by 11.6 percent in the last quarter.

Explaining that the faster the revenue growth is, the more losses the company suffers, while the slower growth is the higher profits are, many believe that it is because securities companies with foreign capital are implementing policies that focus on developing market share and accepting profits.

At MAS, after increasing its charter capital from 700 billion dong to two trillion dong in 2017, in 2018, the company continued to increase its charter capital to 4.3 trillion dong, keeping the second position in terms of capital size among the securities companies in the market, only following SSI Securities Joint Stock Company.

After completing the increase of charter capital to 5.455 trillion dong with additional capital contributed by the parent company, in early October 2019, MAS officially overtook SSI, becoming the securities company with the largest chartered capital on the stock market.

Raising capital strongly, MAS also promoted the recruitment of human resources and operation networks.

Since the network only includes its headquarters in Hanoi and HCM City branch in late 2017, the number of MAS branches has increased to five by the end of 2018 and continues to increase to seven by the end of September 2019.

MAS is currently the pioneer in implementing many incentive programmes for customers to open new accounts, so the surge in operating costs is understandable.

These activities quickly brought MAS a new position in the market. On Hochiminh Stock Exchange (HOSE), after entering the Top 10 brokerage market share in the second quarter of 2019 with 3.69 percent, MAS rose to the 5th position in the third quarter with a market share of 5.27 percent, up two places in ranking and 1.69 percent in market share compared to the previous quarter.

On the Hanoi Stock Exchange (HNX), from 9th place with 3.51 percent market share in the second quarter of 2019, MAS rose to the 6th position with 5.19 percent market share in the third quarter.

In the group of foreign securities companies, KIS is a rare name that maintains growth in market share when returning to the Top 10 on HOSE from the first quarter of this year, but brokerage activities remains profitable.

KIS is one of the foreign securities companies with a long time of operation in Vietnam, so compared to new names such as MAS, KBSV or YSVN, this company has built a certain foundation, especially with major clients, investment funds from Korea.

KIS continued to promote customer development and personnel, leading to a decrease in profit margin, but not to the extent of loss.

KIS’s profit margin has decreased from 40.2 percent in the third quarter of 2018 to 31.2 percent in the third quarter of 2019.

Although brokerage operations suffered losses or decreased profits, most foreign securities companies recorded positive growth in operating profit in the third quarter of 2019 as well as after nine months.

The MAS financial report stated that the third-quarter profit before tax reached 129.5 billion dong, up 82.6 percent compared to the same period of 2018; Accumulated nine months increased 83 percent, with 338.9 billion dong. In which, realised profit was 343.8 billion dong, unrealised profit was 4.8 billion dong.

KBSV also has a more impressive growth with pre-tax profit in the third quarter of 2019 increased by 5.2 times over the same period in 2018, reaching 48.9 billion dong. In nine months, KBSV achieved 113.8 billion dong of EBT, 3.5 times higher than the same period last year.

YSVN also reported positive profit with a profit of 7.9 billion dong in the third quarter of this year, while a loss of four billion dong in the same period of 2018. In the first nine months, YSVN Securities saw 19.5 billion dong of profit (the same period in 2018 was 10.2 billion dong).

At KIS, the pre-tax profit growth in the third quarter of 2019 and the cumulative nine months were 39.5 percent and 72.6 percent, respectively.

MBKE is the only name with declining profits.

The reason for the overall operating profit of foreign securities companies tended to grow strongly despite losses from brokerage activities resulting from strong growth in interest income from loans and receivables, offsetting all losses and decline in profits from the remaining array.

Specifically, in the third quarter, interest income from loans and receivables at MAS recorded 157 billion dong, 2.8 times the same period last year. At YSVN, KBSV and KIS, the increase in interest income and receivables respectively were 3.1, 7.8 and 2.1 times in the third quarter.

Corresponding to the increase in interest income, the balance of loans and receivables also increased sharply. Outstanding loans at MAS until September 30, 2019 reached 6.909 trillion dong, up 92.8 percent compared to the beginning of the year. At YSVN, KBSV and KIS, the outstanding loans until September 30, 2019 were 1.652 trillion dong (up 33.9 percent), 2.104 trillion dong (up 83.4 percent) and 2.722 trillion dong (37.3 percent).

The motivation for the outstanding loans of foreign securities companies to grow stronger than the domestic companies was from the competitive interest rates of this group of enterprises.

While the average lending interest rate level in the top securities companies is popular at around 12-14 percent per year (except in some lower cases when customers have large and reputable loan balance), in the group foreign securities companies, the offered margin interest rate is only around 10 percent per year.

For example, at MAS, the Company is offering loan interest rates from only 9.5 percent per year for new accounts.

At KBSV, after introducing the “KB Super Dream” package from March 2019, early October 2019, KBSV has just announced additional funding for this package of up to 200 billion dong. Accordingly, customers will be exempted from loan interest to buy securities in the first 10 trading days (0 percent interest rate) and only calculate interest on outstanding loans from the end of 11th day onwards.

Attractive output interest rates do not mean that the margin of lending from foreign securities companies is lower than that of domestic securities companies.

The reason is that, while domestic securities companies have to borrow domestic loans from commercial banks, issue bonds and certificates of deposit with a common interest rate of seven to nine percent per year, the foreign securities sector is supported by lower interest rates from foreign parent financial groups, or borrowed in USD with low interest rates compared to VND.

At KIS, this company is borrowing from Korea Investment Holdings with an interest rate of 4.6 percent per year. At MAS, loans only have interest rates from 2.144.9 percent per year.

At YSVN, loans with TAIFX interest rate plus 0.85 percent or 6-month LIBOR plus 1.2 percent. On average, the cost of capital of foreign securities companies only ranges from three to six percent per year.

Although subject to additional risks of exchange rate fluctuations, but in the context that VND is one of the most stable currencies in the region and the current economic outlook, this level of risk is at most only expected. Report at about two to three percent per year, even in 2019, the exchange rate with the US dollar is forecasted to be almost unchanged.

This is an advantage for foreign securities companies to lower lending rates while ensuring profit.

With competitive interest rates, it is not difficult to understand when outstanding loans at foreign securities companies maintain strong and steadily increase over quarters, rather than fluctuating abnormally like many domestic securities companies.

Attractive interest rates have become an important tool for foreign securities companies to attract customers. More and more customers open trading accounts, so that the brokerage revenue, margin debt and even margin lending interest increased.

However, from the overall business picture, the block of foreign securities companies is not necessarily without weaknesses. That is, as foreign investors, these units cannot invest in stocks that have run out of “room” and affect the supply of new products and services such as warrants with guarantee from the second quarter of this year.

In the group of foreign securities companies, KIS is the pioneer to become the issuer instead of providing trading services like other units and currently has 12/32 tickers listed by KIS. (as of October 24, 2019).

However, KIS’s warrants are less attractive to investors, one of the reasons is that the warrants are based on stocks with foreign room, not issued on out-of-room stocks such as FPT, MWG, PNJ, REE…, because it is impossible to prevent risks.

The reputation of foreign securities companies also makes it more difficult for proprietary traders because they cannot invest in stocks that are out of room and cannot seek profits when the market is active in these stocks.

It is worth mentioning that although the growth in absolute profits over the same period, but compared to the capital size that foreign securities companies are used to generate profits, this rate is very low.

After the “grace period” from the parent group, foreign companies will be under pressure to profit on their real capital and from here, the competition story of securities companies in the new market can be compared on same ground.

Back to the margin story, although it is a major source of profits for foreign securities companies, it will grow strongly if it does not come with good risk control, which is easily overlooked in concentrated development of the market, always stick to the potential risk of bad debts and the consequences can only be seen in the future.

 

Category: Business, Vietnam

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