Korean brokerage firms post smaller-than-expected CFD, PF provisions

Contrary to market concerns, South Korean brokerage firms have managed to avoid being jolted by potential earnings shocks stemming from contracts for difference (CFDs) receivables. Nevertheless, they are sounding a cautionary note, signaling the potential for a further earnings downturn depending on the trajectory of the real estate market due to growing provisions for losses associated with domestic project financing (PF), overseas real estate funds, and second-quarter valuations.

According to the financial industry on Thursday, provisions for CFD receivables at Korea’s top 10 domestic brokerage firms are estimated at 150 billion won ($114.1 million). However, they are presumed to have cut the amount by 500 billion won in valuation and domestic real estate PF losses from overseas real estate funds in the second quarter. “CFDs are recorded a receivable immediately at a certain point, so they have been almost fully reflected in the second quarter,” said Lee Hong-jae, an analyst at Hyundai Motor Securities Co. Among brokerage houses, Korea Investment & Securities Co. and Hana Securities Co. posted the largest one-time provisions in the second quarter.

Kiwoom Securities Co., which had small exposure to overseas real estate but a large amount of CFD investments from retail investors, also posted earnings that fell short of market expectations as it accumulated provisions for CFDs and real estate PF ranging from 70 billion won to 90 billion won. Samsung Securities Co. is known to have recorded CFD provisions and real estate fund valuation losses in the range of 50 to 70 billion won given the amount of losses on cost-measured financial assets reported for the second quarter.

NH Investment & Securities Co. posted lower provisions than expected. The amount of the provision was 30 billion won, of which 20 billion won was related to real estate PF and 10 billion won CFD receivables. Net profit for controlling shareholders for the second quarter announced by Mirae Asset Securities Co. on Thursday was 132.5 billion won, below market consensus. Mirae Asset Securities‘ CFD receivables were small compared with other securities firms, and the company did not record any large-scale losses from overseas real estate valuations.

Financial holding companies KB Securities Co. and Shinhan Investment & Securities Co. were both estimated to have CFD and real estate provisions below 20 billion won. “The real estate PF provisions became an issue starting from the end of last year and early this year, but bank holding companies, unlike brokerage firms, did not report the amount of provisions for the second quarter, making it hard to estimate the figure accurately,” said Na Min-wook, an analyst at DS Investment & Securities Co.