The risk profile of large Taiwanese securities houses may deteriorate as they accelerate expansion overseas and raise leverage once foreign investment grows excessive relative to their loss-absorption buffers and liquidity flows, Fitch Ratings said yesterday.
Yuanta Securities Co (元大寶來證券) and KGI Securities Co (凱基證券), the nation’s top two brokerages with market shares of 13 percent and 9 percent respectively, saw their leverage surge to 4.3 times their equity levels last year, from 2.72 times in 2013, the international ratings agency said.
The acquisition of Tongyang Securities Inc by Yuanta Securities and the merger between KGI Securities and Grand Cathay Securities Co (大華證券) enabled the two companies to enlarge their economies of scale quickly, said Sophia Chen (陳怡如), who covers financial institutions for Fitch Taiwan.
The two securities firms may continue to expand, likely in emerging markets in the Asia-Pacific region, as excessive competition and low interest rates constrain profitability at home, Chen said.
Overseas earnings contributions rose to 29 percent last year, up from 17 percent in 2013, Fitch data showed.
Such a strategy would push the companies’ leverage higher, making them vulnerable to market volatility, credit losses and severe capital erosion in the case of external shocks, Chen said.
“It is important to note that the two brokerages have little experience and familiarity with the overseas markets where their exposure is building up,” the analyst said.
Jonathan Lee (李信佳), a senior director at Fitch Taiwan, forecast that overseas operations would account for 40 percent of total earnings this year.
Hong Kong branches may generate robust profits given the stock rallies and active trading, Lee said.
Currently, risk pressures remain manageable, Fitch said, as Yuanta Securities and KGI Securities both maintain healthy loss-absorption buffers and hold generally low-risk investment tools such as government and investment-grade private-sector bonds.
In addition, the two brokers have favorable leverage ratios in comparison with peers in Japan and South Korea, where securities houses are more actively engaged in market making and proprietary trading, Fitch said.
Other Taiwanese brokerages carry much less weight, Fitch said, with Fubon Securities Co (富邦證券) ranking third with a 6 percent market share, followed by SinoPac Securities (永豐金證券) and Capital Securities Co (群益證券) with 5 percent each.
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