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Samsung Securities – Hong Kong swan song

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HONG KONG (Dow Jones Banking Intelligence) – Korean brokerage Samsung Securities Co. has now effectively largely shut down its international operations in Hong Kong – at the behest of its parent – following a major expansion just two years ago. At the same time, Japan’s Daiwa Securities Group Inc. and Mizuho Financial Group Inc. announced deep cuts in their overseas operations, totalling 200 and 300 redundancies respectively. We look at the reasons why – and at what’s in store for Asia’s smaller capital markets players.

While Samsung Securities has had a presence in Hong Kong since 2001, this unit of one of Korea’s major conglomerates and the largest – and arguably the most successful – broker there, really started to boost its local presence in 2010 through the hire of S.J. Hwang, an experienced operator and former co-head of equities for Asia (ex-Japan) at Credit Suisse, as its CEO for Asia (ex-Korea).

The operations, which are said to have employed some 100 people, quickly expanded in the cash equities area. A variety of high profile hires took place from competitors, including Macquarie and Nomura – in the latter’s case, especially following the Japanese bank’s acquisition of Lehman Brothers in late 2008, and ensuing departures. The growth of Samsung Securities’ investment banking operations in Hong Kong wasn’t as swift – in particular, it only had minimal sector coverage capabilities – although it did close several small-cap ECM transactions over the last few years, including the listing of Germany’s Schramm Holdings AG in Hong Kong in December 2009 (a company now in the process of de-listing) and five placements there for a combined US$250 million equivalent, mainly in the mining and resources sector, according to Dealogic.

Shutting the broker’s Asian equity business, where it had managed to gain material trading market share with some major institutional investors, in particular on the strength of its equity research, is said to have caused anguish with several portfolio managers who were given no notice to redirect business elsewhere. On the ECM front, several mandates will be up for grabs by other houses (the number of 17 deals has been mentioned, although that appears probably excessive). The firm also potentially faces a difficult time with some of its corporate clients: the initial stock exchange filing for an IPO it was working on is said to have been only a few weeks away when Samsung Securities’ parent pulled the plug on 31 January.

This sorry episode turns the spotlight on one of the most active, but also most competitive, capital markets in the world. Building a securities business is expensive. It takes sales people, traders, sales- traders, research analysts and assistants and the associated back-office platform – not to mention compliance and supervisory and management departments. Keeping up with algorithmic trading technology and achieving substantial trading volumes are a must. ECM origination efforts depend in no small measure on a firm’s credentials and on the strength of the equity business’ market shares and research rankings. Rainmakers – especially those with China connections – come at a hefty price. Principals – those bankers that are qualified to sponsor new issues – remain few and far between, and can also come at substantial cost.

[See previous column – “Principals key to playing Hong Kong’s IPO game” –  13 October 2011]

Like some of its Japanese and Australian competitors eager to gain a foothold in Hong Kong’s equity market, Samsung Securities has probably found that the combination of a ballooning cost-to-income ratio and of a loss-making business, subsidized by home operations themselves hard hit by a stagnant (and even shrinking) market was fast becoming unsustainable.

[Details of those who lost their licenses with the SFC in Hong Kong – as posted on David Webb’s Webb-site – can be found HERE]

There’s no shortage of new entrants in Hong Kong, from Russia’s VTB Capital to India’s Religare Capital Markets and the U.S.’s Piper Jaffray or Jefferies. But with well-entrenched bulge-bracket players and Chinese houses increasingly gaining traction on the back of lending relationships, hard underwriting tactics and aggressive marketing, reality quickly starts to bite back for those operations that extend beyond a simple niche offering.

(Philippe Espinasse worked as an investment banker in the U.S., Europe and Asia for more than 19 years and now writes and works as an independent consultant in Hong Kong. Visit his website at http://www.ipo-book.com. Readers should be aware that Philippe may own securities related to companies he writes about, may act as a consultant to companies he mentions and may know individuals cited in his articles. To comment on this column, please email djbankingintelligenceereditors@dowjones.com).

[This article was originally published on Dow Jones Banking Intelligence on 1 February 2012 and is reproduced with permission.]

Copyright (c) 2012, Dow Jones & Company, Inc.