S&P Goes Negative on Mirae, KIS as Korean Property Bets Turn Sour

S&P Global Ratings has lowered its outlook to negative on Mirae Asset Securities and Korea Investment & Securities, with the agency flagging the Korean brokerages’ exposure to struggling property markets at home and overseas.

S&P cut its rating outlook from stable to negative for Mirae Asset Securities and KIS while affirming the Seoul-based companies’ BBB long-term and A-2 short-term issuer credit ratings in separate actions taken late last week.

Korean securities firms are mainly exposed to weakening commercial real estate markets in the US and Europe, the agency said. The negative rating outlook reflects the view that property risks could strain the firms’ asset quality and profitability over the next few years, potentially leading to ratings downgrades.

“Property risks remain high for Korean securities firms,” S&P said. “These companies’ sizable property exposure in both domestic and overseas markets could hurt their asset quality and result in subdued profitability in the coming one to two years.”

Diminishing Returns

Mirae Asset Securities reported a return on average assets of 0.3 percent in 2023, according to preliminary financial results cited by S&P, down from 0.7 percent in 2022 and 1 percent in 2021. The diminishing profitability was mainly due to additional impairment losses and provisions related to overseas and domestic property exposures, the agency said.

KIS, meanwhile, reported a return on average assets of 0.8 percent last year, similar to 2022 but less than its average of 1.6 percent during 2019-21. S&P again cited impairment losses and provisions tied to overseas and domestic property exposures that “partly strained” the firm’s profitability.

Korean securities firms’ exposure to overseas alternative investments was about 30 percent of their total shareholders’ equity on average at the end of 2023, S&P estimated. Most of the investment was in subordinated tranche or equity, both of which the agency deems risky.

Back in South Korea, S&P reckons that the property market won’t recover significantly in the next few years. Therefore the firms may need to set aside additional provisioning, depending on the quality of projects.

“We estimate Korean securities firms’ exposure to real estate project financing (guarantees and loans) at end-2023 averaged about 33 percent of their shareholders’ equity,” the agency said.

Foreign Office Flops

The Korea Economic Daily reported last May that a private US real estate fund managed by Mirae Asset Global Investments had posted a 70.2 percent loss as the vehicle neared maturity that month. The fund’s cornerstone asset, an office tower at 1750 K Street Northwest in Washington DC, was said to have declined in value to 25 percent of its $115 million purchase price in 2015.

Mirae Asset Global Investments also invested in Boston’s State Street Financial Center on behalf of a South Korean land ministry property fund, with that asset down more than 30 percent in value from its $134.9 million purchase price in 2017, the Korea Times said last week.

Across the Atlantic, Mirae Asset Global Investments and its partners are in talks to sell their 20 Old Bailey office block in the City of London to Indonesia’s Sinar Mas Land for £240 million ($308 million), according to React News. The Korean-led consortium had bought the property from private equity giant Blackstone for £341 million in 2018.

A South Korean lawmaker said last month that the country’s five biggest financial companies were facing KRW 1 trillion ($749 million) in losses from KRW 20 trillion in overseas real estate investments, led by Hana Financial Group with an exposure of more than KRW 6.2 trillion invested outside the country, Bloomberg reported.