[Edaily Marketin JI YEONG-EUI Reporter] Securities firms are stepping up their efforts to attract customer funds by offering annual interest rates in the 5% range. This is part of their strategy to expand the commercial paper business—where they borrow money from customers to invest in corporate loans and acquisition financing, earning interest and fees in the process.

The problem is that the higher the interest rates promised to customers, the more profit securities firms must generate to cover those costs. With the promissory note market nearing 56 trillion won and the number of participants rising to nine, the intensifying interest rate competition could end up putting a strain on the profitability of securities firms.

Prom

issory Note Market Swells to 56 Trillion Won… Competition for High-Interest Special Offers Heats Up

According to the Financial Services Commission and the investment banking (IB) industry on the 29th, the outstanding balance of promissory notes raised by seven domestic securities firms stood at 55.9291 trillion won as of the end of June. This represents an increase of 11.5379 trillion won (26%) compared to 44.3912 trillion won during the same period last year. This is attributed to the combined effect of expanded funding by existing operators and new issuances by Kiwoom, Hana, and Shinhan Investment Securities, which received licenses at the end of last year. Subsequently, in September, Samsung and Meritz Securities received licenses, bringing the total number of operators to nine.

As the number of market entrants grows, interest rate competition to attract customers is intensifying. Kiwoom Securities launched a special offer with an annual pre-tax rate of 5.8% for a 3-month term, while Hana Securities offered 5.7% per annum for a 1-year term. Samsung Securities offered 5.5% per annum for instruments with a maximum term of 90 days, and Meritz Securities offered 5.0% per annum on 6-month instruments for new customers on the 27th.

Commercial paper is a product with a maturity of one year or less issued by licensed securities firms using their own credit. Securities firms invest the funds they raise in corporate bonds, corporate loans, and acquisition financing to earn interest and investment returns. Based on their secured capital, they can also earn commissions by arranging corporate finance transactions. However, the higher the interest rate at which they raise funds, the greater the investment returns they must secure to match it.

For example, maintaining an average funding balance of 1 trillion won at an annual rate of 5% for one year results in interest expenses alone of 50 billion won. If the funding rate rises by 1 percentage point, the annual burden increases by 10 billion won. If investment returns do not increase accordingly or if investment assets become impaired, profits are bound to plummet. In particular, if competition for high-interest special offers continues, the impact on overall funding costs must also be examined. If sales of products offering high interest rates persist and interest rates on standard products also rise, the interest expenses that securities firms must bear will increase.

The key issue is whether they can secure high-quality investment opportunities to put the raised funds to work. Even if the amount of money raised through promissory notes increases, failure to generate corresponding investment returns will only add to the burden. In particular, as competition among securities firms for corporate finance (IB) deals intensifies, a decline in investment returns—combined with high funding costs—will inevitably increase pressure on margins.

Furthermore, increasing investments in assets with relatively high yields to cover high-interest funding costs could also heighten risk exposure. If corporate loans turn bad or there are delays in recovering funds from acquisition financing, firms could incur losses even if they earn interest and fees. If assets with long recovery periods are managed using promissory notes maturing within one year, funds must be refinanced at each maturity date.

It is also worth noting that financial regulators are tightening the regulatory reins. The mandatory venture capital allocation ratio required by financial regulators will rise from 10% this year to 25% by 2028. Under this system, investment management companies must allocate a portion of their total assets under management to venture capital, based on the mandatory amount calculated using funds raised through promissory notes and Integrated Investment Accounts (IMAs). Alongside expanding corporate finance investments, the challenge of managing profitability and asset quality is no small task.

While securities firms that have raised funds at high interest rates may be tempted to turn to high-yield overseas assets if they cannot generate sufficient investment returns domestically, this is not easy given the scrutiny from regulators and the original intent of the system. Financial authorities and supervisory agencies are encouraging firms to use funds raised through promissory notes for domestic corporate finance and venture capital. While overseas investment itself is not prohibited, authorities do not view an expansion of such investments favorably, given the system’s intended purpose of supplying funds to domestic companies. In fact, last March, the Financial Supervisory Service (FSS) reviewed securities firms’ overseas private loan investments and examined the amount invested through commercial paper.

An industry insider in the investment banking sector noted, “Since firms must also factor in the burden of repaying the funds raised through promissory notes, some are likely starting to feel the strain,” adding, “As funding rates rise, they need to secure profitable investment opportunities, but since there aren’t that many high-quality investment opportunities in the market these days, competition over high interest rates could backfire.”