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Although stock prices across small and mid-sized securities firms have climbed in tandem over the past year, they have struggled to shake off undervaluation compared to their larger peers. While the price-to-book ratio (PBR) of some small and mid-sized brokerages lingered in the 0.3 range, major large-cap securities firms recorded PBRs around 1, perpetuating a persistent valuation divide. Analysts suggest that to narrow this gap with industry leaders, smaller firms must improve capital efficiency by lifting their return on equity (ROE).

According to financial market tracker FnGuide on the 6th, the PBR of Eugene Investment & Securities stood at 0.35 as of the 4th. DB Financial Investment stood at 0.36, LS Securities at 0.43, and Yuanta Securities Korea at 0.51. The simple average PBR of the four brokerages was 0.41, falling short of even half of each firm's net asset value.

In contrast, Mirae Asset Securities recorded a PBR of 1.52, NH Investment & Securities 1.04, Samsung Securities 0.96, and Korea Investment Holdings 0.92. The average PBR of these four large brokerages was 1.11, roughly 2.7 times higher than that of the four smaller firms.

Despite their subdued market valuations, small and mid-sized securities firms posted substantial profit gains. In the first half of this year, Yuanta Securities reported consolidated net profit of 129.8 billion won, up 298% year-on-year. Eugene Investment & Securities jumped 204% to 120.2 billion won, LS Securities climbed 116% to 73.9 billion won, and DB Financial Investment rose 49% to 70.8 billion won.

Over the past year, share prices climbed 41% for Yuanta Securities, 34% for LS Securities, 30% for Eugene Investment & Securities, and 18% for DB Financial Investment. Although the average gain across the four firms topped 30%, their market valuation relative to net assets continued to lag behind larger firms.

The earnings growth across small and mid-sized brokerages in the first half was largely driven by higher trading value fueled by a domestic stock market boom. Yuanta Securities saw significant profit expansion in retail brokerage and financial product sales, while Eugene Investment & Securities improved across core business divisions including wealth management (WM), equity trading, and investment banking (IB). LS Securities was buoyed by a return to profitability in investment brokerage and higher gains from proprietary trading, while DB Financial Investment saw improved profitability in WM and principal investment (PI) backed by strong equity markets.

However, market observers note that short-term net income gains alone are insufficient to overcome undervaluation. A critical factor in market assessment is how consistently a firm can generate profit from its equity capital base. A higher ROE—reflecting earnings power relative to net assets—allows a company to command higher market value even with the same capital base.

An industry source noted, "Given that the cost of capital for financial institutions hovers around 10%, a firm must consistently maintain an ROE above 10% to achieve a PBR exceeding 1. For small and mid-sized securities firms, secondary valuation rerating will depend less on the scale of profit growth itself and more on how much they can enhance capital efficiency."

According to FnGuide, the consensus third-quarter operating profit for the Kospi securities sector is forecast at 2.1895 trillion won, a 46% decline from the previous quarter. Slower brokerage revenue caused by reduced transaction volume, alongside high base effects from second-quarter valuation gains, are expected to weigh on performance. Moving forward, narrowing the valuation gap will hinge on whether smaller firms can diversify revenue streams into WM and IB to dampen market-driven volatility and improve capital efficiency.

                                                                                                                Kim So-ra