Daishin Securities Co., Ltd.
Annual Report for the year ended on
31 March 2009 as filed with the UK Listing
Authority on 30 September 2009
Annual Report
(48th Fiscal year)
Fiscal year: From April 1, 2008 to March 31, 2009
To: Financial Supervisory Service of Korea Stock Market Division of the Korea Exchange
Daishin Securities Co., Ltd. herewith submits its annual report to the Financial Services Authority of the United Kingdom. This annual report is the summary and translation of the annual report of Daishin Securities Co., Ltd. submitted to the Financial Supervisory Service of the Republic of Korea pursuant to Financial Investment Service and Capital Markets Act
September 30, 2009
Company Name : Daishin Securities Co., Ltd. CEO : Chung Nam Roh
Head Office : 34-1, Youido-dong, Youngdungpo-ku, Seoul, 150-884, Korea (Tel) 82-2-769-2000
Prepared by : (Position) Gneral Manager Strategic Planning & Coordination Dept. (Name) Dae-Han Hong
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Table of Contents
I. Business Report ...1 1. Corporate History ………….……….1 2. Chairwoman’s Message……….2 3. CEO’s Interview……… 44. General Corporate Information ……….5
A. Business Objectives………..5
B. Total Employee Status………..8
C. Status of Domestic Branches and Overseas Representative Offices……… 8
D.Organization Chart……….9
E. Stock Information………..10
5. Parent Company, Subsidiary Company and Consolidated Circumstances, etc………11
A. Parent Company Status……….11
B. Subsidiary………..11
C. Director’s Concurrent Office Position at Parent Company & Subsidiaries………..11
6. Operating Results & Asset Status for past 3 years………12
A. Operating Results………..12
B. Asset Status………...12
C. Financial Stability……….12
7. Risk Management………..13
8. Challenges……….14
9. Major Shareholder Structure……….16
10. Board of Directors and Audit Committee Member……….16
11. Investment Status in Other Companies………16
12. Major Creditor, etc………...16
13. Important Events Occurred after Company Fiscal Year………..16
14. Other Important Circumstances related to Business Operation………...16
II. Financial Report (Non-consolidated)……….………17
1. Balance Sheet……….17
2. Statement of Income………..19
3. Statement of Appropriations of Retained Earnings………...21
4. Statement of Changes in Shareholder’s Equity……….22
5. Statement of Cash Flows………...23
III. Audit Report……….………..26
1. Audit Report by the Audit Committee………...26
2. Report of Independent Auditors (Non-consolidated Financial Statements)………..27
IV. Appendix………28
1. Management’s Discussion and Analysis………….………...28
2. Report on Internal Accounting Control System……….35
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I.
Business Report
1. Corporate History
1962 Jul. 27 Established as Sam-Lark Securities
1968 Jul. 08 Renamed Chung-Bo Securities
1975 Apr. 22 Oct. 01
Renamed Daishin Securities
Listed on Korea Stock Exchange (now Korea Exchange)
1984 Aug. 25 Sep. 22
Established Tokyo Representative Office Established Daishin Economic Research Institute
1985 Mar. 06 Apr. 12 May 28
Forged capital alliance with W.I.C.O., Hong Kong Forged capital alliance with Yamaichi Securities, Japan Relocated headquarters to Yeoido, Seoul
1988 Mar. 24 Established Daishin Investment Consulting Co
1990 Jul. 20 Established Daishin Songchon Cultural Foundation
1996 Jul. 01 Nov. 23
Changed the name of Daishin Investment Consulting Co. to Daishin Investment Trust Management Co.
Introduced Korea’s first “One Card System”
1997 Apr. 12 Launched home trading system (CYBOS DOS version)
1998 Jun. 09 Introduced Internet trading, the first among large brokers
1999 Aug. 31 Nov. 03
Capital increase (new share issue via third party placement) - strategic alliance with Sumitomo Life Insurance, Japan Capital increase (rights offering)
2002 Sep. 16 Retired 200,000 common shares of treasury stock
2003 Jul. 21 Sep. 04 Dec. 01
Selected as a component of KODI (Korea Dividend Stock Price Index, an index of 50 component stocks)
Registered as insurance sales agent financial institution
Selected as a component of KOGI (Korea Corporate Governance Stock Price Index)
2004 Mar. 10 Jun. 03 Jun. 23
Received Good Compliance Member Award given by Korea Exchange Recognized for outstanding corporate governance by Korea Exchange Registered to engage in investment advisory business
2005 Feb. 25 Sep. 26 Dec. 09 Dec. 09 Dec. 17
Received approval to deal in OTC derivatives products Road shows (major US cities including New York) Received approval to engage in trust business Registered to engage in retirement pension business
Capital increase (new share issue via third party placement) - strategic alliance with SPARX Asset Management, Japan
2006 Aug. 21 Aug. 29 Oct. 16
Launched next generation ARS system
Forged strategic alliance with Nikko Cordial Group of Japan Forged capital alliance with Nikko Cordial Group
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2007 Nov. 03 Listed 20 million GDS on London Stock Exchange (capital increase by KRW 50 billion)
2008 Feb. 13 May 26 Sep. 12
Established Daishin Securities Asia Limited, Hong Kong (overseas subsidiary) Established Shanghai Representative Office in China
Added an affiliate with the establishment of private equity fund, Daishin Pegasus No.1
2009 Feb. 04 Feb. 05 Apr. 22 May 04
Shift to financial investment business with the implementation of Financial Investment Services and Capital Markets Act
Daishin Securities Asia Limited, Hong Kong, launches operation
Participation in Korea Financial Telecommunications and Clearings Institute project for fund transfer (Retail payment)
Opened next-generation financial system
2. Chairwoman’s Message
To our esteemed shareholders,
Fiscal year 2008 was a year of unprecedented challenges for the financial markets and economies across the globe. The support we received from our shareholders was invaluable in helping us navigate through the troubled times.
Growing financial turmoil, bankruptcy of prominent global companies and volatile commodity prices raised fears that the global economy may be headed for a prolonged recession. Korea was not spared from the woes. Prospects for the domestic economy were bleak amid a downward spiral of the Korean currency, declining exports and subsequent deterioration in corporate earnings, and depressed domestic consumption.
Over the past fiscal year, all of us at Daishin Securities worked tirelessly to find new opportunities for growth amid the crisis. We extended our international network to add momentum to our global business. We opened an office in Shanghai to make headway in China, which has emerged as a global economic center, while full-fledged operations are now underway at our Hong Kong subsidiary.
Our newly launched next-generation IT system allows us to meet diverse customer needs in the face of rapid market changes including adoption of the Financial Investment Services and Capital Markets Act (FSCMA). Based on the new IT system and differentiated services, we aim to spearhead new trends in the financial markets. In recognition of our ongoing drive to provide services that delight customers, Daishin Securities secured the No.1 spot in the 2008 global customer satisfaction survey by JMA Consultants of Japan. This year, we ranked first among securities firms in the wellbeing & premium brand category. For fiscal 2008, Daishin Securities recorded operating revenue of KRW2,823.7 billion and operating expenses of KRW2,723.5 billion. Operating income amounted to KRW100.1 billion. Non-operating income was KRW27.1 billion and non-operating expenses were KRW2.3 billion. We posted pre-tax income of KRW124.9 billion and net income of KRW103.3 billion.
We distributed cash dividends of KRW1,000 per share for common stock and Class 2 preferred stock and KRW1,050 for Class 1 preferred stock. In doing so, we upheld our pledge to return wealth to our shareholders while becoming the only major securities company in Korea to pay out cash dividends for eleven consecutive years. Daishin Securities will maintain its profit-oriented approach to maximize
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earnings in fiscal year 2009 and meet our shareholders’ expectations.
In addition to the slump in the world economy, we anticipate fiercer competition from Korean and global financial institutions. To respond to new developments in the financial markets and to spearhead change, our business objective for fiscal 2009 is to become a “financial attending doctor offering expert financial services.” Our action plans to realize this goal include strengthening core services, cultivating future growth engines, and promoting a corporate culture based on trust. Harnessing our next-generation IT system introduced last fiscal year, we will strive to boost work efficiency and deliver unique, high quality services.
Every effort will be made to ensure the success of new businesses to achieve earnings diversification and a stable profit structure. We will also promote a new investment culture with added emphasis on risk management. Daishin Securities will continue to evolve into a global investment bank that pursues mutual advances with customers and shareholders.
We look forward to your continued faith and encouragement as we work towards our vision of becoming the foremost investment bank in Korea.
Daishin Securities Co., Ltd. Chairwoman
Auh-Ryung Lee
3. CEO’s Interview
Q. What is the future direction of Daishin Securities in this age of the Financial Investment Services and Capital Markets Act (FSCMA)?
Our ultimate objective is to build the world’s most trustworthy company that grows together with our clients. Rather than concentrating on simply growing our capital and organization, we have a relentless focus on the fundamentals and on upgrading quality of customer service. Our plan is to complete the transition into a financial services provider with Korea’s leading brand value by the year 2013.
2009 will be the year in which we make the leap as a full-fledged investment bank. Our strategy is to bolster both existing strengths and promising growth areas to sharpen our future competitive edge. To this end, we plan to dramatically enhance our advantage in the retail segment while working to gain a solid foothold for growth in areas such as wealth management, investment banking and principal investment.
In the retail segment, our goal is to make all our clients financially happy. We are empowering our sales staff with in-depth financial expertise so they can become a “financial attending doctor” offering totalwealth management solutions. Moreover, we are reinforcing all areas of the retail business by pooling our resources and mapping out new strategies.
Compliance is another important area of focus as we endeavor to mitigate risks and increase customer trust. The FSCMA has opened doors for securities firms to broaden their scope of business to areas such as futures and hedge funds. We plan to achieve a stable profit structure by making full preparation before entering the new markets and developing differentiated products.
Q. What are your business plans for fiscal 2009?
In fiscal year 2008, Daishin Securities posted a drop in earnings from the previous year. But even in an extremely turbulent financial market, our fundamentals remained intact thanks to our proactive approach to risk
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management, and the company is now readying for another leap forward.
Daishin’s 2009 management goal is to become a “financial attending doctor offering expert financial services.” To attain this goal, we will deliver total financial services and further improve retail services through companywide sales process innovation.
Other 2009 objectives include successful entry into new businesses such as futures and hedge funds to propel future growth, development of new products and services to pursue earnings diversification, and an all-out campaign to increase assets. Daishin Securities remains firmly committed to evolving into a global investment bank by instilling an investment culture that values an inclusive and preemptive approach to risk management. We will also work towards building up our image as a trustworthy company that always puts customers first.
Q. Tell us about your efforts to enhance shareholder value.
Daishin Securities has always placed priority on maximizing shareholder value. Our principle of returning wealth to shareholders has been represented by our cash dividend payouts.
We are also Korea’s only major securities company to distribute cash dividends for eleven years in a row. For fiscal year 2008, Daishin Securities distributed per share cash dividends of KRW 1,000 for common stock, KRW 1,050 for Class 1 preferred stock, and KRW 1,000 for Class 2 preferred stock.
Going forward, we will invest more in areas with high growth potential and strengthen our competitiveness in retail operations to ensure that our shares are fairly valued in the market.
Daishin Securities Co., Ltd. President & CEO
Chung-Nam Roh
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4. General Corporate Information A. Business Objective
(1) The purposes of the Company shall be to engage in the following businesses: 1. Buying and selling securities;
2. Securities brokerage;
3. Acting as an intermediary or agent for sale or purchase of securities;
4. Acting as an intermediary, arranger or agent with respect to entrustment of a sale or purchase transaction to be executed on the Stock Market Division or KOSDAQ Market Division of the Korea Exchange or an exchange located in a foreign country which is similar to the Korea Exchange; 5. Securities underwriting;
6. Public offering of outstanding securities;
7. Arranging for a public offering of newly issued or outstanding securities; 8. Extending credit in relation to sale or purchase of securities;
9. Securities savings business; 10. Margin lending;
11. Securities lending and acting as an intermediary for securities lending or borrowing; 12. Securities business in foreign countries;
13. Engaging in business activities described in Items 1 through 4 above with respect to securities indexes;
14. Evaluating or appraising securities and equity securities;
15. Acting as an intermediary, arranger or agent for corporate mergers and acquisitions;
16. Buying and selling certificates of deposit and acting as an intermediary for sale or purchase of certificates of deposit;
17. Trustee business for a public offering of bonds; 18. Acting as an agent in relation to securities transactions;
19. Providing advice or assistance in connection with management, restructuring and/or finance of companies;
20. Acting as an intermediary or providing advisory services for lease, sale or purchase of real properties owned by customers or clients during the course of conducting the business activities set out in Item 15 or 19 above;
6 21. Leasing real properties to others;
22. Renting safe deposit boxes to others;
23. Lending its own securities to institutional investors; 24. Selling lottery tickets and admission tickets as an agent; 25. Providing training regarding securities;
26. Publishing publications and books;
27. Commuter service business, and leasing and selling computer systems or software related to the securities business;
28. Securities lending and acting as an intermediary, arranger or agent for securities lending transactions;
29. Underwriting business for securities issued in a manner other than through public offering of new shares, and acting as an intermediary, arranger or agent for such business;
30. Selling and purchasing claims arising from loans, other transactions related thereto, and acting as an intermediary, arranger or agent therefor;
31. Safe-keeping securities;
32. Acting as an asset manager or a servicer of a special purpose vehicle under the Act on Asset- Backed Securitization;
33. Buying and selling foreign payment instruments for customers’ or clients’ exchange of investment funds, and trading futures to hedge against foreign exchange risks;
34. Exchanging foreign currencies, etc.;
35. Acting as an intermediary for selling, buying, exchanging or lending foreign currencies or conducting derivatives transactions, and other related businesses;
36. Over-the-counter derivatives transactions, and acting as an intermediary, arranger or agent for such transactions;
37. Payment guarantee of principal and interest of corporate bonds;
38. Acting as an agent for holding in custody deposits for shares to be publicly offered; 39. Futures business;
40. Investment advisory business, discretionary investment management business, investment management business, and selling various types of investment information;
41. Public offering or sale of shares of indirect investment companies; 42. Selling indirect investment securities;
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43. Acting as an agent or intermediary for selling insurance products; 44. Retirement pension business;
45.Selling information on appraisal of securities, etc. to the public through publications, books, electronic documents, etc.;
46. Acting as an intermediary, arranger or agent to cause financial institutions that formed a business alliance to lend money to customers or clients;
47. Acting as an advertisement agent through publications, books, electronic documents, etc.; 48. Businesses set out as securities firms’ areas of business in the Securities and Exchange Act
(“SEA”) and other relevant laws and regulations;
49. Any and all activities incidental to any of the foregoing.
(2)The Company shall conduct the following businesses after obtaining approvals and authorizations from the relevant agencies and authorities, including the government:
1. Conducting or providing credit investigation and services;
2. Forming an alliance with credit card companies, insurance companies and other financial institutions;
3. Foreign exchange businesses other than those set out in Items 33 through 35 of Paragraph (1) above; 4. Selling, purchasing, and acting as an intermediary or agent for selling or purchasing, derivatives
products;
5. Any and all activities related to investment in venture companies; 6. Electronic finance business;
7. Trust business pursuant to the Trust Business Act; 8. Internet broadcasting business; and
9. Any and all activities incidental to any of the foregoing.
(3) In addition to the businesses set out in Paragraphs (1) and (2) above, the Company may concurrently engage in other businesses after obtaining approvals and authorizations from the relevant agencies and authorities, including the government.
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B. Total Employee Status
(As of March 31st 2009)
Management Sales Others Total
Male 403 876 28 1,307
Female 667 154 7 828
Total 1,070 1,030 35 2,135
C. Status of Domestic Branches and Overseas Representative Offices
(As of March 31st 2009)
HQ Branches Rep. Offices Sales Office Total
Domestic 1 116 - - 117
Overseas - - 3* - 3
Total 1 116 3 - 120 * Overseas Offices
- Tokyo Representative Office
8/F, NAX Bldg., 1-3-2 Shinkawa, Chuo-ku, Tokyo, Japan Tel : 81-3-3551-8088, Fax : 81-3-3551-5533
- Kazakhstan Representative Office
Office 29, Nurly Tau 4A 7th, Almaty Business Center, Al-Farabi Avenue, Almaty, Kazakhstan Tel : 7-727-311-0239, Fax : 7-727-311-0240
- Shanghai Representative Office
Office 1209-A07, 12/F Shui On Plaza Centre, 333 Huai Hai Zhong Road, Lu Wan District, Shanghai 200021, P.R. China
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D. Organization Chart
General Meeting of Shareholders
Planning Group •Public Relations Dept. •Strategic Planning &
Coordination Dept. •Financial Management Dept. •Financial Service Development Dept. •Treasury Dept. Administration Support Group •Personnel Dept. •Human Resource Development Dept. •General Affairs Dept. •Settlement Service Dept. •Trust Dept.
Information Technology Group
•I.S. Planning Dept. •I.S. Operation Dept. •I.S. Development Dept. •Next Generation System
Dept.
Six Regional Headquarters •Dongbu Regional Institutional Business Dept. •Seobu Regional Institutional Business Dept. •Jungbu Regional Institutional Business Dept.
Compliance Officer •Compliance Dept. Risk Management Group •Risk Management Dept.
•Credit Analysis Dept. Wholesale Group •Institutional BusinessDept. •International Business Dept. •Wholesale Derivatives Business Dept. •Global Business Development Dept. •Two Overseas Representative Offices •One Overseas Subsidiary
Corporate Pension & Asset Group •Corporate Pension &
Asset Consulting Dept. •Corporate Pension &
Asset Management Dept. •Institutional Wealth
Management Business Dept.
Financial Clinic Group •Total Service Strategy
Dept.
•Total Service Promotion Dept.
•VIP Service Dept. •Customer Satisfaction
Dept. Logic & PortfolioCenter
• Consulting Lab Dept. • Consulting Clinic Dept. Audit Committee Member • Auditing Dept. • Legal Support Dept..
Board of Directors Chairman Vice–Chairman President(C.E.O) Deputy President Audit Committee Secretary Dept.
Innovation Support Dept
Research Center •Investment Strategy Dept. •Corporate Research Dept
Investment Banking Group
•Corporate Finance Dept. •Structured Finance Dept. •M&A · International
Finance Dept.
Capital Market Group •Trading Dept.
•Fixed Income Dept. •Derivatives Trading Dept. •Derivatives Business
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E. Stock information
(1) Type of stocks & total issuance Types of shares Amount of
shares
Capital
(Thousand won) Percentage Note
Registered
common shares 50,773,400 253,867,000 58.51%
200,000 stock cancellation through profit
Registered
preferred shares 36,000,000 180,000,000 41.49% Total 86,773,400 433,867,000 100% (2) Change in capital
Date Types of shares Amount of shares Amount of capital increase (Thousand won) Capital after increase (Thousand won) Note 1987.7.19 Registered
common shares 8,800,000 44,000,000 Reverse stock split 1988.3.24 Registered common shares 4,400,000 22,000,000 66,000,000 Paid-in capital increase 1988.8.4 Registered preferred shares 6,600,000 33,000,000 99,000,000 Paid-in capital increase 1989.3.30 Registered preferred shares 6,600,000 33,000,000 132,000,000 Paid-in capital increase 1989.3.31 Registered
common shares 3,300,000 16,500,000 148,500,000 Stock issue Registered
preferred shares 3,300,000 16,500,000 165,000,000
Capitalization of excess reserves 1989.5.30 Registered
common shares 3,166,493 15,832,465 180,832,465 Stock dividend 1989.12.9 Registered common shares 1,129,240 5,646,200 186,478,665 Paid-in capital increase Registered preferred shares 4,295,733 21,478,665 207,957,330 1989.12.12 Registered
common shares 5,204,267 26,021,335 233,978,665 Stock issue Registered
preferred shares 5,204,267 26,021,335 260,000,000
Capitalization of excess reserves 1990.5.26 Registered
common shares 2,048,410 10,242,050 270,242,050 Stock dividend 1994.5.28 Registered
common shares 1,080,966 5,404,830 275,646,880 Stock dividend 1995.5.27 Registered
common shares 1,270,624 6,353,120 282,000,000 Stock dividend 1999.8.31 Registered common shares 1,128,000 5,640,000 287,640,000 Paid-in capital increase 1999.11.3 Registered common shares 17,258,400 86,292,000 373,932,000 Paid-in capital increase 2005.12.17 Registered common shares 2,187,000 10,935,000 384,867,000 Paid-in capital increase 2007.11.3 Registered preferred shares 10,000,000 50,000,000 434,867,000 Paid-in capital increase
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5. Parent Company, Subsidiary Company and Consolidated Circumstances. A. Parent Company Status
- none
B. Subsidiary
Subsidiary Relations Company Address Book Value
(billion KRW) Main business Stake % Daishin Economic Research Institute 34-8 Youido-dong Youngdungpo-ku, Seoul, 150-884, Korea 4.95 Service 495,000 99% Research Daishin Investment Trust Management 34-8 Youido-dong Youngdungpo-ku, Seoul, 150-884, Korea 39.46 Securities investment trust & advisory 6,000,000 100% - Daishin Securities Asia Limited, Hong Kong 28/F, Queen's Road Central 8, Central, Hong Kong 12.91 Brokerage, advisory 10,000,000 100% -
Pegasus PEF - 3.39 PEF - 26.1%
C. Director’s Concurrent Office Position in Parent Company & Subsidiaries
Position Name Concurrent office Notes Executive Manager
Director Planning Group
Yong-Hyun Cho Daishin Investment Trust Management Independent Auditor
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6. Operating Results & Asset Status for past 3 years A. Operating Results
(For the years ended March 31, 2009, 2008, and 2007) (in thousands of Korean won)
2009 2008 2007 Ⅰ. Operating revenues 2,823,670,244 2,690,484,028 1,033,910,492 Ⅱ. Operating expenses 2,723,541,110 2,466,844,238 912,441,246 Ⅲ. Operating income 100,129,134 223,639,790 121,469,245 Ⅳ. Non-operating income 27,062,390 41,840,120 24,309,899 Ⅴ. Non-operating expenses 2,277,936 9,280,188 6,228,861 Ⅵ. Net income before taxes 124,913,588 256,199,722 139,550,283
Ⅶ. Income tax expense 21,662,244 78,358,876 39,560,680
Ⅷ. Net income 103,251,344 177,840,846 99,989,604
B. Asset Status
( March 31, 2009, 2008, and 2007) (in thousands of Korean won)
2009 2008 2007
Assets
Ⅰ. Cash and deposits 1,381,131,392 1,010,070,660 800,684,214 Ⅱ. Securities 3,,491,341,898 3,075,990,415 2,890,463,819 Ⅲ. Derivatives 366,332,382 491,492,701 215,317,208
Ⅳ. Loans 519,708,930 730,602,182 620,634,923 Ⅴ. Tangible fixed assets 547,306,130 538,849,820 586,667,406
Ⅵ. Other assets 181,568,528 131,771,748 202,573,047 Total assets 6,487,389,264 5,978,777,527 5,316,340,617 Liabilities
Ⅰ. Deposits from customers 1,134,342,861 811,393,326 899,291,693 Ⅱ. Borrowings 3,538,146,354 3,235,624,938 2,746,423,723 Ⅲ. Other liabilities 157,281,094 201,470,199 148,890,165 Total liabilities 4,829,770,311 4,248,488,463 3,794,605,581 Stockholder's equity Ⅰ. Capital stock 434,867,000 434,867,000 384,867,000 Ⅱ. Capital surplus 715,771,295 717,846,169 655,919,845 Ⅲ. Capital adjustments (139,041,646) (78,044,740) (17,098,659) Ⅳ. Accumulated other comprehensive income 61,081,073 62,538,914 5,366,482 Ⅴ. Retained earnings 584,941,229 593,081,721 492,680,368 Total stockholder's equity 1,657,618,952 1,730,289,064 1,521,735,036 Total Liabilities and Stockholder’s equity 6,487,389,263 5,978,777,527 5,316,340,617
C. Financial Stability
FY2008 FY2007 FY2006 Net Capital Ratio 609.8 % 609.8 % 712.9 %
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7. Risk Management
History of Risk Management at Daishin Securities
All companies with a long tradition have overcome crisis at some point in time.
Likewise, Daishin Securities has grown over the years by turning crisis into opportunity
In 1980, the Korean economy contracted while interest rates soared beyond 30%. Akin to most companies at the time, Daishin Securities suffered a deterioration in earnings amid the harsh operating environment. However, we took advantage of soaring interest rates by investing in bonds. The bond investments generated significant returns and paved the way for our growth in the 1980s.
When the KOSPI underwent a correction in 1995 after hitting an unprecedented high in November 1994, we disposed of a large portion of stocks in proprietary accounts and used the proceeds to repay short-term borrowings. When the foreign exchange crisis erupted and stock prices plummeted two years later, we were free of debt and thus, able to ride out the turbulence with relative ease of mind. Furthermore, while our peers focused on selling beneficiary certificates amid the “Buy Korea” rage, we launched our CYBOS home trading system. CYBOS gave us an edge in the online stock trading market and provided strong impetus for growth.
When there was a surge in sales of beneficiary certificates (BC) with exposure to Daewoo Group bonds in 1998, Daishin Securities suspended the sales of such BCs.
Instead, we concentrated on BCs invested in public bonds. One year later, Daewoo Group succumbed to bankruptcy. That triggered a massive redemption of BCs and our competitors incurred huge losses from Daewoo bonds. In striking contrast, Daishin Securities produced the industry’s best operating results for fiscal 1999 thanks to preemptive risk management.
Stimulus measures to prop up the economy after the foreign exchange crisis created a consumption bubble in the early 2000s. As credit card spending ballooned, the proportion of consumption in GNP increased markedly. Fortunately, Daishin Securities refrained from investing in bonds issued by credit card companies and lending institutions. When the credit bubble eventually burst in 2003, credit card bonds plunged. A major Korean business group was even forced to sell off its securities unit. Once again, Daishin was able to sail through the turmoil due to its proactive approach to managing risk.
Preemptive and strategic risk management is helping Daishin Securities take the recent global financial turmoil in stride. The subprime mortgage debacle unfolded as several hedge funds went bankrupt in July 2007 and created jitters in international financial markets. The crisis led to the collapse of prominent investment banks such as Lehman Brothers and Bear Stearns, and many financial institutions that had transactions with
the insolvent firms suffered losses. However, we actually enjoyed gains from derivatives by signing credit enhancement contracts with global investment banks for OTC derivatives transactions in order to reduce counterparty risk.
We increased liquidity during the one-year period from autumn of 2007 until the global financial crisis broke out in 2008. We disposed of real estate worth KRW101.6 billion and issued $129 million in global depository receipts. To respond to potential delinquencies related to the overheating real estate market, we practiced restraint with respect to real estate project financing and recovered investments already made before July 2008. In our proprietary accounts, we vastly reduced exposure to stocks and risky assets. Our bond portfolio mainly comprised safe and liquid bonds such as treasury bonds and stabilization bonds. That strategy led to sizeable profits compared to the extent of our bond holdings due to the government’s rate-cutting measures last year. As indicated above, Daishin Securities has a long tradition of preemptive risk management. Based on our accumulated knowhow in managing risk, we will further evolve as Korea’s leading financial services provider.
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Tighter Risk Management
Daishin Securities promotes an investment culture based on preemptive and companywide risk management. Our goal is to establish a total risk management system that enables us to respond effectively to the fast changing financial environment.
To strengthen the system of checks and balances among the front-middle-back offices, the Risk Management Department was elevated to Risk Management Group as part of the organizational reshuffling in April 2009. The Credit Analysis Team was upgraded to Credit Analysis Dept. to boost expertise and work efficiency. The Credit Analysis Dept. was launched for several reasons. First, the adoption of the Financial Investment Services and Capital Markets Act (FSCMA) is expected to result in more diverse products and an increase in payment guarantees, loans and principal investment. This calls for more thorough examination before proceeding with investments. There is also a need for more stringent procedures on reviewing loan applications and securities offered as collateral to address the risk of delinquency of unsecured loans due to the financial crisis.
Total risk management system
To practice tighter risk management for new products and comply with guidelines set by the regulatory agencies following implementation of FSCMA, Daishin Securities launched its next generation total risk management system (TRMS) in May 2009.
The main points of TRMS are tighter risk monitoring and companywide risk management. We have set up an early warning mechanism by monitoring the investment limit, VaR limit and sensitivity limit for each product and each unit, and by strengthening the contingency plan indicator reporting function. We have also drawn up a derivative evaluation model to prepare for expected expansion of the derivatives market and subsequent rise in need for more specialized risk management. In terms of credit risk, we are prepared to calculate credit VaR according to the BaselⅡ framework and manage the company’s total exposure.
Another unique feature of TRMS is enhanced control over operational risk. The risk of embezzlement, fraud and other similar incidents along with unforeseen system errors exists in all financial institutions. Accordingly, Daishin Securities measures operational risk according to BaselⅡ standards, monitors key risk indicators (KRI), and carries out risk control self-assessments (RCSA) in order to promote the importance of operational risk management throughout the company.
8. Challenges
Business Model to Secure Foot hold for Future Growth
2009 is the year Daishin Securities will make the leap as a full-fledged investment bank.
At Daishin, our strategy is to bolster both existing strengths and promising growth areas to sharpen our competitive edge. Traditionally, our strong point has been retail.
In line with the enforcement of the Financial Investment Services and Capital Markets Act (FSCMA) this year, we plan to further improve retail services through companywide sales process innovation designed to shore up our brand power and strengthen competitiveness. Daishin’s 2009 management goal is to become a “financial attending doctor offering expert financial services.”
The financial attending doctor service, which integrates brokerage and asset management, will be our top priority. Going beyond the practice of recommending a specific stock or product, this premier service provides total wealth management solutions that encompass the entire investment process from preliminary investment consultation to follow-up risk management.
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With this in mind, we opened the Logic and Portfolio Center in March 2009. Its key responsibilities are coming up with various scenarios and projections, strategies and products to increase customer value. We are also creating a process manual for refined services and offering training in all areas of finance to enable our employees to conduct effective investment consultations.
In the wholesale segment, we plan to complete the company- wide total sales system for our corporate clients. To this end, we are in the process of building an organic cooperation system across our entire segments of institutional sales, research, investment banking and pensions.
We will further expand our overseas reach in an effort to secure diverse sources of income. Our mid-to-long term goal is to transform into one of Asia’s leading investment banks. We will focus on areas where we can excel in and seek business opportunities in Southeast and Central Asia, regions with high growth potential and where we have the edge. To minimize risks and generate stable returns, we will maintain our strategy of forging alliance with local partners when entering a new market.
Compliance is another area of focus as we endeavor to mitigate risks and protect customers.
Last year, we proved that preemptive and strategic risk management is vital to survival and profit generation. In order to stay profitable, we need powerful risk management solutions. That holds greater meaning following the introduction of the FSCMA.
Our plan is to instill an investment culture that values all-inclusive and proactive approach to risk management. We will continue to reinforce monitoring of new financial products for any vulnerability based on our newly introduced total risk management system.
New Business Opportunities
The FSCMA has opened the doors for securities firms to expand their scope of business activities. By developing a wide range of financial products and services, securities firms can seek new business opportunities that will provide new momentum for growth.
At Daishin Securities, we are awaiting government approval to start the futures business. Once we get the green light, we will launch brokerage and trading services for KRX-listed products such as interest rate futures and currency futures in the second half of the year. Going forward, our plan is to gain a greater edge in derivatives by expanding operations into overseas futures and margin FX.
The launch of retail payment services slated for the latter half of 2009 will not only increase customer convenience but help us upgrade our competitiveness. We also plan to diversify our revenue sources by entering such markets as hedge funds, payment guarantee and pension guaranteed loans.
Our unparalleled overseas stock trading services will continue as well. Following the first trading service launched for Japanese stocks in February 2008, we are set to provide services in Hong Kong and Chinese stock markets in late 2009. Future plans include offering direct trading access to US stock exchanges to reflect increased merits of investing in major US firms whose stock values have plunged recently and growing interest in commodities (gold and crude oil) and ETFs (Exchange-Traded Fund). We are also looking into introducing a Hong Kong ELW (Equity-Linked Warrant) trading service.
Our ultimate goal is to deliver comprehensive overseas investment services by gradually enhancing our presence in the global marketplace with overseas stock, bond and derivative offerings.
16
9. Major Shareholder Structure
(as of March 31st, 2009, Common shares basis) Stakeholder Number of shares Percentage(%) Relation with
Daishin Remark Hong-Seok Yang and 5
relatives 3,512,964 shares 6.92%
Major Shareholder Daishin ESOP 3,493,324 shares 6.88% ESOP Treasury stock 5,388,808 shares 10.61% Treasury stock National Pension Service. 3,321,769 shares 6.54% -
10. Board of Directors and Audit Committee Member
Sort Name Position Duty Remark
Full-time Auh-Ryung Lee Chairwoman Full-time Chung-Nam Roh President & CEO Full-time Ki-Hoon Kim Audit committee
member
Auditing Dept, Legal Support Dept.
Part-time Young-Ill Koh Outside Director Audit Committee chairman
Part-time Ki-Bae Lee Outside Director Part-time Sung-Ho Kim Outside Director
Part-time In-Tae Hwang Outside Director Audit Committee member
11. Investment Status in Other Companies
- No comments in particular
12. Major Creditor, etc
- No comments in particular
13. Important Events Occurred after Company Fiscal Year
- Subsidiary Company, Daishin Investment Trust Management estimated the loss incurred from the financial accident to 35.4 billion, and this is to be settled by end of June using reserve funds for debts.
As the largest shareholder, Daishin Securities participated in the right offering of Daishin Investment Trust Management. (Right offering amount : 28 billion)
14. Other Important Circumstances related to Business Operation
17
II. Financial Report
1. Balance Sheet
Daishin Securities Co., Ltd.
Non-Consolidated Balance Sheets
March 31, 2009 and 2008
(in thousands of Korean won)
2009 2008 Assets
Cash and bank deposits ￦ 409,060,038 ￦ 361,222,311 Deposits segregated under regulation 972,071,355 648,848,349 Trading securities 2,697,372,812 1,976,064,478 Available-for-sale securities 248,900,815 244,113,001 Equity-method investments 60,713,594 64,197,769 Structured securities 433,176,449 755,122,814 Derivative assets 366,332,382 491,492,701 Loans receivable, net 519,708,931 730,602,182 Property and equipment, net 547,306,131 538,849,820 Intangible assets, net 30,314,940 12,352,905 Accounts receivable, net 34,313,048 14,279,772 Accrued revenue, net 40,931,852 28,636,667 Advanced payments 11,966,612 7,594,625 Guarantee deposits 63,555,539 65,287,449 Collective fund for default loss 5,403,190 6,565,910
Others 46,261,576 33,546,774
18 (in thousands of Korean won)
2009 2008 Liabilities and Shareholders' Equity
Liabilities
Deposits from customers ￦ 1,134,342,861 ￦ 811,393,326 Borrowings 409,583,235 613,498,183 Debentures, net 59,679,998 10,000 Securities sold under repurchase
agreements 1,740,559,485 1,223,720,658 Securities sold 2,579,222 13,007,866 Structured securities sold 1,165,433,853 1,382,751,472 Derivative liabilities 160,310,563 2,636,760 Accrued severance benefits, net 1,759,474 1,334,621
Income taxes payable - 46,266,903
Other accounts payable 29,443,514 15,157,455 Accrued expenses 15,898,095 19,933,068 Guarantee deposits received 65,937,175 71,040,053 Deferred income tax liabilities 40,093,889 33,011,641
Withholdings 2,633,876 9,257,646
Others 1,515,071 5,468,811
Total liabilities 4,829,770,311 4,248,488,463
Commitments and contingencies Shareholders' equity Capital stock Common stock 254,867,000 254,867,000 Preferred stock 180,000,000 180,000,000 Capital surplus 715,771,296 717,846,169 Capital adjustments (139,041,646) (78,044,740) Accumulated other comprehensive
income 61,081,074 62,538,914
Retained earnings 584,941,229 593,081,721 Total shareholders' equity 1,657,618,953 1,730,289,064
Total liabilities and
shareholders' equity ￦ 6,487,389,264 ￦ 5,978,777,527
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2. Statement of Income
Daishin Securities Co., Ltd.
Non-Consolidated Statements of Income
For the years ended March 31, 2009 and 2008
(in thousands of Korean won)2009 2008
Operating revenues
Commissions received ￦ 293,114,678 ￦ 431,214,666 Gain on sales of trading securities 104,083,162 108,455,788 Gain on valuation of trading securities 33,372,056 9,275,435 Gain on disposal of available-for-sale
securities 2,429,515 9,310,161
Gain on valuation of securities sold - 631,233 Gain on structured securities transactions 38,755,058 76,217,703 Gain on structured securities sold
transactions 1,676,233,143 943,923,599 Gain on derivative transactions 410,669,648 898,777,264 Interest income 209,107,414 161,519,068 Dividend income 4,322,427 3,549,639 Gain on valuation of deposits segregated under
regulation 39,746,681 40,205,358 Reversal of allowance for doubtful accounts 4,166,517 5,856,758
Others 7,669,945 1,547,356
2,823,670,244 2,690,484,028
Operating expenses
Commissions expenses 19,685,357 29,394,608 Loss on sales of trading securities 138,521,575 95,616,005 Loss on valuation of trading securities 4,420,568 4,219,166 Loss on disposal of available-for-sale
securities 802,286 170,263
Loss on impairment of available-for-sale
securities 6,029,315 333,697
Loss on valuation of securities sold 263,882 51,326 Loss on structured securities transactions 225,828,176 105,175,500 Loss on structured securities sold
transactions 200,001,803 941,149,877 Loss on derivatives transactions 1,681,569,405 882,198,109 Interest expense 130,728,212 91,001,149 General and administrative expenses 296,013,906 314,705,473 Bad debts expense 19,270,143 2,798,526
Others 406,482 30,539
2,723,541,110 2,466,844,238
20 (in thousands of Korean won)
2009 2008 Non-operating income
Office rental income ￦ 13,479,206 ￦ 13,142,941 Gain on disposal of property and equipment 7,330 24,946,210 Gain on valuation of equity-method
investments 298,097 598,969
Others 13,277,757 3,152,000
27,062,390 41,840,120
Non-operating expenses
Loss on disposal of property and equipment 253,963 2,263,350
Donation 1,221,943 5,525,912
Loss on valuation of equity-method
investments 793,021 43,240
Others 9,009 1,447,686
2,277,936 9,280,188
Net income before income taxes 124,913,588 256,199,722 Income tax expense 21,662,244 78,358,876
Net income ￦ 103,251,344 ￦ 177,840,846
￦ 1,317 ￦ 2,043 Basic earnings per share (in Korean won)
Diluted earnings per share (in Korean won) ￦ 1,317 ￦ 2,043
21
3. Statement of Appropriations of Retained Earnings
Daishin Securities Co., Ltd.
Non-Consolidated Statements of Appropriations of Retained Earnings
For the years ended March 31, 2009 and 2008
(Dates of appropriations: May 29, 2009 and May 30, 2008
For the years ended March 31, 2009 and 2008, respectively)
(in thousands of Korean won) 2009 2008
Retained earnings before appropriations
Unappropriated retained earnings
carried over from prior year ￦ 23,703,252 ￦ 37,858,321 Net income 103,251,345 177,840,846
126,954,597 215,699,167
Transfer from reserve for loss on futures
transactions 120,628 55,363
Appropriations (Note 18)
Legal reserves 8,007,449 10,616,186 Reserve for loss on futures transactions - 43,256 Other capital adjustments - 5,229,977
Dividends 80,074,489 106,161,859
Voluntary reserves 10,000,000 70,000,000 98,081,938 192,051,278
Unappropriated retained earnings
carried forward to the subsequent year ￦ 28,993,287 ￦ 23,703,252
22
4. Statement of Changes in Shareholder’s Equity
Daishin Securities Co., Ltd.
Non-Consolidated Statements of Changes in Shareholders' Equity
For the years ended March 31, 2009 and 2008
23
5. Statement of Cash Flows
Daishin Securities Co., Ltd.
Non-Consolidated Statements of Cash Flows
For the years ended March 31, 2009 and 2008
(in thousands of Korean won) 2009 2008
Cash flows from operating activities
Net income ￦ 103,251,344 ￦ 177,840,846 Adjustments to reconcile net income
to net cash provided by operating activities
Loss (Gain) on disposal of trading securities, net 34,438,413 (12,839,783) Gain on valuation of trading securities, net (28,951,488) (5,056,269) Loss on structured securities transactions, net 187,073,118 28,957,798 Gain on structured securities sold transactions, net (1,476,231,340) (2,773,722) Loss (Gain) on derivatives transactions, net 1,270,899,757 (16,579,155) Loss (Gain) on valuation of securities sold , net 263,882 (579,907) Bad debts expense 19,270,143 2,798,526 Depreciation 23,395,755 20,546,739 Loss(Gain) on disposal of property and equipment, net 246,633 (22,682,860) Loss on impairment of available-for-sale securities 6,029,315 333,697 Gain on disposal of available-for-sale securities, net (1,627,229) (9,139,898) Provision for severance benefits 1,578,846 1,283,391 Loss (Gain) on valuation of equity-method
investments, net 494,924 (555,729) Reversal of allowance for doubtful accounts (4,166,517) (5,856,758) Gain on valuation of deposits segregated under
regulation (39,746,681) (40,205,358)
Others, net 7,733,317 12,425,879
24
(in thousands of Korean won) 2009 2008
Changes in operating assets and liabilities
Deposits segregated under regulation ￦ (283,476,325) ￦ 105,421,819 Trading securities (726,795,259) (487,684,259) Structured securities 131,773,660 448,452,457 Derivative assets (1,149,138,387) (259,853,692) Loans receivable 215,059,768 (104,351,877) Accounts receivable (24,727,539) 83,805,231 Accrued revenue (10,177,190) (532,105) Advanced payments (4,371,987) 10,056,492 Collective fund for default loss 1,162,720 387,575 Derivative liabilities 162,323,277 2,609,644 Deposits from customers 322,951,998 (84,216,574) Securities sold (10,692,527) 10,186,300 Structured securities sold 1,258,913,721 (99,455,650) Income taxes payable (45,479,882) 37,899,723 Other accounts payable 14,286,058 (9,370,153) Accrued expenses (4,034,973) 7,660,884 Withholdings (6,623,770) 3,312,238 Deferred income tax 13,575,909 (1,538,727)
Decrease in severance insurance
plan deposits 2,811,582 757,404
Payment of retirement trust 55,093 103,118 Payment of severance benefits (318,787) (2,285,130) Securities sold under repurchase agreements 516,838,827 327,573,722 Others, net (12,363,412) (2,487,718)
361,552,575 (13,549,278)
Net cash provided by operating activities 465,504,767 114,368,159
Cash flows from investing activities
Decrease in time deposits, net 1,000,000 -Decrease (Increase) in guarantee deposits, net 1,731,910 (9,396,244) Disposal of property and equipment 14,270 101,743,961 Acquisition of property and equipment (32,112,969) (51,790,254) Acquisition of intangible assets (17,962,035) (12,352,905) Disposal of available-for-sale-securities 38,054,397 75,970,853 Acquisition of available-for-sale-securities (72,320,670) (127,203,070) Decrease in equity-method investments 9,440,900 -Increase in equity-method investments (3,491,723) (18,891,029)
Others (8,021,261) (3,963,163)
25
(in thousands of Korean won) 2009 2008
Cash flows from financing activities
Increase (Decrease) in borrowings, net ￦ (203,914,947) ￦ 251,898,183
Issuance of shares - 112,850,436
Disposal of treasury shares - 5,887,500 Acquisition of treasury shares (77,503,777) (79,876,528) Decrease in guarantee deposits received, net (5,102,877) (7,521,135) Issuance of debentures 59,678,900 -Retirement of debentures (10,000) -Payments of dividends (106,147,158) (77,439,494)
Others - 9,198
Net cash provided by (used in) financing
activities (332,999,859) 205,808,160
Net increase in cash and cash equivalents 48,837,727 274,294,468
Cash and cash equivalents
Beginning of year 360,183,811 85,889,343 End of year ￦ 409,021,538 ￦ 360,183,811
26
III. Audit Report
1. Audit Report by the Audit Committee
The Audit Committee has reviewed and audited the accounting principles and operations for 48th fiscal year (1st April 2008 ~ 31st March 2009), and it has made the audit report as follows.
(1) Audit method summary
The Audit Committee has reviewed the accounting books and related documents, as well as the financial statements and other detailed documents for the accounting audit, and the committee has made comparison check, on-the-spot inspection, witness, reference check and other appropriate auditing measures if it was found necessary.
In regards to the operations audit, the Audit Committee has received management report from the Directors and it has reviewed the related documents and details in an appropriate manner when the committee found it necessary for attending the Board of Directors meeting or other important meetings,
(2) Details on the balance sheet & income statement
The balance sheet and income statement fairly represents the Company’s assets and profit/loss conditions appropriately in accordance to the Korean regulations and the Company’s statute.
(3) Details on the statement of appropriations of retained earnings
The Company’s statement of appropriations of retained earnings has been prepared appropriately in accordance to the Korean regulations and the Company’s statute.
(4) Details on the business report
The Company’s business report accurately represents the Company’s condition.
11th May 2009
Daishin Securities Co.,Ltd. Chairman of Audit Committee Young-Ill Koh
27
2. Report of Independent Auditors (Non-consolidated Financial Statements)
To the Board of Directors and Shareholders of Daishin Securities Co., Ltd.
We have audited the accompanying non-consolidated balance sheets of Daishin Securities Co., Ltd. (the “Company”) as of March 31, 2009 and 2008, and the related non-consolidated statements of income, appropriations of retained earnings, changes in shareholders’ equity and cash flows for the years then ended, expressed in Korean won. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of Daishin Securities Co., Ltd. as of March 31, 2009 and 2008, and the results of its operations, the changes in its retained earnings, the changes in its shareholders’ equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea. Accounting principles and auditing standards and their application in practice vary among countries. The accompanying non-consolidated financial statements are not intended to present the financial position, results of operations, changes in shareholders’ equity and cash flows in conformity with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea. In addition, the procedures and practices used in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying non-consolidated financial statements are for use by those who are informed about Korean accounting principles or auditing standards and their application in practice.
Seoul, Korea May 11, 2009
This report is effective as of May 11, 2009, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying non-consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any
28
IV. Appendix
1. Management’s Discussion and Analysis
Overview
In the aftermath of the global credit crisis, stock markets and asset values including raw materials and real estate worldwide corrected significantly and led to the steep downturn of the real economy. Although US sub-prime mortgage issues surfaced in 2007, the world economy continued to grow thanks to high growth in emerging countries like China and India. However, risks in the financial markets resurfaced following the rating downgrade of monoline insurers and bankruptcy of Bear Stearns and peaked with the bankruptcy of Lehman Brothers. Spreading to the rest of the world, the credit turmoil has triggered a potentially dragged out global recession. The Korean economy was not spared from the phenomenon and saw a sharp decline in the value of the won, weakening exports, sluggish domestic demand, shrinking investments and a slowdown in corporate earnings.
The dollar-based MSCI global index declined 43.5% in 2008 and retreated to levels recorded five years ago. The MSCI developed market index plummeted 42.1% and the MSCI emerging market index, which received investors’ attention for the past few years, retreated 54.5%. The Korean stock market also experienced marked losses. After peaking at 2,064.85 on October 31, 2007, KOSPI dropped below 1,000 in October 2008. It gained back some of the lost ground to reach 1,206.26 in March 31, 2009, which was still down by 29.2% from a year earlier. KOSDAQ fell 34.6% year-on-year to 421.44.
Uncertainties in the capital market triggered a massive sell-off by foreign investors as they reduced their exposure to the Korean stock market, and foreign net selling amounted to KRW 21 trillion in FY2008. The average daily stock trading turnover dropped 19.9% from KRW 7,972.3 billion in FY2007 to KRW 6,385.7 billion in FY2008. On the other hand, the fluctuating stock market led to a respective 13.6% and 24.1% increase in the average daily transaction value of futures and options. Fund balance reached KRW 361 trillion at the end of 2008 as a result of steady influx of money into installment funds amid the absence of massive redemptions despite unstable financial market conditions in Korea and overseas. Furthermore, steep correction of the stock market led to opportunities for institutional and retail investors to buy into undervalued stocks, and the Korean stock market stabilized earlier than expected with the higher liquidity.
Operating revenue in FY2008 increased 5.0% compared to the previous year to KRW 2,823.7 billion thanks to growing revenues from marketable securities and interest income, although lower stock trading turnover and reduced retail trading depressed commission income. However, operating income dropped 55.2% to KRW 100.1 billion due to deteriorating revenue from brokerage and financial services amid the bearish stock markets and greater provisioning related to preemptive risk management efforts. Pre-tax income and net income declined to KRW 124.9 billion (down51.2%) and KRW 103.3 billion (down 41.9%), respectively. Although FY2008 results were down compared to the previous year, Daishin Securities still managed to maintain stable earnings despite the credit crisis worldwide.
As of the end of March 2009, total assets stood at KRW 6,487.4 billion, up by 8.7% from a year earlier. We reshuffled our asset portfolio to 1) increase our position in less risky assets such as cash/deposits, government bonds, and monetary stabilization bonds; and 2) reduce our exposure to assets with greater risk such as derivatives, structured securities and loans. In doing so, we lowered the risks associated with asset management and became better positioned to cope with uncertainties in the capital markets. As a result, our net capital ratio and assets to liabilities ratio stood at 844.3% and 127.8%, respectively, at the end of FY2008, which were far above the limits set by the Financial Supervisory Service.
Moreover, Daishin Securities is the only major securities firm in Korea to pay out cash dividends for eleven consecutive years. We strive to achieve continued enhancement of shareholders’ value as evidenced by the 5.4% dividend yield on common stock for FY2008, which is the highest level in the industry.
Analysis of Operating Pe rformance
Net Operating Revenues
Although market liquidity and fundamentals of the economy weakened with the global credit crunch during 2008, Daishin Securities was able to create a steady stream of revenues thanks to preemptive and strategic risk management.
29
Accordingly, we recorded net operating revenue of KRW 396.1 billion for FY2008. That represented a decline by 26.4% year-on-year but was higher than the figure posted in FY2006. This is an indication that Daishin Securities has established a business portfolio and growth platform that can produce solid performance even in difficult times.
Net revenue from brokerage fell 29.5% year-on-year to KRW 290.3 billion owing to the decrease of average daily trading turnover and a weaker presence of retail investors in the stock market. Net revenue from financial services recorded a 29.7% year-on-year drop to KRW 37.2 billion as the bearish market forced a decrease in broker loans (unsecured loans and loans backed by securities) by 37.3%. On the other hand, as the result of stronger marketing activities aimed at risk-averse clients, the number of cash management accounts (CMA) accounts grew 31.3% year-on-year to 205,817, and money deposited in CMAs rose by 25.8% year-on-year to KRW 1,165.3 billion.
Turning to the Capital Market Group, our proprietary trading desk reduced the weighting of high-risk assets such as equities in its portfolio and focused on safer assets with high liquidity such as government bonds and monetary stabilization bonds. Accordingly, net operating revenue from capital market operations amounted to KRW 63.4 billion (up 51.4% year-on-year) in FY2008, helped by the government’s relaxed monetary policy. .
Net Operating Revenues (KRW billion)
FY06 FY07 FY08 %YoY
Brokerage
Financial service (loan service) Wealth management
Capital markets (proprietary trading income) Investment Others 282.8 30.4 27.5 22.2 5.0 15.4 411.6 52.8 19.0 41.9 7.5 5.6 290.3 37.2 14.5 63.4 4.8 -14.0 -29.5 -29.7 -23.8 51.4 -35.7 - Net operating revenues 383.3 538.3 396.1 -29.4
Breakdown of Net Operating Revenues (%)
FY06 FY07 FY08
Brokerage
Financial service (loan service) Wealth management
Capital markets (proprietary trading income) Investment banking 76.9 8.3 7.5 6.0 1.4 77.3 9.9 3.6 7.9 1.4 70.8 9.1 3.5 15.5 1.2 Total 100.0 100.0 100.0
Balance of beneficiary certificates (BCs) sold recorded a 9.5% year-on-year increase to KRW 2,726.9 billion despite the weak equity market. As customers became more risk-averse, funds were concentrated on safer vehicles like MMF.
While the balance of MMF and equity-type BCs sold increased by 161.0% and 7.9% year-on-year to KRW 1,076.6 billion and KRW 385.9 billion respectively, balance of bond-type and hybrid-type BCs sold decreased 53.7% and 4.2% to KRW 312.5 billion and KRW 287.1 billion, respectively. Balance of overseas and derivatives fund BCs was down by 10.6% at KRW 664.9 billion. Commission income from sales of BCs, despite the increase in balance sold, decreased 17.1% to KRW 8 billion owing to lower commission rates.
30
Balance of Beneficiary Certificates (KRW billion)
FY06 FY07 FY08 %YoY
Beneficiary certificates (year-end) MMF Bond-type Hybrid-type Equity-type Others 1) 2,136.7 290.7 786.7 576.8 166.3 316.2 2,498.4 412.5 675.5 299.8 357.5 744.0 2,726.9 1,076.6 312.5 287.1 385.9 664.9 9.5 161.0 -53.7 -4.2 7.9 -10.6 BC commission income 6.0 9.6 8.0 -17.1 1)
Others = overseas fund + derivatives fund + others
Interest-earning assets comprised mainly of bonds and loans which offer relatively high stability and profitability. The loans (margin to customers, loans for stock purchase, loans secured by securities) mostly have stocks as collateral. As the loan to collateral ratio is monitored real-time, our portfolio has relatively low risk and high return. Net interest income in FY2008 grew 6.7% to KRW 118.1 billion despite lower market interest rates.
Net Interest Income (KRW billion)
FY06 FY07 FY08 %YoY
Interest income Interest on bonds Interest on loans Interest on deposits Interest on funds managed Others Interest expense 135.6 55.1 30.7 34.4 4.8 10.6 45.3 201.7 86.4 61.8 41.5 9.2 2.9 91.0 248.9 128.5 46.3 41.1 28.7 4.3 130.7 23.4 48.7 -25.1 -1.0 212.0 48.3 43.7 Net operating income 90.3 110.7 118.1 6.7
* Interest income includes gain on valuation of deposits segregated under regulation
The Capital Market Group recorded a KRW 63.4 billion gain in FY2008, a 51.4% improvement over the FY2007 figure.
The proprietary trading desk primarily invested in safe and liquid monetary stabilization bonds and government bonds, and benefited from the drop in interest rates following the Korean government’s monetary loosening policy, which resulted in bond trading profits of KRW 72.3 billion. On the other hand, equities trading produced a loss of KRW 7.2 billion due to the sharp fall in stock prices despite a conservative investment strategy and reduction in the weight of higher-risk equities. Daishin Securities continues in its endeavors to improve its propretary trading profits by diversifying away from equities and bonds and pursuing alternative investments and principal investments.
General and Administrative Expenses
General and administrative (G&A) expenses for FY2008 decreased 5.9% year-on-year to KRW 296.0 billion. Wages, which account for around 60% of G&A expenses, were down 9.6% to KRW 180 billion. This was despite the inaugural launch of ESOP in March 2009, resulting in compensatory stock award of KRW 8.6 billion, and a performance bonus of KRW 3 billion to management and research personnel. Daishin Securities maintains the discretionary portion of wages at about 50% in order to flexibly respond to stock market conditions.
Through cost control initiatives, the IT system operating expenses and advertising expenses were cut by 4.0% and 34.3% to KRW 22.5 billion and KRW 5.6 billion, respectively. Rent and depreciation expense increased 21.2% and 13.9% to KRW 6.9 billion and KRW 23.4 billion respectively due to extension of our branch network as part of efforts to reinforce retail brokerage and wealth management services.
31
G&A Expenses (KRW billion)
FY06 FY07 FY08 %YoY
Salaries & employee benefits IT system operating expenses Rent Miscellaneous commissions Advertising expenses Depreciation expenses Others 156.4 22.3 4.9 15.8 10.4 20.0 32.1 199.1 23.5 5.7 18.4 8.5 20.5 39.0 180.0 22.5 6.9 20.7 5.6 23.4 36.9 -9.6 -4.0 21.2 12.3 -34.3 13.9 -5.3 G&A expenses 261.9 314.7 296.0 -5.9
Breakdown of G&A Expenses (%)
FY06 FY07 FY08
Salaries & employee benefits IT system operating expenses Rent Miscellaneous commissions Advertising expenses Depreciation expenses Others 59.7 8.5 1.9 6.0 4.0 7.6 12.3 63.3 7.5 1.8 5.8 2.7 6.5 12.4 60.8 7.6 2.3 7.0 1.9 7.9 12.5 Total 100.0 100.0 100.0
Profitability and Shareholder Value
The downturn in the Korean equity markets following the global financial turmoil adversely affected our profitability. Operating income fell 55.2% year-on-year to KRW 100.1 billion in FY2008 and the operating income margin declined for the second consecutive year. The margin erosion is largely explained by the fact that stock valuation gains stemming from greater issuance of ELS were recognized as operating revenue. The reported operating revenue is overstated relative to net operating revenue since stock valuation gains from ELS issuance are largely offset by matching stock valuation losses from hedging. Accordingly, actual operating profitability is assessed to be higher than the accountingbased figure. The ability to generate KRW 100.1 billion in operating income in a bearish market is a reflection of our solid earning structure.
Operating Profitability (KRW billion)
FY06 FY07 FY08 %YoY
Operating revenues Operating income 1,033.9 121.5 2,690.5 223.6 2,823.7 100.1 5.0 -55.2
Operating income margin (%) 11.7 8.3 3.5 -4.8%p
Daishin Securities continues with efforts to improve overall profitability by boosting the net non-operating income. In FY2008, we slashed our non-operating expenses by 75.5% year-on-year. Despite a decrease in absolute terms, net non-operating income accounted for 20% of pre-tax income, which is a testament to the effective operations at Daishin.
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Non-operating Balance (KRW billion)
FY06 FY07 FY08 %YoY
Non-operating income Non-operating expenses 24.3 6.2 41.8 9.3 27.1 2.3 -35.3 -75.5
Net Non-operating income 18.1 32.6 24.8 -24.0
The equity market downslide triggered by the global financial crisis put a crimp on bottom-line earnings. FY2008 pre-tax income dropped 51.2% year-on-year to KRW 124.9 billion, while net income recorded a 41.9% drop to KRW 103.3 billion. On the other hand, we conducted a stock buyback as part of efforts to stabilize the share price and the compensatory stock award program, which in turn lowered the weighted average number of outstanding common stocks in FY2008 by 7.2% to 45,791,649. Thus, earnings per share for common stock after subtracting preferred stock dividends stood at KRW 1,317 in FY2008, a 35.5% decrease from the prior year.
Net Income (KRW billion, %)
FY06 FY07 FY08 %YoY
Net income Net income margin ROE 100.0 9.7 6.6 177.8 6.6 10.3 103.3 3.7 6.2 -41.9 -3.0%p -4.1%p
Daishin Securities carries out various activities to maximize shareholder value. As part of our commitment to returning value to shareholders, we have paid out cash dividends for eleven consecutive years, the first major securities firm to do so in Korea. For FY2008, we distributed dividend per share (DPS) of KRW 1,000 for common stock, KRW 1,050 for class 1 preferred stock, and KRW 1,000 for class 2 preferred stock. Although total dividends declined relative to last year, the payout ratio improved to 77.6%. The dividend yield was at the highest levels in the industry, reaching
