Meritz Financial Group shares surged more than 5% in a single day after its subsidiary Meritz Securities received regulatory approval to launch a promissory note business. The ability to raise funds up to 200% of its equity capital—unlocking approximately 16.7 trillion won (approximately $12.3 billion) in deployable capital—sparked investor enthusiasm. On the same day, Meritz Securities also approved a capital reserve reduction to expand its dividend capacity.
According to the Korea Exchange on the 28th, Meritz Financial Group closed at 132,600 won (approximately $97), up 5.57% from the previous session. The gain stood in stark contrast to the broader market, where the KOSPI plunged 2.70% to close at 6,889.74, falling below the 7,000 level for the first time in four trading days.
The rally was driven by Meritz Securities being designated as a comprehensive financial investment business entity with equity capital exceeding 4 trillion won (approximately $2.9 billion), qualifying it for a promissory note business license. As of end-June this year, Meritz Securities’ standalone equity capital stood at 8.3495 trillion won (approximately $6.1 billion). Under regulations allowing promissory note issuers to raise funds up to 200% of equity capital, the firm now has the foundation to deploy approximately 16.7 trillion won (approximately $12.3 billion).
Meritz Securities has distinguished itself in real estate project financing (PF) and corporate finance. Expectations that the firm can aggressively expand its investment banking (IB) business on the back of substantially increased assets under management translated into strong buying interest.
Opportunities and Constraints of Promissory Notes
The promissory note business could serve as a new growth engine for Meritz Securities, but it also comes with challenges that must be navigated.
Promissory note issuers are required to deploy at least 10% of raised funds as venture capital. This means the firm must simultaneously build capabilities in unlisted startup equity investments and mezzanine investments in KOSDAQ-listed companies. The recent surge in domestic and international government bond yields has also raised the bar for generating investment returns. On the same day, the three-year Korean Treasury bond yield in Seoul’s bond market closed at 4.119% annually, up 11.3 basis points (1bp = 0.01 percentage point) from the previous session.
An IB industry source said, “It’s not easy to generate stable returns while investing in assets with higher risk than government bonds, so conditions for the promissory note business have deteriorated. The key will be identifying corporate finance assets that offer both profitability and soundness, leveraging the competitiveness built in real estate finance.”
Capital Reserve Reduction Expands Dividend Capacity
On the same day, Meritz Securities held a shareholders’ meeting and board meeting at Three IFC in Seoul, approving a capital reserve reduction. As a wholly owned subsidiary of Meritz Financial Group, the increased distributable profits from this reduction are expected to be fully utilized as shareholder return resources for the parent company.
Meritz Financial Group has established a policy to return 50% of consolidated net income to shareholders over three years through 2028 via dividends, share buybacks, and cancellations. Since subsidiary dividends are the source of the holding company’s return capacity, expanding the securities unit’s dividend capacity is interpreted as a measure supporting this policy.
In December last year, Meritz Securities raised 500 billion won (approximately $367.6 million) through a rights offering, adding the share premium to its capital reserve. This reduction converts the capital reserve accumulated from the capital increase into dividend resources.
Strong earnings also support expectations for larger dividends. Last year, Meritz Securities reported consolidated net income of 766.3 billion won (approximately $563.5 million), up 10.1% year-over-year. Historically, interim dividends have typically ranged from 33% to 35% of the previous fiscal period’s consolidated net income. Applying this ratio, this year’s interim dividend is estimated at approximately 260.5 billion won (approximately $191.5 million), and with the additional capital reserve reduction resources, the actual dividend is expected to significantly exceed this figure. It would also be higher than last year’s interim dividend of 228 billion won.
Given that Meritz Securities’ interim dividend announcements over the past three years have been concentrated in October and November, the interim dividend amount is expected to be determined soon. A Meritz Securities official said, “The capital reserve reduction has increased distributable profits, securing additional dividend capacity. This will contribute to Meritz Financial Group’s stable shareholder returns.”
Interaction Between Dividends and Promissory Notes
Industry observers view Meritz Securities’ capital reserve reduction as not unrelated to its recently obtained promissory note license. The analysis is that with a funding channel equivalent to 200% of equity capital secured through the promissory note license, reducing existing capital reserves for dividend purposes does not create significant liquidity management burdens.
However, if dividends are actually paid, equity capital will decrease, and the promissory note funding limit—calculated based on equity capital—will also shrink accordingly. While promissory notes expand funding capacity, they are ultimately recognized as liabilities and subject to regulations on how the funds can be deployed. Therefore, it would be premature to characterize promissory notes as a buffer that alleviates liquidity pressure from dividends. The key variables in liquidity management will be the actual size of the interim dividend and the pace of promissory note issuance and deployment.
Meritz Securities is accelerating business portfolio diversification, including entering the promissory note business, to secure dividend capacity while creating new revenue sources and supplying venture capital. The strategy is to leverage its competitiveness in corporate finance to expand its earnings base using promissory notes as a new funding instrument.