Under Financial Supervisory Service Chief's Restraint... Hana Financial Group Considers Interim Dividend for the First Time in 11 Years

Financial Supervisory Service Chief's Dividend Restraint Order Resonates with Banks
May Impact Financial Holding Companies' Moves to Expand Subsidiaries

Hana Financial Group Headquarters Building

[Asia Economy Reporter Kwon Haeyoung] Hana Financial Group is deliberating whether to carry out its interim dividend this year, a practice it has never skipped in the past decade. This is due to the financial authorities' directive to refrain from stock price support measures amid the impact of the novel coronavirus disease (COVID-19). There is speculation that the financial authorities' order to expand real economy support functions could affect not only the payment of interim and year-end dividends by financial companies this year but also future moves to expand subsidiaries.

On the 7th, a Hana Financial Group official stated, "Capital capacity has decreased due to the expansion of COVID-19 loans, and the financial authorities are also recommending restraint on dividends," adding, "Nothing has been decided yet, but we will fully consider this situation when establishing dividend policies, including interim dividends."

Hana Financial Group is the only domestic bank that has consistently paid interim dividends. Since the holding company's launch in 2006, it has paid interim dividends every year except for 2009, when there was a half-year loss due to the financial crisis. Hana Financial has traditionally divided the half-year and year-end dividends roughly into 20-30% and 70-80%, respectively, but it was reportedly planning to adjust these to 40-50% and 50-60% starting this year. However, last week, Financial Supervisory Service Governor Yoon Seokheon recommended refraining from dividend payments and share buybacks as stock price support measures, prompting a full review of this year's dividend policy.

The financial sector generally agrees with Governor Yoon's directive. Since the financial authorities have relaxed bank soundness regulations to enhance loss absorption capacity and real economy support, there is a shared understanding that excess capital should be restrained from being used for dividends and share buybacks. The financial authorities have decided to lower the burden of complying with the Basel III requirements by early adoption of some items and have also eased regulations on the Korean won liquidity coverage ratio (LCR) and the loan-to-deposit ratio (LDR).

Another financial holding company official said, "Overseas financial authorities have also recommended suspending dividend payments and share buybacks, and banks are accepting this as a recent global trend," adding, "Although the stock price decline is a burden, considering the emergency situation with significant recession concerns, the supervisory authorities' recommendation is deemed reasonable."

However, for financial companies planning mergers and acquisitions (M&A) or subsidiary expansion, this could be a burden. Since the capital regulation relaxation is an order to expand real economy supply, if excess capital is used to expand subsidiaries, they cannot ignore the financial authorities' scrutiny.

Woori Financial Group must decide by June whether to acquire Aju Capital. Subsidiary incorporation is virtually likely. Woori Bank has invested 102.5 billion KRW in a special purpose company (SPC) for acquiring Aju Capital to secure a first refusal right. If Aju Capital is acquired, Aju Savings Bank, a 100% subsidiary of Aju Capital, can also be incorporated as a subsidiary. The exercise price of the first refusal right is estimated to be around 600 billion KRW.

The problem is that Woori Financial Group's BIS ratio stood at 11.89% at the end of last year, lower than other financial holding companies such as Shinhan Financial Group (13.9%), KB Financial Group (14.48%), and Hana Financial Group (13.95%). This is because it is subject to the standard approach, which has stricter capital calculation criteria. Although the Financial Supervisory Service is expected to approve a switch to the internal ratings-based approach, the increase in the BIS ratio is said to be limited. For this reason, there is a negative sentiment within the financial authorities about Woori Financial using the expanded capital capacity from relaxed soundness regulations to acquire Aju Capital. As a financial holding company that must inject trillions of won into bond and stock stabilization funds and expand loans to small business owners and companies affected by COVID-19, it cannot avoid feeling the burden.

This content was produced with the assistance of AI translation services.