Shareholder Returns VS Capital Securing... Dividend Dilemma in the Banking Sector

Unexpected Q3 Earnings Boost Shareholders' Expectations for Dividend Increase

[Asia Economy Reporter Park Sun-mi] As the banking sector enters the third-quarter earnings announcement season, shareholders' expectations are growing that the 'surprise' earnings, which exceeded expectations, could lead to an expansion of dividends.

Banks are reaching a consensus that dividend expansion is necessary to enhance the undervalued stock value and return profits to shareholders. However, banks are cautious about implementing this immediately, reflecting the uncertain economic situation caused by the novel coronavirus infection (COVID-19).

According to the financial sector on the 26th, KB Financial Group and Hana Financial Group, which disclosed solid third-quarter earnings contrary to concerns, stated in their conference calls that they are considering dividend expansion but not at this moment. Acknowledging the growing shareholder demands for increased dividends following a record quarterly net profit exceeding 1 trillion won, KB Financial emphasized the COVID-19 situation and confirmed that the dividend payout ratio will be maintained at least at last year's level.

Kim Ki-hwan, CFO of KB Financial, said, "Quarterly dividends are definitely worth considering from the perspective of enhancing shareholder value," but added, "However, due to COVID-19 this year, aggressive dividend expansion may be difficult, and it will likely be similar to last year." Last year, KB Financial paid a dividend of 2,210 won per share, with a payout ratio of about 26%.

Hana Financial, which announced third-quarter net profits more than 10% higher than the second quarter, is also exploring various shareholder return policies including quarterly dividends, but believes that implementing quarterly dividends in the short term will be difficult. Lee Hu-seung, CFO of Hana Financial, stated, "Considering the low stock price, quarterly dividends have value," and added, "Quarterly dividends are also good for shareholders' cash flow." He continued, "However, due to various external economic uncertainties, it will not be easy to realize quarterly dividends soon," and said, "We will discuss this thoroughly after the end of COVID-19."

Shinhan Financial, which is scheduled to announce its third-quarter earnings on the 27th, is also pushing to enable quarterly dividends through amendments to its articles of incorporation at the shareholders' meeting in March next year, but this too is premised on the post-COVID-19 period. Shinhan Financial has already informed financial authorities of its intention to implement quarterly dividends once the COVID-19 situation ends. Under the current articles of incorporation, interim dividends can only be paid once a year, but if amended at the March shareholders' meeting, up to four interim dividends per year will be possible.

The banking sector's consideration of dividend expansion reflects the growing shareholder demands for returns amid undervalued stock prices and recent earnings improvements. In fact, during the third-quarter earnings announcement season, the stock prices of financial holding companies, which had lagged behind the KOSPI's rise, have been rising continuously on expectations of dividend expansion.

Financial Authorities Recommend Dividend Restraint
Korea Institute of Finance: "Possibility of increased loan loss costs should be actively reflected in dividend decisions"

However, financial authorities are recommending restraint on dividends in the banking sector. Yoon Seok-heon, Governor of the Financial Supervisory Service, recommended banks to refrain from paying dividends during the COVID-19 outbreak last April, and the authorities still maintain their stance that a conservative dividend policy is necessary considering banks' capital adequacy.

Researcher Kwon Heung-jin of the Korea Institute of Finance also advised in a recent report that banks should consider the possibility of increased loan loss costs due to COVID-19 when deciding on dividends. Researcher Kwon said, "Domestic banks should prepare for the possibility that potential non-performing loans may materialize significantly as the economic downturn caused by COVID-19 prolongs or as the loan maturity extensions and interest payment deferrals expire in March next year." He also added, "It is necessary to actively reflect the possibility of increased medium- to long-term loan loss costs after COVID-19 in dividend decisions to secure sufficient capital buffers."

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