Financial Authorities Urge "Reduce Year-End Dividends"... Banks Say "Convincing Shareholders Is Key"

[Asia Economy Reporter Jo Gang-wook] Financial authorities have begun efforts to reduce year-end dividends of financial holding companies ahead of the dividend season. This is due to the prolonged COVID-19 pandemic increasing economic uncertainty, prompting banks to reduce dividends compared to previous years to strengthen their loss absorption capacity.

According to the financial sector on the 6th, the Financial Supervisory Service (FSS) is currently considering a temporary reduction in bank dividends. The FSS is holding consecutive meetings with banks to discuss dividend reduction plans.

Earlier in April, Yoon Seok-heon, Governor of the Financial Supervisory Service, recommended banks to suspend dividend payments, share buybacks, and performance bonuses in response to the shock caused by COVID-19. It appears that the FSS has now officially started recommending reductions due to the prolonged pandemic situation.

Major countries around the world are also restricting financial sector dividends due to the impact of COVID-19. The U.S. Federal Reserve (Fed) has ordered a halt to share buybacks until the end of the year and to freeze dividends at or below previous levels. The UK's Prudential Regulation Authority even imposed a full ban on dividends for banks.

The FSS is reviewing whether dividend restriction requests are possible under current regulations and whether additional assessments are needed, and plans to consult with the Financial Services Commission (FSC). It is also known that options such as temporarily lowering payout ratios and then increasing dividends again once the COVID-19 situation ends are being considered.

Alongside this, the FSS is also considering issuing additional dividend-related guidelines based on stress tests (financial soundness evaluations) that assess whether banks can withstand shocks under various COVID-19 scenarios. Furthermore, it is reported that institutional grounds to request dividend restrictions from banks in the long term are also being prepared.

The problem lies in market backlash. Bank stocks are traditional high-dividend stocks that attract investors during the year-end dividend season. Although lending regulations continue to tighten, expectations of dividends based on stable earnings positively influence stock prices.

Bank stocks are also attracting attention because interest rates are likely to have bottomed out and may turn upward. If the economy recovers from the COVID-19 shock, it could lead to inflation and interest rate hikes.

For these reasons, some voices oppose dividend restrictions, citing that domestic banks’ business performance this year has been better than expected despite COVID-19, and that dividend restrictions could harm shareholder value by causing stock price declines.

However, there are also voices agreeing with the intent and direction of preparing for the COVID-19 crisis. Therefore, reasonable persuasion of shareholders is expected to be key to reducing year-end dividends.

A financial sector official said, "We fully understand the financial authorities’ intentions in this emergency situation caused by COVID-19," but added, "However, it may not be easy to persuade shareholders as major financial holding companies have posted record-high earnings as of the third quarter this year."

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