Financial Authorities Urge Building Cash Reserves by Cutting Dividends... "Limited Effect on Capital Expansion"

NH Investment & Securities "Bank Dividend Payout Ratio Has Minimal Impact on Capital Strength"
Reducing Dividends Unlikely to Significantly Boost Capital
Year-End Dividend Payout Ratio Expected to Decrease to 23.7%

The Financial Supervisory Service building located in Yeouido, Yeongdeungpo-gu, Seoul. [Image source=Yonhap News]

[Asia Economy Reporter Song Seung-seop] A report has emerged indicating that even if domestic commercial banks reduce their dividend payout ratios, the impact on their capital strength is minimal. This analysis is completely opposite to the financial authorities' assertion that dividends should be restrained to enhance loss absorption capacity.

On the 16th, Bo-ram Jo, a researcher at NH Investment & Securities, stated, "We conducted scenario analysis to assess the impact of changes in dividend payout ratios of banks and holding companies on their capital strength," adding, "We confirmed that changes in dividend payout ratios do not lead to critical or significantly meaningful changes in capital strength."

The study examined seven banks including KB Kookmin, Shinhan, Woori, Hana, Industrial Bank of Korea, BNK Gyeongnam, and DGB Daegu. It analyzed changes in the capital adequacy ratio (BIS) when the dividend payout ratio, which averaged 24.3% last year, was increased to the mid-to-long-term target level of 30%, or reduced to 20% or 15%. Generally, a higher BIS indicates soundness, while a lower BIS suggests weakness.

The analysis showed no significant changes in BIS across all banks. Even when the dividend payout ratio was increased to 30%, the BIS ratio decreased by only 0.03 to 0.07 percentage points. When dividends were reduced to 20%, the BIS ratio increased by just 0 to 0.08 percentage points. Even with a strict limit of 15%, the increase in BIS ratio ranged from 0.03 to 0.15 percentage points, indicating little impact on capital strengthening.

For example, Woori Financial Group's dividend payout ratio this year is 24.6%, with a BIS ratio of 14.2%. Lowering the dividend payout ratio to 20% would raise the BIS ratio by 0.03 percentage points. Even with a strict limit of 15%, it would increase by only 0.07 percentage points. Similarly, Hana Financial Group's current dividend payout ratio of 23.8% would see the BIS ratio rise slightly by 0.04 and 0.10 percentage points if reduced to 20% and 15%, respectively.

The analysis showed that even if the dividend payout ratios of commercial banks are reduced to 20% and 15%, the capital adequacy ratio (BIS) does not change significantly.

NH Investment & Securities: "Reducing Dividends Has Little Effect on Capital Expansion"

This contrasts with the financial authorities' position, who are considering reducing shareholder dividends in the banking sector at year-end. Since April, the authorities have consistently recommended banks to reduce dividends and refrain from share buybacks. The rationale was to accumulate cash and improve soundness in response to uncertainties caused by the COVID-19 pandemic, but the report concludes that dividend reductions are unlikely to achieve these effects.

Moreover, considering the banking sector's strong performance in the third quarter this year and the global financial industry's average dividend payout ratio of 50%, it is expected that the domestic banks' "mid-to-long-term dividend payout ratio of 30%" will remain unchanged. Analyst Jo commented, "There is a temperature gap between banks' willingness and ability to pay dividends and the current macro and regulatory environment," but added, "It is judged that each bank's commitment to dividend and shareholder return policies is firm."

Nevertheless, the average year-end dividend payout ratio in the domestic banking sector is predicted to decrease slightly to 23.7%, down 0.06 percentage points from last year. The reasons cited include the ongoing macroeconomic uncertainties making immediate dividend increases difficult, and voices advocating for dividend reductions to strengthen loss absorption capacity compared to previous years.

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