Financial Authorities Urge "Restrain Dividends and Accumulate Funds" vs Experts Say "Capital Expansion Effect Is Limited" (Comprehensive)

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%

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

In fact, although domestic financial holding companies have performed well this year despite the COVID-19 pandemic, raising expectations for dividends, the financial authorities have strongly recommended repeatedly that dividends be restrained.

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

The analysis examined seven institutions including KB Kookmin, Shinhan, Woori, Hana, Industrial Bank of Korea, BNK Gyeongnam, and DGB Daegu, focusing on changes in the capital adequacy ratio (BIS ratio) 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 ratio is evaluated as healthier, while a lower ratio indicates poorer condition.

The results showed no significant changes in BIS ratios 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 at minimum. When dividends were reduced to 20%, the BIS ratio increased by only 0 to 0.08 percentage points. Even with a strong restriction to 15%, the increase in BIS ratio ranged from 0.03 to 0.15 percentage points, which did not significantly affect capital strength expansion.

For example, Woori Financial Group’s dividend payout ratio this year is 24.6%, and its BIS ratio is 14.2%. Lowering the dividend payout ratio to 20% raises the BIS ratio by 0.03 percentage points. Even with a strong restriction to 15%, it increases 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 when reduced to 20% and 15%, respectively.

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

This contradicts the financial authorities’ stance, which is considering reducing shareholder dividends in the banking sector at year-end. Since April, the financial authorities have consistently recommended reducing dividends and refraining from share buybacks in the banking sector. The rationale was that banks should accumulate cash and improve soundness to respond to uncertainties caused by COVID-19, but the report’s findings suggest that dividend reductions are unlikely to achieve these effects.

Moreover, with the banking industry’s strong performance in the third quarter this year, annual results are expected to be better than anticipated. Considering that the global banking industry’s average dividend payout ratio reaches 50%, the domestic banks’ "mid-to-long-term dividend payout ratio of 30%" is expected to remain unchanged. Analyst Jo stated, "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 domestic banking industry’s average dividend payout ratio at year-end is predicted to decrease slightly by 0.06 percentage points to 23.7% compared to last year. The reasons cited include the ongoing macroeconomic uncertainty making immediate dividend increases difficult, and voices calling for dividend reductions to strengthen loss absorption capacity compared to previous years.

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