Bank Dividend Payout Ratio '15~25%' "Some Financial Firms Fail the Test"

[Image source=Yonhap News]

[Asia Economy Reporter Kangwook Cho] Financial authorities have set a minimum dividend payout ratio of 15% for domestic financial holding companies. This is because some financial firms failed to meet the benchmark in the financial soundness assessment (stress test).

It was even found that if the economy does not rebound in 2022, the capital adequacy ratio of some financial firms, including financial holding companies, will fall below regulatory levels.

According to financial authorities on the 27th, the Financial Supervisory Service (FSS) is currently finalizing analysis work after conducting scenario-based evaluations on whether domestic financial institutions can withstand the COVID-19 crisis well, based on a three-year long-term outlook.

The evaluation results predicted that if the depressed economy rebounds in a U-shaped recovery, no significant problems would arise.

However, under a scenario where the economy continues an L-shaped stagnation without recovery in 2022, the total capital ratio based on the Basel Committee on Banking Supervision (BIS) standards (total capital to risk-weighted assets) of some financial firms, including financial holding companies, would fall below regulatory levels, necessitating additional capital accumulation.

By regulation, banks and bank holding companies must maintain a BIS total capital ratio of at least 10.5% (11.5% for systemically important banks), and if they fall short, restrictions on dividends and other distributions apply. If the total capital ratio falls below 8%, the Financial Services Commission initiates prompt corrective actions (management improvement recommendations).

However, the cumulative net profit of the four major financial holding companies in the third quarter of this year reached 9 trillion won, a 15.1% increase compared to the same period last year. Shinhan and KB each posted net profits exceeding 1 trillion won in the third quarter alone, achieving record-high results. The total provisions accumulated during this period amounted to 3.0894 trillion won, 1.2052 trillion won more than last year. Analysts suggest that all four major financial holding companies have no significant issues increasing dividends.

Because of this, the Financial Supervisory Service’s coordination with banks to set dividend payout ratios at 15?25% is being criticized as excessive market intervention, or so-called 'government-controlled finance.'

A financial industry insider said, "While there is some agreement with the financial authorities’ stance on dividends, it is difficult to indefinitely restrain dividends. Above all, since provisions for COVID-19 have been substantially accumulated and performance remains solid, the rationale of enhancing shareholder value cannot be ignored."

In response, financial authorities maintain that preparations must be made for the worst-case scenario.

Yoon Seok-heon, Governor of the Financial Supervisory Service, said at a press briefing on the 23rd, "This is to prepare for the possible prolonged COVID-19 situation and the resulting deterioration. We need to have phased measures in place to enable a soft landing if problems arise."

Financial Services Commission Chairman Eun Sung-soo said, "Dividends are closely related to the capital market, so we respect the intentions of individual financial companies. However, we share concerns about the potential surge in deferred non-performing loans after the maturity extension measures for COVID-19 end."

He added, "Stress tests are currently underway at the FSS and bank holding company levels. Considering the test results, each company should appropriately adjust dividends accordingly."

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