Financial Services Commission Recommends Banks Limit Dividends to Within 20% of Net Profit... Temporary Application Until June

Authorities "COVID-19 Uncertainty Grows, Need to Enhance Loss Absorption Capacity"
Voluntary Dividends as Before Within Capital Adequacy Range After June
FSS Conducts 3-Stage Stress Test...All Banks Show Good Results

[Asia Economy Reporter Kwangho Lee] Financial authorities have recommended that domestic bank holding companies and banks temporarily limit dividends (including interim dividends and share buybacks) to within 20% of net profit. This decision comes from the judgment that, as the COVID-19 pandemic prolongs and uncertainty increases, dividends should be reduced and loss absorption capacity should be strengthened.

The Financial Services Commission announced on the 28th that it reviewed and approved the "Capital Management Recommendation for Banks and Bank Holding Companies in Response to COVID-19," which contains these guidelines.

The application period is until the end of June, and after the recommendation ends, dividends can be freely paid as before within the scope of maintaining capital adequacy.

Dividends from banks affiliated with domestic bank holding companies to their holding companies are excluded. Also, policy financial institutions such as the Korea Development Bank, Industrial Bank of Korea, and Export-Import Bank of Korea, where the government compensates for losses, are excluded from the recommendation.

The Financial Supervisory Service conducted a top-down stress test from October to December last year using the internationally validated model (STARS) on eight bank holding companies including Shinhan, KB, Hana, Woori, NH, BNK, DGB, and JB, as well as six banks including SC, Citi, Korea Development Bank, Industrial Bank of Korea, Export-Import Bank of Korea, and Suhyup Bank.

The stress test was measured in three stages, jointly prepared with the Bank of Korea: ▲ assuming a crisis scenario more severe than the 1997 foreign exchange crisis (economic growth rate -5.1%) ▲ a U-shaped scenario with expanded negative growth this year due to global economic slowdown and recovery in 2022 ▲ an L-shaped scenario with expanded negative growth this year and zero growth in 2022.

As a result, under the U-shaped and L-shaped scenarios, all banks' capital ratios exceeded the minimum required ratios. According to the Banking Supervision Regulations, the common equity tier 1 capital ratio is 4.5%, the tier 1 capital ratio is 6%, and the total capital ratio is 8%.

However, regarding the dividend restriction regulatory ratio, all banks exceeded it under the U-shaped scenario, but under the prolonged recession L-shaped scenario, a significant number of banks fell short.

A Financial Services Commission official said, "Currently, the financial soundness of domestic banks remains at a good level despite COVID-19, and last year's business performance is expected to be similar to previous years. However, since COVID-19 has not been completely eradicated, proactive capital expansion efforts are necessary to respond to economic uncertainty."

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