Chronic Government-Controlled Finance Hits Banking Sector... Dividend Restrictions Cause Stock Prices to Fall Across the Board (Comprehensive 2)

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Dividends Not Allowed, Profit-Sharing Allowed(?)... "Which Game Are We Playing?" Points Out Contradiction
Blue House National Petitions Continue... "Must Solve with Policy and Support, Not Government-Controlled Finance"

Financial Supervisory Service (Photo by Yonhap News)

[Asia Economy Reporter Kwangho Lee] The banking sector is suffering from chronic government-controlled finance. The groggy state is caused by a series of tightening measures that hinder autonomous management, such as dividend suppression recommendations, pressure for profit-sharing systems, and household loan regulations.

On the 28th, the Financial Supervisory Service sent a document to each bank regarding the 'Capital Management Recommendation for Banks and Bank Holding Companies in Response to the Novel Coronavirus Infection (COVID-19),' which was approved at the regular meeting with the Financial Services Commission the previous day. The main point is to recommend that dividends be paid within 20% of net profit on a temporary basis until the end of June this year.

The recommendation applies until the end of June, after which dividends can be paid autonomously as before within the scope of maintaining capital adequacy. Dividends paid by banks belonging to domestic bank holding companies to the holding companies are an exception. Policy financial institutions such as the Korea Development Bank, Industrial Bank of Korea, and Export-Import Bank of Korea, which are compensated for losses by the government, are also excluded from the recommendation.

Earlier, from October to December last year, the Financial Supervisory Service conducted stress tests on eight bank holding companies including Shinhan, KB, Hana, Woori, NH, BNK, DGB, and JB, as well as six banks including SC, Citi, Industrial, Corporate, Export-Import, and Suhyup. The stress tests assumed a crisis situation greater than the 1997 foreign exchange crisis and measured two scenarios: a U-shaped recovery with negative growth in 2021 and recovery in 2022, and an L-shaped scenario with zero growth continuing in 2022.

As a result, in both U- and L-shaped scenarios, all banks' capital ratios exceeded the minimum mandatory ratio, but in the L-shaped scenario, a considerable number of banks failed to exceed the dividend restriction regulatory ratio. The dividend restriction regulatory ratio is the minimum mandatory ratio plus 1% for systemically important banks. The standard for the total capital ratio item is 11.5%. In reality, banks' ratios declined from 14.21% in 2021 to 10.87% in 2023. This means that while banks generally maintain loss absorption capacity, some banks may not have sufficient capital capacity if COVID-19 prolongs.

The financial authorities hold the position that proactive capital expansion efforts are necessary to respond to economic uncertainties. However, they recommend that if the dividend restriction regulatory ratio is exceeded in the L-shaped scenario, dividends may be paid autonomously but should be decided cautiously considering the economic impact of COVID-19.

Banks empathize with the reality surrounding the COVID-19 situation but cannot hide their bewilderment. Dividend restrictions could hamper shareholder value enhancement. Bank stocks have long been considered representative high-dividend stocks. The four major bank holding companies?Shinhan, KB, Hana, and Woori?showed dividend payout ratios of 25-27% last year. Woori had the highest at 27%, KB and Hana at 26%, and Shinhan at 25%.

If shareholders express dissatisfaction and withdraw, adverse effects on stock prices are inevitable. As of 2 p.m. on the day, Woori Financial Group (-2.68%), Shinhan Financial Group (-1.39%), KB Financial Group (-3.42%), and Industrial Bank of Korea (-2.31%) all showed declines.

A bank official said, "Foreign ownership of major financial holding companies exceeds 50%," adding, "It is a frustrating situation because appropriate dividends must be paid to enhance shareholder value." Another official pointed out, "It goes against financial common sense to reduce dividends even though banks' performance and soundness are excellent."

Some criticize the financial authorities' dividend restriction recommendation as contradictory to the profit-sharing system being promoted in the political sphere.

The profit-sharing system is intended for industries that make profits despite COVID-19 to share profits with affected industries. Banks, which posted record-breaking profits last year, are considered representative industries that should share profits.

However, while the financial authorities recommend banks to refrain from dividends and accumulate funds internally to manage capital soundness, the call to share profits with other industries is seen as inconsistent.

On the Blue House's public petition board, petitions such as "Oppose the reduction of year-end dividends for financial stocks" and "Stop government-controlled finance for listed financial companies" have been posted.

One petitioner emphasized, "The financial sector bears all responsibility, compensation, and burden, and whenever necessary, the heads of financial companies are summoned and forced to provide support repeatedly," adding, "The price-to-book ratio (PBR) of Korean financial groups is the lowest among OECD countries. The stock prices prove that Korean financial companies are not recognized internationally."

They continued, "If the same problems are repeated without realizing that these are government-controlled finance practices, the value of financial companies owning the country's greatest assets will continue to decline, ultimately leading to the repeated selling of domestic assets to foreign capital at bargain prices," and added, "I petition for overcoming the political situation by solving the difficult task of public safety with policies and support, not by the easy method of government-controlled finance."

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