Banks Exposed to Dividend Uncertainty

[Asia Economy Reporter Minji Lee] Bank stocks have been exposed to dividend uncertainties. The securities industry expects that investment sentiment will be difficult to revive in the short term, as financial authorities have officially put the brakes on the trend of expanding banks' dividend payout ratios.

According to the Korea Exchange on the 29th, the KRX Bank Index has fallen for seven consecutive trading days as of the previous day. Compared to this month's closing high (663.63), it has dropped by about 10%. On the previous day alone, KB Financial fell about 3%, and Woori Financial Group (-2.5%), JB Financial Group (-2.4%), and Hana Financial Group (-2%) also declined together.

The financial authorities recommended that banks pay dividends within 20% of net profit until June this year. This judgment was made based on the need for conservative capital management for banks assuming a long-term 'L-shaped' recession. This is 5-7 percentage points lower than the dividend payout ratio in 2019.

Although market interest rates are on the rise, they have not affected bank stocks. According to the Korea Financial Investment Association, the 10-year government bond yield rose by 10.5 basis points (1bp=0.01 percentage point) compared to two months ago. While higher interest rates increase banks' net interest margin (NIM), concerns that shareholder value enhancement through dividend expansion will not materialize have had a greater impact.

The most attractive incentive for investors to increase investment in bank stocks is 'dividends.' Although stock price volatility is not large, banks have been increasing their dividend payout ratios every year based on solid net profits, making them a long-term and stable investment destination from the investor's perspective. Among domestic industries, the dividend yield is relatively high.

Previously, banks have shown their intention to expand the domestic dividend payout ratio up to 30% as a mid- to long-term goal. The global average dividend payout ratio reaches the 50% range. Bank stocks in global markets, including the United States, have maintained strength due to rising interest rates and shareholder value enhancement efforts such as share buybacks. Jo Boram, a researcher at NH Investment & Securities who gave a neutral opinion on bank stock investment, said, "The gap between domestic banks' willingness and ability to pay dividends and the current regulatory environment is likely to act as a valuation discount factor."

Although the sluggishness of bank stocks is expected to continue for the time being, it is anticipated that they will show an upward trend again once dividend cuts are reflected in stock prices. Gu Kyung-hoe, a researcher at SK Securities, explained, "In a situation where it is unknown which banks have increased capital concerns, the stock prices of the banking sector are bound to be sluggish until earnings announcements. Once the decision on dividend cuts is made, it is expected to rebound as the negative factors are reflected."

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