[Seungseop Song's Financial Light] Why Do Financial Companies Try to Pay Interim Dividends?

Dividend Payout Ratio Capped at 20% by Authorities
Shareholders Expecting High Dividends Amid Performance Improvement Outraged
Financial Firms 'Soothe Shareholders' with Interim Dividends

Finance is difficult. It is tangled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, a foundation of financial knowledge is essential. Accordingly, Asia Economy selects one financial term each week and explains it in very simple language. Even those who know nothing about finance can immediately understand these 'light' stories that turn on the bright 'light' of finance.

[Asia Economy Reporter Song Seung-seop] Starting with Shinhan Financial Group on the 25th, the shareholder meetings of the four major financial holding companies (KB Financial, Shinhan, Hana, and Woori) have all concluded. If we were to pick a keyword for this year's financial holding companies' shareholder meetings, it would undoubtedly be 'dividends.' This is a change from the past, when the focus was on who would become the group's chairman or whether the bank president would succeed in reappointment. Why has dividend become the main focus at financial companies' shareholder meetings?

Simply put, dividends refer to the profits a company returns to its shareholders after completing a year of business. Since all joint-stock companies operate with shareholders' money, they share the fruits of the company with the shareholders. That is why dividends are called 'shareholder-friendly policies' or 'shareholder return policies.'

When a company autonomously decides the dividend amount, the 'dividend payout ratio' can be known. The dividend payout ratio refers to the percentage of dividends paid out relative to net income (profits after deducting various costs and taxes). It varies depending on the industry and the characteristics of the company. For example, if a company records a net income of 1 trillion won and shows a dividend payout ratio of 20%, the company has returned 200 billion won of profits to its shareholders.

The dividend payout ratios of financial holding companies were known to be relatively high compared to other industries, ranging between 25% and 27% as of last year. If financial holding companies earned 10 billion won in profits, shareholders expected dividends exceeding 2.5 billion won annually. Some investors even purchased financial holding company stocks to receive year-end dividends.

Full of dissatisfaction over lowered dividend payout ratios... Financial companies 'soothing shareholders'

The problem is that the dividend payout ratios of financial holding companies sharply decreased at the end of last year. As COVID-19 cases surged and economic uncertainty grew, financial authorities recommended setting the dividend payout ratio at around 20%. Only Shinhan Financial, which passed the soundness tests presented by the financial authorities, decided on a dividend payout ratio of 22.7%, while KB, Hana, and Woori Financial Holding Companies lowered their dividend payout ratios to 20% in accordance with the authorities' demands.

This led to backlash among shareholders who owned financial company stocks. Despite the financial sector recording good performance during the COVID-19 phase and various soundness indicators expected to be significantly strengthened, the dividend payout ratio was heavily restricted. There were also complaints questioning why the government, rather than the shareholders, directly limits dividends that private companies autonomously implement.

In response, financial companies are making moves to soothe angry shareholders. This is because some shareholders disappointed by the low dividends sold off their financial company stocks, causing stock prices to fall. Usually, stock prices rise as dividends approach, but the opposite situation unfolded. If stock prices fall and shareholders' trust is not gained, there could be difficulties in appointing or reappointing chairmen and bank presidents, as well as in electing board members.

On the 25th, Cho Yong-byeong, Chairman of Shinhan Financial Group, participated in the 20th regular shareholders' meeting.
[Photo by Shinhan Financial Group]

This is why each financial company has expressed intentions for interim dividends and started securing dividend capacity. Shinhan Financial held a shareholder meeting and changed the interim dividend system, which was conducted once a year, to a 'quarterly dividend' clause allowing up to four times a year. In the case of Woori Financial, about 4 trillion won of capital reserves were reduced and converted into retained earnings available for dividends.

Each holding company chairman also actively expressed intentions to increase dividends at the shareholder meetings. At the shareholder meeting on the 26th, KB Financial Chairman Yoon Jong-kyu emphasized, "The dividend payout ratio should be at least 30%," adding, "We have been continuously increasing it and will not stop." Lee Hu-seung, Executive Vice President (CFO) of Hana Financial, the only financial company that has conducted interim dividends annually, stated, "We will do our best to increase shareholder value, including interim and final dividends."

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