Financial Holding Companies' 20% Dividend Cap Expiry Nears...Focus on Interim Dividends Amid Record Earnings

Financial Authorities Conducting Stress Test

[Asia Economy Reporter Park Sun-mi] There is growing emphasis on interim dividends among major financial groups. As the financial authorities' measure to limit financial institutions' dividends to within 20% of net profit, considering the COVID-19 situation, is set to expire at the end of June, there is a view that the possibility of further extension is low due to improved economic conditions.

According to the financial authorities on the 24th, the Financial Supervisory Service has begun stress testing to decide whether to extend the 20% dividend payout ratio limit for banks (including financial holding companies), which ends on the 30th of next month. A financial authority official stated, "We have started reviewing so that banks can make (dividend-related) decisions before the 20% dividend payout ratio limit ends at the end of June," adding, "This time, the test will not reflect the COVID-19 special situation as tightly as before."

In the previous test, the financial authorities assumed a crisis scenario more severe than the 1997 foreign exchange crisis (economic growth rate -5.1%). This reflected the seriousness of the COVID-19 situation. Since stress test scenarios must consider more pessimistic crisis situations than usual economic forecasts, a crisis scenario was assumed with this year's economic growth rate at -5.8% and next year at 0%. As a result, a recommendation was made to limit the dividend payout ratio to within 20% so that banks can maintain sufficient loss absorption capacity to overcome the COVID-19 crisis.

However, with the recent global economic recovery and unexpectedly strong exports, South Korea's economic growth forecast for this year has been revised upward to the high 3% range. Accordingly, the financial sector is placing weight on the possibility that this test scenario will be somewhat relaxed compared to the previous one. If so, most major financial institutions are likely to pass the test with their current capital management levels. This is why expectations are rising that interim dividends in the banking sector could become possible immediately from July, when the 20% dividend payout ratio limit expires.

Already, the four major financial holding companies?KB, Shinhan, Hana, and Woori?commonly emphasized proactive shareholder return policies at their regular shareholders' meetings held in March. Although they accepted the financial authorities' demand to lower the dividend payout ratio to around 20% for now, they expressed a strong intention to ensure that financial holding company shareholders can share maximum profits through interim dividends.

KB Financial Group, which already allows interim dividends in its articles of incorporation, saw Chairman Yoon Jong-kyu personally pledge, "We will strive to bring the dividend payout ratio close to 30% as soon as possible." Hana Financial also stated it would do its best to enhance shareholder value through both interim and year-end dividends. Shinhan Financial amended its articles of incorporation to allow not only interim dividends but also quarterly dividends. Woori Financial explained this as "an intention to pursue various market-friendly shareholder return policies," opening the way to increase distributable profits by about 4 trillion won by transferring capital reserves to retained earnings.

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