Financial Holding Companies' 20% Dividend Cap Ending Soon... Support Grows for Interim Dividends (Comprehensive)

Improved Economic Conditions Lower Chances of Further Extension
4 Major Financial Holding Companies "Will Do Their Best to Enhance Shareholder Value"

[Asia Economy Reporter Park Sun-mi] The possibility of interim dividends from major financial groups is gaining momentum. 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 growing view that the likelihood of further extension is low due to improved economic conditions.

According to the financial authorities on the 24th, the Financial Supervisory Service has begun a stress test 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 expires 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, they assumed an economic growth rate of -5.8% this year and 0% next year. 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 unexpected 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 more 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 from banks will be possible starting in July, when the 20% dividend payout ratio limit expires.

Heads of Top-Performing Financial Holding Companies Emphasize Shareholder Return Policies

In fact, the financial authorities previously emphasized that the recommendation to limit the dividend payout ratio to 20% was a temporary measure to overcome the COVID-19 crisis. Although domestic banks maintain sound financial health despite the COVID-19 situation, this is a temporary measure due to concerns that prolonged economic uncertainty and real economy difficulties could deteriorate soundness.

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

KB Financial Group, which 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 committed to doing 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 stated that it intends to pursue "various market-friendly shareholder return policies" and paved 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.