Banking Sector with Expected Net Interest Margin Improvement... Dividend Payout Ratio Promised at 30%

Hana Financial Closes Shareholder Register as Preliminary Step for Interim Dividend
"Financial Authorities Need to Consider Easing Capital Dividend Restrictions"

[Asia Economy Reporter Park Sun-mi] As market interest rates rise, the net interest margin (NIM) of domestic banks is expected to improve further in the second quarter. With the dividend payout ratio restriction of 20% set to end at the end of this month, the financial sector is poised to actively move toward expanding the payout ratio to 30%.

On the 16th, financial information provider FnGuide aggregated the market consensus for the second quarter controlling shareholder net income of the four major financial holding companies: KB Financial at 1.1059 trillion KRW, Shinhan Financial at 1.06 trillion KRW, Hana Financial at 808.5 billion KRW, and Woori Financial at 544.6 billion KRW. All are expected to achieve double-digit growth compared to the same period last year.

One of the main factors raising performance expectations is the clear prospect of further improvement in bank NIM in the second quarter, riding the ongoing upward trend in market interest rates.

According to the Financial Supervisory Service, the representative profitability indicator for banks, NIM, stood at 1.43% at the end of the first quarter this year, up 0.05 percentage points from the record low of 1.38% in the fourth quarter of last year. After plummeting throughout last year, NIM rebounded in the first quarter of this year and is expected to improve by an additional 0.04 to 0.06 percentage points in the second quarter. This is due to rising market interest rates mainly on short-term instruments and the fact that the number of business days in the second quarter is greater than in the first quarter for banks.

Choi Jung-wook, a researcher at Hana Financial Investment, explained, "Expectations for the sustainability of bank NIM improvement can grow," adding, "Last week, the one-year government bond yield rose by 0.12 percentage points, and short-term instruments under nine months also increased. Since corporate loan interest rates of banks are mainly linked to short-term interest rates, a rise in short-term rates eventually leads to an increase in bank loan rates, sustaining the upward trend in NIM."

Within the financial sector, as the financial authorities' recommendation to limit bank dividend payouts to within 20% of net income ends this month, the dominant view is that financial holding companies will show active movements to expand the dividend payout ratio immediately after confirming second-quarter results.

Expectations for Interim Dividends Rise with Hana Financial’s Shareholder Register Closure

Hana Financial’s announcement of the closure of its shareholder register yesterday is perceived as a preliminary step for interim dividends. Industry insiders expect interim dividends to be paid around August.

The chairpersons of the four major financial holding companies attended an investor relations (IR) meeting for overseas investors hosted by JP Morgan on the 10th, where they expressed their commitment to proactive shareholder return policies, including interim dividends. KB Financial Chairman Yoon Jong-kyu reaffirmed the existing stance that the dividend payout ratio should be 30%, and Woori Financial Chairman Sohn Tae-seung also stated plans to raise the payout ratio to 30% by 2023.

The industry places significant weight on the possibility that the 20% dividend payout restriction will not be extended. The Financial Supervisory Service began collecting necessary data by the 11th to conduct a stress test on banks reflecting the changed economic conditions. Major financial authorities in countries such as the U.S. Federal Reserve Board (FRB) and the European Central Bank (ECB) have already eased dividend restrictions as their banks’ capital adequacy has improved and real economies have recovered.

In South Korea, there are growing opinions that financial authorities should consider easing dividend restrictions in light of banks’ capital adequacy and the changed economic environment. Kwon Heung-jin, a research fellow at the Korea Institute of Finance, stated in his report titled ‘Status and Implications of Domestic and Overseas Bank Dividend Restrictions Related to COVID-19’ that "dividends are a natural right of shareholders and play a positive role by signaling the bank’s current status and future prospects to the market, so excessively prolonged restrictions are undesirable."

He advised, "Financial authorities need to consider easing capital dividend restrictions. However, even if dividends are eased, continuous communication with individual bank groups regarding capital plans, monitoring the smooth implementation of capital plans, and regularly conducting stress tests to maintain financial stability should continue."

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