Banking Sector with Announced NIM Enhancements... Moves Toward Interim Dividends (Comprehensive)

Banking Sector NIM Expected to Improve Further in Q2
Shareholder Return Activities Likely to Increase

[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 cap of 20% set to end at the end of this month, the financial sector is poised to actively move toward increasing 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.

The ongoing rise in market interest rates is a key factor boosting expectations for performance, as the second quarter NIM improvement in the banking sector is becoming more certain.

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 plunging throughout last year, NIM rebounded in the first quarter of this year and is expected to improve further by 0.04 to 0.06 percentage points in the second quarter. This is due to the rise in short-term market interest rates and the fact that the number of business days in the second quarter is greater than in the first quarter.

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

Within the financial sector, as the regulatory recommendation limiting bank dividend payouts to within 20% of net income is set to expire at the end of this month, the dominant view is that financial holding companies will show active moves to expand dividend payout ratios immediately after confirming second-quarter results.

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

Hana Financial’s announcement of the closure of its shareholder register the day before is seen as a preparatory step for interim dividends. There are also speculations that interim dividends will be paid around August. Hana Financial plans to decide on whether to implement interim dividends and the dividend size at the board meeting next month, after reviewing the recovery status from COVID-19 and the financial authorities’ capital management recommendations.

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 announced plans to raise the payout ratio to 30% by 2023. Until now, only Hana Financial has paid interim dividends, but these developments increase the likelihood that all four major financial holding companies will pay interim dividends this year.

This outlook is supported by the growing likelihood that the 20% dividend payout cap will not be extended. The Financial Supervisory Service has begun re-conducting stress tests for banks, collecting necessary data by the 11th to reflect the changed economic conditions. Major financial authorities worldwide, including the U.S. Federal Reserve Board (FRB) and the European Central Bank (ECB), have been easing dividend restrictions as their banks’ capital adequacy improves and real economies recover.

In South Korea, opinions are emerging 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 International 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, regularly conducting stress tests, and maintaining efforts to ensure financial stability must continue."

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