Banks to Autonomously Decide Dividends from July... End of Capital Management Recommendation Capped at 20%

Recommendation to Conduct Dividends Within 20% of Net Profit to End This Month

[Asia Economy Reporter Park Sun-mi] The recommendation for capital management in the banking sector, which limited dividends to within 20% of net profit, will end at the end of this month. Starting July 1, banks will be able to autonomously decide whether to conduct interim or quarterly dividends and determine their levels. Accordingly, interim and quarterly dividends by banks will also be possible in the second half of the year.

On the 25th, the Financial Services Commission announced at its regular meeting held the previous day that it had decided to end the 20% dividend restriction capital management recommendation for banks and bank holding companies as scheduled at the end of June. This decision was made because all banks and bank holding companies passed the Financial Supervisory Service's stress test.

The Financial Supervisory Service conducted stress tests on eight bank holding companies and eight banks starting last month. The results showed that all bank holding companies and banks exceeded the regulatory ratio limits for dividend restrictions in all scenarios. In the January stress test, many banks and bank holding companies failed to meet the regulatory ratios under the L-shaped scenario (long-term recession), but this time, they all met the regulatory ratios such as 7% common equity tier 1 (8% for D-SIBs), 8.5% tier 1 capital (9.5% for D-SIBs), and 10.5% total capital (11.5% for D-SIBs).

Additionally, the fact that domestic banks and bank holding companies have expanded funding to the real economy since COVID-19 while maintaining soundness also influenced the decision. Currently, the banking sector has enhanced its loss absorption capacity by significantly exceeding the BIS total capital ratio regulatory requirements through additional loan loss provisions and dividend reductions.

Major countries such as the United States and Europe have also announced plans to ease dividend restrictions based on stress test results and improvements in economic conditions, and South Korea's economic situation has improved compared to when the capital management recommendation was implemented.

However, Financial Services Commission members expressed the opinion that even though the capital management recommendation limiting dividends to within 20% of net profit is ending, banks should autonomously decide dividend levels while fully considering the ongoing uncertainties related to COVID-19. They emphasized the need to balance both enhancing shareholder value and the necessity for sufficient capital accumulation due to continued COVID-19 uncertainties when determining dividend levels.

A financial authority official stated, "For example, referring to the average dividend payout ratio before the spread of COVID-19 is one method," adding, "There was an opinion that the ongoing measures such as maturity extensions and repayment deferrals to support small and medium-sized enterprises and small business owners, as well as regulatory flexibility measures to expand liquidity supply to the real sector amid the continuing COVID-19 pandemic, should be fully taken into account."

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