What Is the Background of the 20% Dividend Restriction Lift in the Banking Sector?

Stress Tests All Passed... Autonomous Dividend Level Decisions Starting July

[Asia Economy Reporter Park Sun-mi] The financial authorities' decision to allow banks to autonomously determine dividend levels starting in July is largely influenced by factors such as improvements in the real economy and passing stress tests.

According to the Financial Services Commission on the 26th, the capital management recommendation limiting all banks and financial holding companies to dividends within 20% of net profits ended at the end of June. From July 1, banks can independently decide whether to conduct interim or quarterly dividends and determine their levels.

This is due to the improved real economy situation compared to when the capital management recommendation was implemented, with major institutions revising upward South Korea's growth forecasts. The International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) forecast South Korea's economy to grow by 3.6% and 3.8% respectively this year, revising their previous estimates of 3.1% and 3.3% upward. The Bank of Korea also expects the Korean economy to grow by 4% this year, adjusting its previous forecast of 3.0% upward.

The fact that the banking sector expanded funding to the real economy after COVID-19 while maintaining soundness and passing stress tests also had an impact.

The Financial Supervisory Service conducted stress tests in May and June on eight financial holding companies including Shinhan, KB, Hana, Woori, NH, BNK, DGB, and JB, as well as eight banks including SC, Citi, Industrial, Corporate, Export-Import, Suhyup, K-Bank, and KakaoBank. This test set the lower 5% level of possible future economic growth rate distributions as the 'deterioration' scenario and the lower 1% level as the 'severe' scenario. Under the 'deterioration' scenario, with economic growth rates of 1.3% this year and 2.2% next year, and the 'severe' scenario, with 0% this year and 1.5% next year, all banks' capital ratios exceeded the regulatory ratio limiting dividends.

Stress test scenarios are generally set considering more pessimistic crisis situations than typical economic forecasts. The results indicate that even under conservative scenarios, the banking sector's loss absorption capacity is sufficient. In the January stress test this year, under an L-shaped scenario assuming a prolonged recession, many banks and financial holding companies failed to meet regulatory ratios.

On the 24th (U.S. time), major U.S. banks also passed the Federal Reserve's stress tests, allowing shareholder dividends and share buybacks, which had been restricted since COVID-19, to resume from July. This easing trend in bank dividend regulations is also seen in major countries. The European Central Bank, which recommended limiting dividends to 15% or less of net profits, plans to maintain this measure only until the end of September and will decide next month whether to lift restrictions on dividends and share buybacks.

However, our financial authorities expressed the opinion that even after ending the capital management recommendation to limit dividends within 20% of net profits, banks should carefully consider the ongoing uncertainties related to COVID-19 when determining dividend levels. The request includes balancing both enhancing shareholder value and the need for sufficient capital expansion due to continued COVID-19-related uncertainties when deciding dividend levels.

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