"Bank Stocks: No Dividend Cuts Even with Increased Loan Loss Provisions"

DS Investment & Securities Report

[Asia Economy Reporter Minji Lee] DS Investment & Securities predicted on the 5th that despite the year-end special loan loss reserve accumulation for commercial banks, there will be no uniform restriction on dividend payout ratios.

At the 4th meeting of the Financial Risk Response TF, Kim So-young, Vice Chairman of the Financial Services Commission, expressed her stance on promoting the establishment of a special loan loss reserve accumulation requirement in preparation for increased financial market volatility. Unlike loan loss provisions, loan loss reserves are classified as capital items and do not affect net income reduction. However, they can reduce distributable profits, potentially leading to an overall decrease in dividend levels.

Nam Min-wook, a researcher at DS Investment & Securities, said, “Considering the end of financial support programs and the recent increase in economic volatility, the possibility of additional year-end loan loss reserve accumulation is quite high,” adding, “This could be perceived by investors as a signal to restrain dividends, which is negative for market sentiment.”

Despite the year-end special loan loss reserve accumulation, dividend payout ratios are expected to maintain the previous year’s level except for some banks. The loss absorption capacity emphasized by authorities can be classified into expected losses (loan loss provisions) and unexpected losses (capital). Currently, the capital as a loss absorption capacity for unexpected losses stands at an average common equity tier 1 ratio of 12.5% for banks as of Q2, exceeding the minimum regulatory ratio of 10.5%, which assumes a maximum countercyclical capital buffer of 2.5%. The loss absorption capacity for expected losses is at a conservative provision policy level of 221% as of Q2, close to that of U.S. bank stocks (average 228%). Furthermore, the absolute scale of undistributed retained earnings is substantial, so the reduction in dividend capacity is estimated to be limited.

Researcher Nam analyzed, “This special loan loss reserve accumulation is more about enhancing loss absorption capacity than restricting dividends,” adding, “If the measure were intended to restrict dividends, recommending the accumulation of loan loss provisions, which directly affect profits, would be more effective than loan loss reserves.”

Nam explained, “However, since corporate loan growth is expected to continue rather than household loans, banks with relatively insufficient capital capacity will find it difficult to maintain dividend payout ratios.”

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