20-percent dividend cap for banks defended by the FSC

An image shows the Inside of a bank in Seoul on Feb. 5. The Financial Services Commission has advised banks to limit their dividend in preparing for Covid-19 risks despite record-breaking profits in 2020. [YONHAP]

Regulators want banks to limit their payout ratios, and the banks are not at all happy about the recommendation.

The Financial Services Commission (FSC) on Monday in a statement said its advice to local banks to limit dividends to 20 percent of profits was perfectly legal and based on stress tests and the need to maintain stability in the financial sector.

The advice was made in late January and will be effective through the first half.

The FSC said the 20-percent ceiling was to help banks conserve capital to weather the Covid-19 storm.

Banks have argued that the FSC was overstepping its authority and meddling in its business.

Banks last year reported strong performances despite the novel coronavirus impacting the economy as people borrowed money to invest in assets, including real estate and stocks, on fear of missing out on the rally in asset prices.

Despite the government making efforts to cool the housing market, real estate prices continue rising, while stock prices continue to rise driven by retail investor demand.

With the exception of Woori Financial Group, the largest banks reported record profits.

KB Financial Group recorded a net profit of 3.45 trillion won ($3.08 billion) in 2020, up 5.7 percent, while Shinhan Financial Group made 3.4 trillion won, up 0.3 percent, and Hana Financial Group reported a net profit of 2.64 trillion won, up 10.3 percent.

Woori’s net shrunk 30.2 percent to 1.87 trillion won.

While NH Nonghyup has yet to announce its results for the entire year, as of the third quarter, the financial group’s net profit stands at 1.46 trillion won, which is up 4.8 percent on year.

Despite record-breaking profits, several banks announced dividends recently in line with the FSC’s recommendation.

KB Financial Group’s board of directors last week announced a dividend at 1,770 won per share, which is 20 percent of its profits. That’s a 20-percent drop from 2,210 won per share last year, when the dividend was set at 26 percent of its net profit.

Hana Financial Group made a similar decision, setting the dividend at 1,350 won per share, 20 percent of its net profit.

That’s a 16-percent drop from 2019’s 1,600 won per share.

Shinhan has yet to decide.

The FSC has argued that other jurisdictions have taken much stricter steps in advising banks on dividend limits, including the European Union (EU) and Britain. The FSC said the EU recommends limiting dividends equal to 15 percent of net profits, while Britain set the ceiling at 25 percent.

The average dividend of EU banks before Covid-19 was around 40 percent of profit. Korea’s average has been 24 percent over the last five years.

It said according to a study by the Basel Committee on Banking Supervision, 27 out of 30 major countries have taken action on capital conservation, including limiting dividends.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]