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Korean banks in dilemma over dividend payments

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Financial Supervisory Service Governor Yoon Suk-heun / Yonhap
Financial Supervisory Service Governor Yoon Suk-heun / Yonhap
By Park Jae-hyuk

Domestic banks have come under mounting criticism regarding dividend payments, after the Financial Supervisory Service (FSS) recommended them to follow the trend of global lenders of cutting payments to shareholders during the COVID-19 pandemic to strengthen their reserves.

According to the financial watchdog, Monday, FSS Governor Yoon Suk-heun said in an executive meeting last Thursday that Korean financial services firms should look to the actions of foreign banks, so as to secure enough total loss-absorbing capacity and maintain their ability to finance the real economy without delay.

The FSS cited Citigroup in the United States, HSBC and Standard Chartered in the United Kingdom, and ABN AMRO in the Netherlands.

Although economic experts agree that banks cutting their dividends is inevitable under the current crisis, retail investors have slammed the financial authority, alleging it was openly meddling with the management of private enterprises.

"A supervisory institution's intervention in individual companies is inappropriate in general. A decision on dividend payments should be up to each company as it could help a company enhance its enterprise value," Yonsei University economics professor Sung Tae-yoon said.

"However, banks are on the verge of having an insufficient capital adequacy ratio for the current crisis, so I think the FSS should be allowed to intervene in their dividend payments at this time."

In 2019, the nation's four-largest banks ― Shinhan, KB Kookmin, Hana and Woori ― collectively paid nearly 4 trillion won ($3.2 billion) to their holding companies in dividends.

With the money from their banking units, the four financial services holding firms collectively paid 2.8 trillion won to shareholders.

In particular, 1.6 trillion won was given in dividends to foreign shareholders of the four banking groups.

The FSS expects local banks to reduce their dividend payments, starting from interim dividends that are supposed to be paid during the first half of the year.

Investors who bet on banks with the expectation of high dividends, however, have complained about the FSS' posture.

"Investing in banks has become meritless, due to low interest rates, so no dividends and no buyback," a retail investor said.

During the first quarter of 2020, domestic bank shares dropped 33.6 percent on average, exceeding the 20.2 percent fall of the KOSPI.

SK Securities analyst Koo Kyung-hoi said the banks' stock prices will depend on whether or not they pay dividends to their shareholders.

The U.K.-based HSBC and Standard Chartered suffered a stock price fall when the Prudential Regulation Authority urged it to stop dividend payments.

In response, retail investors in Hong Kong have warned of legal action against HSBC, calling for the bank to hold an extraordinary general meeting, the Financial Times reported.

U.S. banks have begun to defend their dividend payouts during the pandemic, in contrast to the FSS governor's remarks.

The Financial Times noted that Citigroup, Morgan Stanley and Goldman Sachs will defend plans to continue paying dividends, arguing that they have the means to continue doing so and cutting dividends would be "destabilizing to investors."

Citigroup CEO Mike Corbat told CNBC that his company's dividends were "sound and we intend to keep paying them."


Park Jae-hyuk pjh@koreatimes.co.kr


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