South Korea’s top financial regulator said Thursday it has decided to advise major banks to maintain their dividend payouts below 20 percent of net income during the first half of this year in response to the prolonged economic fallout of COVID-19. 

Under the latest guidance by the Financial Services Commission, local lenders are expected to cut payments to shareholders by about 5 to 7 percentage points. Last year, the country’s four major banking groups -- KB Financial, Shinhan Financial, Hana Financial and Woori Financial -- paid out 26 percent, 25.97 percent, 25.7 percent, 27 percent of their profits in dividends, respectively. The FSC recommendation will remain in effect until June.

The dividend payout ratio is the amount of dividends paid to shareholders in relation to the total net income generated by a company. The dividend payout normally includes both the interim dividend and share buybacks.
 
The decision came after the FSC carried out a comprehensive stress test designed to gauge financial institutions’ ability to absorb risks under different economic scenarios. A number of bank holding companies fell short of the authority’s capital adequacy requirements under an L-shaped recession scenario, whereby an economy experiences a deep recession and does not recover to its previous rate of growth for several years. 

“In case the COVID-19 pandemic prolongs, local lenders need to take a conservative approach to their capital management, including loan issuance and dividend payments,” a FSC official said.

The authorities have been in talks with local banks on reducing dividend payouts since late last year as economic uncertainties continued due to the virus resurgence.

“Dividend payouts are closely related with shareholder value, so the FSC respects financial companies’ autonomous decision on dividends. However, we hope the firms to build up adequate levels of loan loss provision and capital base so that they can better respond to the COVID-19 impact,” said the FSC Chairman Eun Sung-soo during a press conference held in December last year.

Meanwhile, dividends that banks offer to their holding companies are not subject to the new guidance. Also, the state-run Korea Development Bank and the Export-Import Bank of Korea will be excluded from it. 

By Choi Jae-hee (cjh@heraldcorp.com)