Shinhan Financial Group becomes first among rivals to outline dividend policy

[Photo by MK DB]

Shinhan Financial Group Co. has become the first South Korea financial holding companies to set specific numbers on its dividend distribution plans to shareholders.

Shinhan Group unveiled its goal this year in a forum to return more than 12 percent to its shareholders, based on the Bank for International Settlements’ (BIS) recommended capital ratio on a common equity basis, according to one industry source on Sunday. The regulatory requirement for the BIS ratio under Basel III is 7. As of end of third quarter last year, the average BIS ratio was 12.26 percent, above the requirement.

Domestic financial holding groups generally show price-to-book ratios of as low as 0.4, mainly due to a lack of returns to shareholders. “Many financial groups have shown their intent to return more to their shareholders, but this is the first time that a specific figure has been mentioned,” an industry source said.

Align Partners Capital Management Inc., known for its activist voice, earlier sent a letter to seven Korean financial holding companies and asked them to reallocate capital and to expand their dividend payments. The private equity firm said that the financial groups should return the entire amounts to their shareholders if their common equity basis capital ratio exceeds 13 percent. It also asked that those groups disclose their shareholder return policy by Feb. 9.

Other financial holding groups are keen on the issue, as well. KB Financial Group Inc. mentioned enhanced shareholder returns in an executive workshop on Friday. During a third-quarter earnings conference call last year, KB said that its internal goal was to increase its yearly dividend payment compared to the year before, claiming that the group has the capacity to do so, given its revenues, and its dividend payout ratio was not necessarily behind its competitors. Hana Financial Group Inc. and Woori Financial Group Inc. are also discussing a range of shareholder return policies internally.

[Source: KB Financial Group]

Financial holding groups have increased shareholder returns recently. Due to Covid-19 volatility and regulatory recommendations on capital management, the financial groups had reduced their dividends over the past few years. The KB Group distributed 500 won ($0.40) in quarterly dividends this year and plans to increase its yearly dividends this year, including its fourth-quarter dividends. Shinhan Group had quarterly dividends of 400 won per share in the third quarter. Hana Group and Woori Group gave out 800 won-per-share and 150 won-per-share in the second half 2022, respectively.

During Covid-19, dividend payout ratios of Korea’s seven large financial holding groups stayed at the 20 percent range in 2020 and at the 26 percent range in 2021. One industry source noted that the financial groups actually do want to be more active in terms of shareholder returns, with increased dividends, not only because they have been having some of their best-ever profits recently, but also due to their equity prices. The dividend payout ratios at financial holding groups for 2022 will be near 30 percent, the source said.

While there’s a general consensus in favor of expanded shareholder returns, there are different voices regarding slow-down in the volume of loans for expanded dividend payouts. Align Partners claims that banks should slow the growth of loans to increase rates of risk weighted assets (RWA) around 2 percent-5 percent, near the gross domestic product, so that they could have higher shareholder returns.

However, slowing loans isn’t the solution to higher shareholder returns. “Fewer loans, the main revenue source for banks, may risk the growth of banks,” the Korea Institute of Finance said. The research institute raised concerns that a potential economic downturn would highlight risk management and capital reallocation may raise the financial soundness of these companies.

Some also worry about banks’ function of providing funds to the general public. Last year, household loans saw their first negative growth since the figure started to be tracked in 2003. The figure is forecast to continue along its negative growth trend this year due to higher interest rates, and due to government regulations increasing the threshold for the public to receive a loan from a bank. As of end 2022, the balance of household loans at four large banks fell by almost 15.2 trillion won.