Banks protest regulators' call to expand bad debt allowance

In this Nov. 3, 2021 file photo, Financial Supervisory Service Governor Jeong Eun-bo speaks at a meeting with the leaders of financial holding firms here in Seoul. Joint Press Corps-Yonhap

By Lee Min-hyung

Major financial groups are crying foul over regulators' pressure on banks to expand the allowance for bad debt, as they fear the move will hamper the momentum for stock growth, an industry official said.

Starting this year, bank shares soared on expectations of additional earnings growth thanks to the Bank of Korea's (BOK) unwavering signal for more rate hikes this year.

But the growth of bank stocks hit a snag after the Financial Supervisory Service (FSS) urged lenders to expand their bad debt allowances, citing possible economic shocks caused by soaring debt shouldered by households and the self-employed. The bad debt allowance refers to a provision that banks assemble to brace for scenarios in which some of their borrowed money cannot be retrieved.

The pressure comes as a negative signal to the banks, as the regulatory pressure will end up reducing dividend offerings to their shareholders, despite banks' record earnings growth in 2021.

The stock prices of the major financial holding firms are thus on the decline in line with this regulatory pressure, according to data from the Korea Exchange.

Shares of KB Financial Group, the nation's largest financial holding company, reached a three-year high of around 62,000 won in early January, but the price has since plunged to around 57,000 won per share as of Jan. 25.

The stock movements of other financial firms also showed a similar pattern during the period. The stock price of Shinhan Financial Group also reached nearly 40,000 won in early January, but fell by around 5 percent in around two weeks. A similar scenario was also the case for two other major financial holding groups, Hana Financial Group and Woori Financial Group.

Earlier expectations were that banks would be able to extend their momentum for a rally this year due to the planned rate hikes from the Korean central bank and the U.S. Fed. As the loan-deposit margin is the key profit source of banking groups, such rate hikes will increase their earnings, thereby enhancing shareholder returns.

But with watchdogs putting the brakes on such plans, bank shares are feared to go back into their boxed-in range, despite the seemingly rosy external business conditions for them, according to industry sources.

“Expanding dividends to shareholders should be one of the top priorities for banks at a time when they are reaping record earnings,” an official from a major commercial lender said. “Listed firms can rev up their stock value through a stronger set of shareholder return policies, but continuous regulatory hurdles cloud that outlook.”

Retail investors here also have the tendency of purchasing or selling bank shares with a focus on how much in dividends they can receive each year, so this latest regulatory pressure does not enhance banks' stock value, he added.

In this Sept. 10, 2021 file photo, Financial Services Commission Chairman Koh Seung-beom, third from right, poses with leaders of financial holding firms here before holding a conference in Seoul. From left are Woori Financial Group Chairman Son Tae-seung, Hana Financial Group Chairman Kim Jung-tai, KB Financial Group Chairman Yoon Jong-kyoo, Koh, Shinhan Financial Group Chairman Cho Yong-byoung and NH Financial Group Chairman Son Byung-hwan. Joint Press Corps-Yonhap

Even if banks also understand the point of the regulation amid the lingering financial uncertainties here and abroad, financial firms cannot engage in independent shareholder return policies under such a regulatory environment, and shareholders will fall prey in the end, according to the official.

The Financial Services Commission (FSC) is also requesting the same of banks for similar reasons as the FSS.

“Given the possibility of the collapse of the self-employed, we ask for banks to increase their allowance for bad debts,” FSC Chairman Koh Seung-beom said in a recent conference with bank officials.

Last year, the commissions introduced the so-called 20-percent dividend rule. The regulation required banks to put an upper limit of 20 percent on their dividend payout ratio, citing then-escalating fears of the spread of COVID-19. The temporary rule ended in July.

It remains unclear whether the commissions will reintroduce a similar rule, but chances appear slim for them to do so amid the fierce backlash from investors and banks.

Another official from the financial industry also said that the likelihood of such regulations being introduced is low.

“Banks have already generated outstanding performance throughout 2021 despite the pandemic,” the official said. “It will be tough for regulators to intervene in banks' dividend policies at a time when their earnings reflect solid growth. The general consensus is that the BOK will also push for at least a couple of more rate hikes by the end of this year, which bodes well for banks' profitability.”

The BOK started raising the key rate in August of last year for the first time since cutting it to a record low of 0.5 percent, due to the increasing pandemic uncertainty back in 2020. Up until now, the central bank has increased the key rate to the pre-pandemic level of 1.25 percent.

According to data from market tracker FnGuide, the four major financial groups are estimated to have generated a combined net profit of 14.92 trillion won in 2021, up 33.3 percent from the previous year, on their improved net interest margins.

KB is widely expected to have maintained its top position in the industry last year with a net profit of 4.49 trillion won, up 28.3 percent from a year ago. Shinhan is also predicted to have narrowly failed to win the top spot, with a net profit of 4.34 trillion won during the same period.