Foreign banks in dilemma over dividend regulation

People walk by branches of Citibank Korea, left, and Standard Chartered Bank Korea in Seoul in these file photos. / Yonhap

NongHyup resists financial regulator's guideline

By Park Jae-hyuk

Attention is focusing on whether Citibank Korea and Standard Chartered Bank Korea will reduce dividends paid to their foreign headquarters this year to follow a recommendation by the Financial Services Commission (FSC) to keep their dividends below 20 percent of earnings.

Last Wednesday, the financial regulator advised financial holding companies and banks to follow the guideline so they can boost their ability to absorb potential losses from the prolonged coronavirus crisis.

This guideline is also applied to the two foreign banks, which have long been accused of draining out the national wealth with their hefty dividend payouts sent overseas. Their dividend payout ratios have remained much higher than those of their Korean peers, which have paid 25 percent to 28 percent of their earnings in dividends.

In 2019, Standard Chartered Bank Korea sent its largest shareholder 655 billion won ($585 million), more than double its annual net profit that year.

Citibank Korea paid 65.2 billion won in dividends in the same year with a 22.2 percent dividend payout ratio, but the bank sent its parent company 934.1 billion won in 2018, which was more than triple its annual net income.

Industry officials are wondering whether the financial regulator's latest guideline will put the brakes on their longstanding practices.

“If the COVID-19 pandemic prolongs, some banks will need to take a conservative approach to their capital management because their capital adequacy may not be stable enough,” an FSC official said. “Foreign financial authorities in the European Union, the United Kingdom and the United States are also calling for conservative capital management.”

The recommendation will remain in effect until the end of June. Local lenders will be able to make autonomous decisions on their dividends since then.

Citibank Korea and Standard Chartered Bank Korea have yet to determine their dividend payouts for this year, but some industry officials said the banks may not follow the government's recommendation by demanding fair treatment between foreign and Korean banks.

According to the FSC, domestic banks' dividends paid to their holding companies are not subject to the guideline because the financial authorities determined their dividends paid to their parent companies here would not affect their capital adequacy.

The foreign banks can claim their dividend payments will not harm their capital adequacy, given the U.S. Federal Reserve and the U.K. Prudential Regulation Authority also asked banks to limit their dividend payouts to their shareholders.

Backlash from shareholders

Furthermore, the recent dividend regulation is facing sharp criticism from Korean banking groups and their shareholders.

NongHyup Financial Group expressed concerns about the guideline, citing possible damage to local farmers, who have already suffered financial difficulties from the COVID-19 pandemic.

The nation's fifth-largest financial group has paid dividends to its owner, the National Agricultural Cooperative Federation, so that the federation can supply fertilizer and pesticides to farmers and give them the remaining money. If the financial group cuts its dividends, the federation will face a shortage of money to support farmers.

The financial group said it plans to talk with the financial authorities over this issue.

Other local financial holding companies will decide their dividend payout ratios in their general shareholders' meetings scheduled for March.

Their decisions also remain uncertain because their shareholders are protesting the possible reduction of dividends. The financial groups said foreign and retail investors made frequent calls to their investor relations departments last week to ask whether they decided to keep their dividends below 20 percent of earnings.