Regulator to curb excessive dividends

By Kang Seung-woo

The financial authorities are seeking to curb “excessive” dividend payments to shareholders by banks and their parent companies, sources said Sunday.

The Financial Supervisory Service (FSS) claims the new measures are a safety valve to protect financial firms from threats that could be posed amid heightened uncertainty in the global economy. The increasing criticism that financial firms have been profiteering during difficult times for consumers and the industry was also in play.

The attempts to impose rules on dividends are expected to face resistance from financial companies and their shareholders, who claim corporations should be allowed freedom in deciding the level of dividends.

According to industry sources, the FSS has recently ordered banks to submit a five-year plan related to their capital adequacy levels. This includes target ranges for dividend payments and Bank for International Settlement (BIS) ratio over the cited period.

The financial watchdog plans to use the new criteria to rein in heavy dividend payments by lenders. Banks belonging to the four major financial groups — KB, Woori, Shinhan and Hana — will be restricted from making payouts to shareholders of their parent companies.

An FSS official said that dividends paid to holding companies will be allowed when the money has specific purposes, such as investment, repaying debt and covering an increase in operating expenses.

“If dividends to parent companies are limited, these firms will have overall difficulties paying out large amounts due to a lack of resources,” the official said.

In addition, the FSS will also keep holding firms’ dividend payments in check by putting a cap on payouts. It is also looking to prevent financial groups from reaching into the coffers of their non-banking units such as credit card and life insurance affiliates to enable generous dividends.

Officials are considering preventing companies from spending a higher proportion of their income on dividends than the proportion they spent in the previous two years.

The move comes as the government has called for local banks to refrain from excessive payments and to set aside sufficient provisions for loan losses amid a bleak economic outlook for 2012.

According to the FSS, KB, Woori, Shinhan and Hana paid out a combined 975.4 billion won ($840.79 million) in dividends last year, with Shinhan leading the pack with 586.2 billion won.

The dividend payout ratio reached 46.6 percent for KB, followed by Shinhan with 24.6 percent and Woori with 16.9 percent, raising concerns that the big payout ratios could erode financial institutions’ capital strength.

There is also growing criticism about corporate greed in the financial sector.

The financial authorities believe that it is problematic that banks, many of which were rescued by taxpayers’ money during the Asian currency crisis in the late 1990s, spend too much on dividends instead of shoring up their capital base in the face of another potential downturn.

The action by the FSS to curb excessive payouts may face strong opposition from shareholders and could result in stock prices falling.

“In the long run, banks and their parent companies will benefit from their capital strength. Their short-sighted greed with no consideration of the internal and external environment should be abandoned,” the FSS official said.