Banks at loss over regulator's demand to pile up bad debt reserves

Financial Supervisory Service Governor Jeong Eun-bo, left, shakes hands with Financial Services Commission Chairman Koh Seung-beom, at the former's headquarters in Seoul, Jan. 6. Joint Press Corps-Yonhap

By Lee Min-hyung

Banks are perplexed over Korea's financial regulators' instruction to set aside more bad debt reserves, as the request is feared to weaken investor sentiment, despite the outstanding earnings achieved by major lenders last year.

They are stuck in a dilemma after the Financial Supervisory Service (FSS) recently urged banks to increase their loan loss reserves. The decision creates a higher chance that the banks will suffer from bad loans after the financial watchdogs allowed the self-employed and small business owners to delay their loan repayments for another six months until the end of September, due to the ongoing shock of the pandemic

Nonetheless, the demand in itself does little good for financial firms, in terms of winning more investor confidence, as they had to limit their dividend payouts last year under what is referred to as the "20-percent rule" of the financial regulators. The regulation forced banks to set the upper limit of their dividend payout ratio at 20 percent, due to increasing virus-related uncertainties, at the time.

Even if this is not the case this year, investors are paying sharp attention to whether the financial watchdogs will introduce such a restriction once again ― at a time when the virus' spread shows no signs of abating here or abroad.

"Up until recently, the financial watchdogs had not introduced as tight restrictions as they had last year, as banks have repeated their request of the need to protect shareholders' rights by offering reasonable dividend payouts," an official from the financial industry said.

"The latest move by the watchdog appears to be aimed at urging banks to brace for the worst-case scenario amid lingering virus uncertainties, war in Ukraine and the recent extension of the loan benefits to the self-employed," the official said.

Given that foreign shareholders hold more than half of a controlling stake in major financial holding firms such as KB, Shinhan and Hana, these banks may face difficulties in explaining to overseas investors the dividend upper limit policy implemented by the financial regulators last year.

Korea's top four banking groups reported a combined net profit of more than 14.5 trillion won in 2021, up 34 percent from the previous year, and they have reiterated their strong willingness to increase dividend payouts so as to enhance the shareholder return policy.

Banks are particularly in a quandary over the repeated regulatory pressure at a time when their stock prices are nosediving, shortly after reporting outstanding growth back in late January.

Until early February, shares of Korea's leading banking groups soared due to significant earnings growth driven by a recent shift in the monetary environment here and abroad. With the Bank of Korea starting to increase its key rate from August of last year, banks benefited the most from the rate hikes, in terms of their earnings and stock growth.

Expectations were that they would be able to extend the rally this year, as the central bank is set to push for additional rate hikes in line with the U.S. Fed's planned monetary normalization, which is set to occur this month.

However, the rosy outlook has since lost momentum in recent weeks, on the increasing external geopolitical uncertainties and investors' preferences for safe assets. The regulators' pressure on them to set aside more bad debt reserves has also boded ill for their stock growth.

Shares of KB Financial Group, the nation's largest financial holdings firm by market capitalization, has witnessed an increase in losses of around 20 percent for the past month. Most other financial firms also experienced a similar double-digit stock fall during the same period.

"Protecting shareholder value is one of the top priorities for any listed companies, but few can refute the fact that regulators' unpredictable regulations have been putting downward pressure on financial firms' stock value," another source from the local financial industry said.

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