[Click eStock] “IBK, Need for Policy to Increase Dividends for Minority Shareholders”

[Asia Economy Reporter Eunmo Koo] Hana Financial Investment pointed out that while it is inevitable for Industrial Bank of Korea (IBK) to fulfill certain policy finance support roles as a state-run bank, policies such as increasing dividends for minority shareholders are necessary to enhance shareholder value and expand investment incentives.

On the 21st, Hana Financial Investment forecasted that IBK's estimated net profit for the fourth quarter of last year increased by 8.1% year-on-year to 326.5 billion KRW, in line with consensus. Total loans in Q4 are expected to rise by 0.8% (annual loan growth rate of 6.8% in 2019), and net interest margin (NIM) is projected to decline by 6 basis points to 1.75%. Apart from the seasonal increase in conservative provisioning typically made in Q4, no special one-off factors are expected.

Choi Jung-wook, a researcher at Hana Financial Investment, explained in the report that “IBK's price-earnings ratio has significantly underperformed the industry average since October, showing a weak performance,” adding, “The Q3 earnings were at an earnings shock level due to weakness across interest income, non-interest income, and provisions. The outlook for this year’s profits is not very bright due to continued NIM decline, ongoing credit quality concerns, and slow recovery in non-interest income.” He further noted, “Although the dividend yield is high, it is not significantly superior compared to other banks, and the planned 264 billion KRW capital increase this year to support policy finance also dampens investor sentiment. Despite the current price-to-book ratio (PBR) of 0.31 times, it is difficult for undervaluation appeal to stand out.”

While the role of a state-run bank is unavoidable, consideration for minority shareholders is also necessary. This year’s economic policy direction includes a 2 trillion KRW policy finance support program with a special preferential interest rate (minimum 1.5%) to promote new facility investments, and special interest loans for small business owners and self-employed individuals will increase by 400 billion KRW to 2.7 trillion KRW compared to the previous year. Researcher Choi said, “These factors do not significantly impact NIM, but the timing of NIM recovery is expected to be later than other banks. Also, since the new president is from the Ministry of Economy and Finance and the Blue House Secretariat, there is considerable market concern that the policy support role may be more active.”

He continued, “Of course, as a state-run bank with the Ministry of Economy and Finance holding 53.2%, it is proper to perform financial support and inclusive finance roles, which are inevitable. However, minority shareholders’ investment incentives inevitably weaken. If there is no plan for privatization, the government only needs dividends, but minority shareholders have to worry about capital losses due to stock price declines.”

He advised that dividend policies continuously increasing dividends for minority shareholders are necessary. Researcher Choi stated, “IBK implemented a differentiated dividend policy in 2018 for the first time in 14 years (559 KRW per share for the Ministry of Economy and Finance, 690 KRW for minority shareholders). To enhance shareholder value and strengthen weakened investment incentives, at least dividends should continue to favor minority shareholders. Even as a way to reward those participating in financial support roles, dividends for minority shareholders need to be continuously increased.”