[Dividend Pressure Aftermath] Finance Faces the Challenge of 'Calming Angry Shareholders'

Under Pressure from Authorities... Following KB, Financial Holding Companies Likely to Lower Dividend Payout Ratios One After Another
Experts Say "Dividend Intervention Contradicts Market Logic"

[Asia Economy Reporters Sunmi Park and Hyojin Kim] KB Financial Group, which posted record-breaking earnings, lowered its dividend payout ratio to below 20% in accordance with financial authorities' recommendations. As a result, other financial holding companies such as Shinhan, Hana, and Woori, scheduled to announce their earnings on the 5th, are also expected to decide on similar dividend levels. Facing unprecedented pressure from financial authorities to cut dividends, financially strong holding companies are considering various shareholder return policies, including share buybacks, to appease angry shareholders. However, some shareholders who feel harmed by external intervention appear poised to file complaints against management and initiate lawsuits, signaling potential repercussions ahead.

◆Financial Holding Companies Struggle to Appease Shareholders= Among the five major domestic financial holding companies, KB Financial, which announced its earnings first, reported a 4.3% increase in net profit to KRW 3.4552 trillion last year but actually reduced its dividend. The dividend was set at KRW 1,770 per share, a 20% decrease from KRW 2,210 in 2019. The total dividend amount was KRW 689.7 billion, with a payout ratio (dividends/net income) of 20%. The payout ratio also dropped by 6 percentage points from 26% in 2019 to 20% in 2020.

The decision to set the payout ratio at 20% precisely aligns with the guidelines presented by the Financial Services Commission. Earlier, the commission recommended that domestic banks lower their dividend payout ratios to within 20% by June this year as part of COVID-19 response measures. This was intended to strengthen banks' capital management to enhance their loss absorption capacity amid the prolonged pandemic. While verbal recommendations on dividends had been made until now, this is the first official directive. KB Financial indicated that "due to the need for conservative capital management and support for the real economy, the dividend level was temporarily reduced compared to the previous year," suggesting that the decision took the recommendation into account.

Despite KB Financial’s record earnings, its acceptance of the financial authorities' recommendation means that other financial holding companies such as Shinhan, Hana, and Woori, which are announcing earnings simultaneously, are highly likely to decide on similar dividend levels. The atmosphere is that they have no choice but to comply due to the 'special recommendation' from the authorities.

However, NH Nonghyup Financial's situation differs. Nonghyup Financial, which had a payout ratio of 28.1% in 2019, primarily distributes dividends to cooperative members, mostly farmers. Reducing the payout ratio to within 20% would mean less support for farming households struggling due to COVID-19. A senior official at Nonghyup Financial said, "Since dividends are linked to farmers' interests, we plan to persuade the authorities by citing special circumstances ahead of the earnings announcement on the 16th."

The intervention by financial authorities in dividend policies, which contradicts capital market logic, has left financial holding companies with the challenge of appeasing angry shareholders who have not received performance rewards despite record profits. This could lead to shareholder defections, potentially hindering stock price growth. Like KB Financial, which is considering interim dividends and share buybacks, other financial holding companies are likely to intensify shareholder return policies in the second half of the year, which they could not implement in the first half.

◆Experts: "Violation of Shareholder Rights... Excessive Intervention"= Experts criticize the financial authorities' dividend restriction recommendation as an excessive intervention that undermines the value enhancement of companies (financial holding companies) and shareholders. Sung Tae-yoon, a professor of economics at Yonsei University, said, "Dividend payout, an important criterion for evaluating corporate value, being determined not by shareholders' interests but unilaterally by the authorities' standards is highly inappropriate," adding, "It is not right for the authorities to decide the payout ratio itself."

Kim Sang-bong, a professor of economics at Hansung University, also pointed out, "Financial holding companies or banks are not government property." He further criticized, "With the loan principal repayment deferral measures for small business owners in place, it is difficult to gauge the extent of losses or defaults, so they are being forced excessively to increase loss absorption capacity."

There are also forecasts of potential litigation. If shareholders believe that financial companies have been harmed by the government or political authorities, some may file criminal complaints against management for breach of fiduciary duty under criminal law or initiate shareholder derivative lawsuits under commercial law. Some financial companies are internally reviewing related legal issues due to concerns about shareholder backlash.

A financial industry official said, "If dissatisfaction grows among foreign shareholders, who have not received proper dividends due to external interference despite record earnings, it could spread to undermine trust in the domestic financial market," adding, "This will be a representative case where shareholder value is damaged by financial authorities' intervention." Another official lamented, "While it is natural for financial companies to support and participate in various policies during crises, dividend restrictions are excessive."