[Inside Chodong] Banks Must Continue Shareholder Returns

Changhwan Lee, Deputy Head of the Economic and Financial Department

Last year, while our stock market experienced a significant decline causing difficulties for many investors, some sectors managed to achieve gains. Among them, the banking industry was the top star on the KOSPI, with stock prices rising about 30% over the year. It was a moment that shattered the market prejudice that banks are boring and uninteresting.

The core reason behind the soaring bank stock prices was the financial authorities' corporate value enhancement (value-up) policy. At the beginning of last year, the Financial Services Commission and the Financial Supervisory Service announced a corporate value-up program and urged listed companies to actively pursue shareholder return policies. In particular, Kim Bok-hyun, the head of the Financial Supervisory Service, personally visited overseas investor relations (IR) events with financial holding company chairmen to introduce the transformed Korean companies to foreign investors. It was the first time in history that the head of a financial supervisory organization directly engaged in overseas IR, and foreign investors trusted this and increased their investments in Korea.

The banks themselves also made significant efforts to enhance shareholder value. Domestic banks responded to government policies by successively unveiling value-up plans centered on share buybacks, cancellations, and dividend expansions, which led to a strong market reaction. This was also because the financial authorities, who used to frown upon banks expanding shareholder return policies, had changed their stance 180 degrees. As a result of actively pursuing shareholder value enhancement more than any other sector, long-term shareholders who trusted banks were able to secure a reliable safety net for their retirement through stock price increases and dividend expansions. As banks actively embraced value-up, other financial companies such as insurance and securities firms also began announcing value-up policies one after another, and even general companies are starting to feel the positive effects. At this point, it would not be an exaggeration to call banks the evangelists of value-up.

However, the market’s view of banks seems to have shifted slightly this year. The stock prices, which had been rising vigorously until last year, have recently shown signs of stagnation. This appears to be due to doubts about banks’ profitability as the benchmark interest rate entered a lowering phase, and concerns about the sustainability of the government’s value-up policy increased amid fears of a regime change following the martial law incident. Although banks have disclosed additional value-up policies this year to overcome market skepticism, the market response has been muted.

Will the government’s commitment to value-up disappear just because the administration changes? I do not think so. The opposition party, the Democratic Party of Korea, is accelerating amendments to the Commercial Act to protect stock investors and modernize the stock market despite corporate opposition. In some ways, the Commercial Act amendments are even stronger stock market revitalization policies than the value-up policies pursued by the current government. Therefore, it may be premature to speculate that banks or financial companies will abandon value-up policies just because the administration changes. In fact, the policies could become even stronger. Although bank stock prices rose considerably last year, our banks are still undervalued compared to major overseas banks. The price-to-book ratio (PBR) of major domestic banks hovers around 0.5, which is significantly lower than the average PBR of 1.3 for the top 10 listed banks in the United States. Japan’s PBR also exceeds 0.8. To be recognized for their true value, stronger shareholder return policies are necessary.

Value-up policies must continue regardless of the administration, for the sake of both the Korean capital market and national development. As the country’s economy gradually loses momentum, revitalizing the capital market, which is the channel for corporate financing, is essential to secure new engines of economic growth. In an abnormal economic structure where nearly 70% of national assets are tied up in real estate, the capital market must develop to ensure a stable retirement for our people. Value-up policies based on long-term plans by the government and political circles should become a new growth engine for national development.