[The Editors' Verdict] "Even with Profits, No Capital Accumulates"... Nonghyup Financial Must Break Free from Being an 'Unlimited ATM'

A Balance Must Be Found Between Agricultural Support and the Core Role of Financial Services (Profit Generation)
Structural Reform Needed to Strengthen Profitability and Soundness in the Financial Sector
Enhancing Financial Independence of the Nonghyup Central Association and Boosting Competitiveness of Financial Operations

1.5011 trillion KRW. This is the amount NH Nonghyup Financial Group and NH Nonghyup Bank handed over to their major shareholder, the Nonghyup Central Association, last year as agricultural support project funds (farmland funds) and dividends. The amount has continuously increased from △1.419 trillion KRW in 2021 △1.0654 trillion KRW in 2022 △1.1927 trillion KRW in 2023, surpassing 1.5 trillion KRW in 2024.

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This indicates that the financial burden on Nonghyup Financial to fill the Nonghyup Central Association’s treasury is intensifying, meaning that capital soundness is also being continuously impaired. Nonghyup appears to disregard warnings from financial supervisory authorities. The Financial Supervisory Service repeatedly warned about the serious capital outflow from Nonghyup Financial to fill the Central Association’s treasury. On February 4th, when announcing the results of the regular inspection of Nonghyup Financial, it pointed out that “without a mid- to long-term capital management plan, large dividends are paid annually to the major shareholder (Central Association), weakening its own crisis response capability.” Even considering Nonghyup’s special characteristics, it means that management is necessary as a large amount of agricultural support project funds (farmland funds) is already being paid, and again a large amount of capital (dividends) is flowing out. While commercial banks also pay dividends, the structure of concentrating dividends intensively to a specific parent company (Central Association) like Nonghyup is unusual. Previously, management caution was issued, citing problems (overestimation) in the farmland fund calculation method. The financial authorities judge that the soundness of Nonghyup Financial Group is threatened by the considerable farmland funds combined with excessive dividends.

Nonghyup Financial has the special role of being a financial institution for farmers but must also consider survival as a financial institution. While fulfilling the fundamental purpose of agricultural support, it is essential to maintain profitability and stability, which are the core functions of the financial industry. However, the current excessive agricultural support and Central Association dividends undermine Nonghyup Financial’s profitability and, furthermore, its capital soundness.

Even if Nonghyup Financial generates profits, the priority is transferring them to the Central Association rather than internal reserves, reducing the capacity for capital expansion. Although the Bank for International Settlements (BIS) capital adequacy ratio must comply with international standards (Basel III), continuous capital outflows increase the likelihood of becoming subject to financial regulatory measures. If dividends and burdens increase without capital expansion, crisis response capability could significantly deteriorate during economic recessions or increased financial market volatility.

Such financial burdens are likely to eventually affect consumers as well. When capital capacity decreases, banks face difficulties expanding loans and tend to raise interest rates to compensate for profits. This can become a burden for financial consumers, including farmers. There is also a risk of contraction in the supply of loans for low-income households and small and medium-sized enterprises. If a bank’s profitability weakens, it becomes even more difficult to provide loans to borrowers with low credit ratings.

Thus, the unconditional burden of “filling the treasury” threatens the survival of Nonghyup Financial. For Nonghyup Financial to be sustainable, it must now find a balance between agricultural support and its core financial role (profit generation). A financial structure reform is needed that can strengthen the bank’s profitability and soundness while continuing agricultural support. First, institutional improvements must be made to protect the profitability and capital soundness of financial affiliates. Policies are needed to limit capital outflows to the Central Association and encourage capital expansion by banks. Measures to gradually adjust the burden structure of Central Association support funds should also be considered. Dividend payout ratios must be adjusted as well. Efforts to diversify businesses so that the Central Association can generate its own profits and increase financial independence are also necessary. Nonghyup Financial must be healthy for agricultural support to be possible. Nonghyup Financial must break free from being an “unlimited ATM.”