Foreign Bank Dividends Controversy Over 'Capital Outflow' Compared with the Four Major Financial Holding Companies [Why&Next]

Controversy Over Outflow of National Wealth Triggered by the Lone Star Incident
In Five-Year Dividend Comparison, Foreign Shareholder Dividends from Four Major Financial Groups Far Exceed Those Sent to Foreign Headquarters
Foreign Banks Show Stronger Asset Soundness
However, Social Contributions Remain Insufficient
Low Dividend Payout Ratios of the Four Major Financial Groups: A Double-Edged Sword
"For Value-Up, Dividends Must Increase and Overseas Operations Should Succeed"

Standard Chartered in the UK, its parent company SC First Bank, and Citibank Korea, the Korean branch of Citibank USA, have decided to send approximately 788 billion KRW in dividends to their headquarters this year. The controversy that arises every year when they pay dividends to their parent companies is about 'national wealth outflow.' This is because a significant portion of the profits earned domestically, sometimes even exceeding the net profit for the year, is sent to foreign headquarters. However, it has been found that the foreign dividends paid by the four major domestic financial holding companies (KB, Shinhan, Hana, Woori), which are based on domestic capital, are even higher. There are voices suggesting that the perspective on shareholder dividends should not be seen as national wealth outflow but rather as one of the means to enhance shareholder value and corporate value through shareholder returns.

The Beginning of the National Wealth Outflow Controversy: The Lone Star Incident

According to the financial sector on the 19th, SC First Bank held a regular board meeting on the 14th and approved a dividend of 232 billion KRW. Earlier, Citibank Korea approved an interim dividend of about 400 billion KRW in October last year, followed by a final dividend of 155.9 billion KRW on the 14th of last month.

Due to their shareholding structures, the entire dividend amounts from both companies are sent to their headquarters. SC First Bank is 100% owned by Standard Chartered Northeast Asia. In the case of Citibank Korea, Citibank Overseas Investment Corporation in the USA holds 99.98% of the shares. Citigroup USA fully invested in this company.

Since being acquired by their parent companies, SC First Bank and Citibank Korea have sent dividends to their headquarters at least once a year, except for the early stages and special circumstances (such as COVID-19 and self-imposed dividend restrictions). Since 2009, SC First Bank has sent dividends totaling 3.243 trillion KRW to its headquarters. Every time they send dividends to their headquarters, they become embroiled in controversy over national wealth outflow. The criticism is that they send profits earned domestically to foreign headquarters without contributing to social welfare.

This perspective originated from the 'Lone Star incident' that emerged in the early 2000s. In 2003, as Korea Exchange Bank became insolvent, the US private equity firm Lone Star attempted to acquire it. According to the Banking Act at the time, Lone Star could only acquire insolvent financial institutions with a BIS ratio below 8%. However, the Financial Supervisory Service approved Lone Star's status as a major shareholder based on documents projecting Korea Exchange Bank's BIS ratio to be lower than this threshold, which sparked controversy. Starting with allegations that an unqualified company was allowed to acquire the bank at a low price, Lone Star continued a high dividend policy after acquiring Korea Exchange Bank and later sought to sell it. The view that foreign capital acquired Korean-based banks and then 'ran away with the money' became widespread. SC First Bank was sold to the US private equity firm Newbridge Capital in 1999 and acquired by Standard Chartered in 2005. Citibank Korea was born when Citigroup acquired Hanmi Bank in 2004. Those who remember the Lone Star incident worry about the outflow of domestic capital abroad when looking at the dividend policies of SC First Bank and Citibank Korea.

Comparing Dividends Over Five Years: Foreign Banks 1.5855 Trillion KRW vs. Four Major Financial Groups 8.9561 Trillion KRW

Those who view the dividends paid by foreign banks to their headquarters as an outflow of domestic capital believe that as the influence of foreign capital grows, more capital will flow overseas, negatively impacting the domestic economy. On the other hand, some argue that when looking at the dividends paid overseas based on the foreign shareholding ratios of the four major financial groups, the amount is even larger, making the boundary of capital meaningless and emphasizing the need to increase the profits of domestic financial companies' overseas branches.

An analysis comparing the dividends paid by the four major financial groups and foreign banks over the past five years shows that the dividends paid to foreigners by the four major financial groups totaled 8.9561 trillion KRW, about six times more than the 1.5855 trillion KRW paid by foreign banks to their headquarters. This means that the scale of capital 'outflow' overseas was larger for the four major financial groups than for foreign banks. For the four major financial groups, the foreign dividend amount was calculated by considering the total cash dividends for the year, the foreign shareholding ratio at the settlement date, and multiplying by the proportion of banks' net profits within the holding companies. This estimated how much the banks under the holding companies paid dividends to foreign shareholders. Specifically, SC First Bank sent 771 billion KRW to its headquarters from 2020 to last year. Citibank Korea paid 814.5 billion KRW in dividends to its headquarters during the same period. KB Financial paid the most at 2.7305 trillion KRW, followed by Shinhan (2.511 trillion KRW), Hana (2.5645 trillion KRW), and Woori (1.1501 trillion KRW).

The capital adequacy ratios closely monitored by financial authorities during dividend payments were also better for foreign banks. The Financial Services Commission and the Financial Supervisory Service recommend maintaining a Common Equity Tier 1 (CET1) ratio of 13% or higher as part of their value-up (corporate value enhancement) policy. SC First Bank recorded an average of 14.8% over five years. Citibank Korea's BIS capital adequacy ratio reached 24.9%, recording 34.22% as of the third quarter of 2024. Citibank Korea uses the BIS capital adequacy ratio instead of CET1 as its capital adequacy indicator in its business reports. In contrast, the four major financial groups barely exceeded or fell short of 13%. KB Financial recorded 13.4%, Shinhan and Hana 12.9%, and Woori 11.4%.

'Avoid Excessive Dividends, Increase Social Contributions' Four Major Financial Groups: "Dividends Must Increase for Value-Up"

However, there are many criticisms that foreign banks' social contribution activities are lacking. According to the Korea Federation of Banks' social contribution activity report, SC First Bank and Citibank Korea spent 55.4 billion KRW and 52.7 billion KRW respectively on social contribution activities from 2020 to 2023. During the same period, KB Financial spent 825.7 billion KRW, bearing the highest social contribution costs among the four major financial groups. Hana spent 720.9 billion KRW, Woori 674 billion KRW, and Shinhan 601.2 billion KRW.

While the active social contributions of the four major financial groups are positively evaluated, their lower dividend payout ratios compared to foreign banks receive negative assessments. The dividend payout ratio is the ratio of total cash dividends to net income for the period and is a key indicator of shareholder returns. Among the four major financial groups, Hana Financial showed the highest average dividend payout ratio of 27% over five years. It was followed by Woori (26%), and KB and Shinhan both at 24%. In contrast, SC First Bank showed high dividend payout ratios of 63% in 2021 and 70% in 2023 and last year, except for 13.6% in 2020 and 41% in 2022. Citibank Korea recorded 20% in 2020, no dividends in 2021, 50% in 2022 and 2023, and an extraordinary 177% dividend payout ratio last year.

A low dividend payout ratio can positively affect financial soundness. However, to enhance a bank's value, dividends need to increase. Many shareholders must invest, but with low dividend payout ratios, shareholders may find it difficult to see profits and thus hesitate to invest.

Korean companies tend to have very conservative dividend payout ratios. According to the Bank of Korea's BOK Issue Note titled 'The Impact of Shareholder Return Policies on Corporate Value,' a survey of 16 countries based on companies included in the MSCI index showed Korea had the lowest dividend payout ratio at 27.2%. Countries ranking high included the UK (137.4%), Italy (116.4%), Brazil (91.8%), and Russia (76.3%). Therefore, the industry views that more aggressive dividend policies are necessary to continue corporate value-up policies and increase investment demand in the financial sector. Kim Sun-in, deputy head of the National Income General Team at the Bank of Korea, stated in the report, "The financial sector showed a significant positive relationship between shareholder returns and corporate value," adding, "Since the financial sector has lower future growth potential than other industries, expanding dividends can attract investors and increase corporate value."

Rather than worrying about national wealth outflow due to dividends, there are voices emphasizing the urgency of overseas expansion and profit generation by domestic financial companies. It is known that the four major financial groups have not received dividends from their overseas subsidiaries since their overseas expansion. A financial sector official said, "From the perspective of ordinary shareholders, not foreigners, investors will invest only if they receive money," adding, "Policies focused on shareholders should be implemented to bring dividends and encourage reinvestment. If we limit the discussion to 'national wealth outflow' only in Korea, then wouldn't the profits earned by domestic financial companies' overseas subsidiaries also be considered 'national wealth outflow' from the perspective of those countries?"