Korean banks' plan to boost shareholder returns won't affect profits

The regulator is expected to stop any excessive payments.

Major South Korean banks’ plans to boost shareholder returns will not affect their earnings and loan growth prospects, according to Fitch Ratings.

The country’s four major bank holding companies–KB Financial Group, Shinhan Financial Group, Hana Financial Group, and Woori Financial Group–all announced their medium-term capital management plans in early February 2023 in response to equity investors’ demand to boost shareholder returns. The plans focus on gradually increasing dividends and share buybacks at the holding company level.

The announcements should not affect the capitalization of Kookmin Bank, Shinhan Bank, KEB Hana Bank, and Woori Bank. Their CET1 ratios are not expected to materially change, Fitch said. 

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“Fitch anticipates that solid earnings and moderate loan growth prospects of the operating banks, which account for 60%-85% of group consolidated profit, would allow them to take on a greater distribution burden in the near term,” the ratings agency said in a non-rating commentary.

“We expect continued repricing of loans to higher rates and reduced competition over deposits amidst the easing in domestic liquidity to support the banks in sustaining the net interest margin improvement and sound profitability in 2023, offsetting a likely increase in credit costs from higher interest rates and the economic slowdown,” Fitch said, adding that any excessive payouts to shareholders to the extent that jeopardizes the banks’ sound capital buffers would be checked by the local regulator.

Fitch also noted that the regulator’s plan to legislate its power to require banks to build up special loan-loss reserves in equity, in addition to the existing regulatory reserves, demonstrates the regulator’s recent commitment to bolstering the banks’ loss absorption buffers.