[News Focus] Inside the ‘excessive dividends’ controversy plaguing foreign banks in Korea

Global banks operating in South Korea have once again come under close scrutiny for the size of dividends they have paid their parent companies, following their recent announcement of annual earnings and dividend policies for the year.

Come every year, major global banks -- namely Standard Chartered Bank Korea and Citibank Korea -- get flak for paying their parent firms generous dividends that exceed their annual net profit. And this year is no exception.

While within legal bounds, their dividend policies are often depicted as a “mechanism” for capital outflow from Korea to foreign entities, helping raise intense disapproval against them.

Despite such concerns, Korea does not have a legal framework to restrict the amount of dividends a foreign bank can pay its parent company.

While some have called for regulations on this end, free market economists warn that regulating corporate dividend policies will act as a deterrent that will drive away foreign investment.

Excessive dividends?

Last week, SC Bank Korea announced that it posted a net profit of 221.4 billion won ($195 million) in 2018, down 19.1 percent on-year. Despite the profit decline, it paid its parent company UK-based Standard Chartered NEA dividends amounting to 612 billion.

The total amount includes final dividends of 112 billion won confirmed in March with interim dividends of 500 billion won paid out in January.

With this, the Korean office’s dividend payout ratio -- the measure of dividends paid relative to the company’s net income -- for 2018 comes down to 272.7 percent, meaning the bank doled out more than double its profits as dividends.

Similar claims of excessive dividends also plague Citibank Korea, owned by US-based Citibank Overseas Investment Corp. with a 99.98 percent stake in its Korean subsidiary.

Citibank Korea said its net profit in 2018 was 307.4 billion won, up 26.1 percent on-year. The bank attributed its performance to robust noninterest revenue, which grew 47.7 percent on-year to 236 billion won.

At the same time, the bank allotted 934.1 billion won in dividends, including 811.6 billion won in interim dividends paid in November 2018 and 122.5 billion won in final dividends to its parent firm.

As a result, the bank’s divide payout ratio came to 303.9 percent, signaling that the dividends paid were more than three times greater than the net profit it earned here.

The two global banks have stressed that the dividends are part of their capital optimization plans and thus should not be looked at in absolute terms.

They also stress their fiscal stability, signified by the maintenance of a robust BIS capital adequacy ratio -- the ratio of a bank’s capital to its risk-weighted assets.

In announcing its final dividends last month, SC Bank Korea said its dividend decision is aimed at improving the bank’s capital adequacy ratio and maximizing its return on equity.

The bank’s capital adequacy ratio currently stands at 14.42 percent, far above the rate required by Korea’s financial regulator, it said.

Citibank Korea offers a similar explanation, saying that its “decision to pay dividends reflects the strength of Citibank Korea and the success of its growth strategy.”

“The interim dividends we paid last year is part of our capital optimization plans to raise return on equity, and to repay our headquarters for the support during the global financial crisis, byinjecting $800 million into Citibank Korea,” the bank said in a statement.

“The dividend payment does not impact our plans to continue investing in the franchise, including developing a next-generation IT system and enhancing our digital capacity.”

Citibank Korea currently maintains a BIS capital adequacy ratio of 20.1 percent, the highest among all commercial banks in Korea, it said.

Regulation: legitimate or unwarranted?

Although no laws are being broken, controversy over foreign banks’ dividends continues to roil Korea, fanning anti-foreign sentiment. The topic has habitually been raised by lawmakers, with financial regulators also chiming in.

During a general meeting of the National Assembly’s National Policy Committee last week, Rep. Kim Byung-wook of the ruling Democratic Party took issue with foreign banks’ “excessive dividend” payouts here and called for the adoption of new regulations.

Kim argued that foreign banks siphon high profits from Korea through dividends, but fail to bring proportionate amounts of capital back into the country in the form of additional investments or social contributions like job creation. And in the end, this hurts their soundness, according to him.

Negative views toward the foreign banks are amplified by their business strategies which regularly come under attack.

For instance, SC Bank Korea stirred controversy last year for its hiring scheme that allegedly inflated the number of full-time employees it had.

Citibank Korea has also sparked alarm for closing down around 70 percent of its branches here in recent years. Its high interest rates also draw public ire -- the bank’s average add-on interest on credit loans as of end-2018 was 4.72 percent, the highest among Korean commercial banks.

But at the end of the day, business is business and Korea has no legal framework to prevent a foreign bank from paying dividends that exceed its net profit. The law places a limit only on the portion of the net profit that can be distributed as dividends.

And this is the way it should be, said Sung Tae-yoon, a professor of economics at Yonsei University who cited support for a basic attitude of “no intervention” in corporate affairs.

“Companies carefully determine their dividend policies to ensure maximum corporate value. And this right should not be touched (by the government),” Sung said.

Each company has their own dividend payout policy, and depending on it, a company’s corporate value can change. Thus, this area should not be regulated in any direction, he explained.

Approaching the issue from the common perspective of an “outflow of Korean capital to foreigners abroad” is also problematic as it will deter foreign investors, Sung said.

In addition, the Seoul-based economist pointed out “double standards” when it comes to dividend issues. Ironically, Korean firms are criticized for their low dividend policies and investor returns, but the view is flipped when it comes to foreign firms.

“Certainly, firms should be regulated if they are paying out excessive dividends when their BIS capital adequacy ratio is at a problematic level. If not, there is no need,” Sung said.

Financial regulators divided

In light of renewed controversy, the issue of foreign banks’ dividends has come under the radar of Korea’s financial regulators as well, though they remain divided.

During last week’s committee meeting, Financial Supervisory Service Gov. Yoon Suk-heun said he agreed with concerns that SC Bank Korea and Citibank Korea’s dividends were “indeed viewed as excessive,” pledging to work with them to stabilize the market and to take appropriate action.

At the same time, the Financial Services Commission, Korea’s top financial regulator that sits above the FSS, has shown more leniency on the issue.

Responding to the issue, FSC Chairman Choi Jong-ku said that financial companies have the right to set their own dividend policies and their decisions should be respected.

Amid such developments, the FSS began carrying out a “management status evaluation” of Citibank Korea from last week. The process is part of its regular surveillance process implemented annually, the bank said.

By Sohn Ji-young (jys@heraldcorp.com)