Controversy brews over Lone Star’s receipt of massive dividends

The move by Korea Exchange Bank to offer a record interim dividend to its biggest shareholder Lone Star Funds is sparking concerns about long-term growth for South Korea‘s No. 5 lender, market watchers said Sunday.

KEB’s board decided on Friday to pay out a quarterly dividend worth of 1,510 won ($1.42) per share, causing U.S. private equity fund Lone Star to rake in dividends worth 496.9 billion won.

Lone Star has recouped profits of around 2.9 trillion won by receiving yearly and quarterly dividends and selling part of its controlling stake in 2007, topping its original 2.15 trillion won investment of the KEB takeover in 2003.

Lone Star‘s receipt of massive dividends has drawn strong public criticism that the fund is trying to exit from the Korean market after fattening its pockets while turning a blind eye on a long-term growth plan for KEB.

“Paying out excessive dividends is feared to sap the bank’s growth and business value,” said an official at the regulatory authorities. Giving out massive dividends cuts a company‘s room to increase capital spending as its in-house reserve money shrinks.

Unionized workers at KEB have fiercely opposed its board’s move and the financial regulator called in the head of KEB on Friday to express its concerns about the payment of large dividends.

KEB‘s average dividend propensity based on the recent five years beats all its industry rivals, according to data compiled by FnGuide Inc., a financial information provider.

KEB’s propensity to pay out dividends out of its net profits was tallied at an average of 45.35 percent between 2006 and 2010, sharply higher than an average of 15.84 percent calculated based on four banking groups and two local banks, according to the data.

It is troubling that the dividends came as KEB‘s market share and earnings have been sluggish, market watchers noted. In the first quarter, KEB’s earnings tumbled 46.4 percent from a year earlier to 198.6 billion won.

The dividend payout came as Hana Financial Group Inc. is seeking to extend a deal to buy a 51.02 percent stake in KEB from Lone Star Funds.

In November, South Korea‘s No. 4 banking group clinched a deal to buy KEB. But the financial watchdog’s decision to delay its review of Lone Star Funds‘ eligibility as the top shareholder of KEB has complicated Hana Financial Group’s attempt to buy KEB.

Lone Star‘s attempts to sell KEB has been thwarted three times as previous potential buyers like British banking firm HSBC Holdings Co. pulled out of its deal due to a delay in regulatory approval.

Experts also said that the watchdog’s protraction in reviewing its deliberation on KEB‘s deal has helped encourage Lone Star to fatten its pockets from receiving heavy dividends. 

(Yonhap News)