South Korean banks are under pressure to increase their provisions against non-performing loans, which could eventually lead to a lower dividend payment to shareholders despite their record-high profits.

According to sources on Sunday, Seoul’s financial regulator has since late last year requested local lenders to set aside more allowance for substandard and other stressed loans in preparation for shocks from potential insolvency of debts held by households and self-employed individuals. To adjust the reserves, the Financial Supervisory Service (FSS) has advised banks to downgrade their economic outlook, which has been used in the calculation of appropriate provisioning.

The FSS is also said to be mulling a rule change to further tighten provision requirements in unusual circumstances where substandard loans decrease despite growing total exposure.

The combined debt exposure of Korea’s five large commercial banks continued to rise from 1,411.05 trillion won ($1.18 trillion) in the first quarter of last year to 1,438.78 trillion won in the second quarter to 1,480.89 trillion won in the third quarter, whereas substandard and other stressed loans bucked the trend, falling from 4.76 trillion won to 4.39 trillion won to 3.96 trillion won in the same period. As a result, the loan loss provision contracted from 6.81 trillion won to 6.70 trillion won to 6.61 trillion won.

Banks acknowledge the need to increase provision against bad loans to some extent, but they are concerned about lower dividend payments after the hikes in loan loss provision. The higher the reserves, the lower the earnings that generally lead to lower dividend payments.

The banking industry is also worried about whether the authorities would give guideline on banks’ dividend ratio this year as it did in the past. Last year, the financial regulator publicly recommended limiting the dividends of banks and their holding companies to no more than 20 percent of net profit. But banks oppose to a cut in dividends, which undermines shareholders’ interest.

By Yoon Won-sup and Minu Kim

[ⓒ Pulse by Maeil Business Newspaper & mk.co.kr, All rights reserved]