South Korea's guidelines to cap bank dividends are credit positive – Moody's

South Korean financial regulators' guidelines to limit dividend payouts for certain financial institutions is credit positive, Moody's said.

The rating agency said Feb. 1 that the guidelines are credit positive as the dividend restrictions for most banks in the country's banking system will in turn support the banks' capitalization.

In late January, the country's Financial Supervisory Service and Financial Services Commission announced measures limiting dividend payout ratios to 20% until June 30 for financial groups and banks that fail to maintain adequate levels of capitalization under a stress test.

Under the stress tests, some banking financial groups and banks failed to maintain regulatory guidelines on capital ratios, including capital buffers under the stressed scenario. The regulators did not announce the results of individual banks' stress test, but only the aggregate of 14 banking groups and banks, Moody's said.

Further, the rating agency said the guidelines will not affect banks' dividends that are upstreamed to their financial groups. However, Moody's expects lower dividend payouts at the group level will reduce dividends from the operating entities of the financial groups.

Assuming a 20% dividend payout ratio across the South Korean banking system, Moody's estimates the impact from the dividend payout restrictions will increase the average tangible common equity/risk-weighted asset ratio by 17 basis points.