Taiwan's financial holding companies (FHCs) will be keeping a close watch on how newly proposed regulations will hit their ability to pay dividends to shareholders, even as current estimates point toward higher payouts next year.
Dividend payout at each of the four largest listed Taiwanese FHCs is likely to rise in 2024, with Cathay Financial Holding Co. Ltd. seen as more than doubling its per-share dividend, according to S&P Global Market Intelligence estimates. For 2023, dividends at Cathay Financial and Fubon Financial Holding Co. Ltd. are estimated to drop, while the dividend at CTBC Financial Holding Co. Ltd. is set to rise. Shin Kong Financial Holding Co. Ltd. is not likely to issue a dividend for 2023.
But these estimates do not account for the recent directives issued by Taiwan's Financial Supervisory Commission (FSC). The new policy includes several provisions, such as the requirement for FHCs to retain earnings equivalent to at least 50% of their paid-in capital before distributing dividends. It also mandates a post-dividend capital adequacy ratio of over 120%. Furthermore, the double leverage ratio, which measures borrowings against subsidiary investments, must not exceed 115%.
The rules are slated to take effect next year following a 30-day notice period, the FSC said Oct. 19. In Taiwan, an FHC typically has a controlling stake in a bank, insurer or securities firm.
Combined with a challenging growth outlook, the rules will "restrict FHCs' overall ability to pay dividends" once they take effect, said Sophy Ruoxi Zhao, an analyst at S&P Global Market Intelligence. FHCs are expected to adopt stricter dividend policies in the long run, Zhao added.
The new proposal comes on the back of most of Taiwan's FHCs declaring dividends, even after full-year 2022 net income fell amid difficult financial conditions. Net income at 12 of the Taiwan's 15 FHCs took a knock, ranging from a 90.8% plunge at Shin Kong Financial to a dip of 1.4% at Taiwan Cooperative Financial Holding Co. Ltd., Market Intelligence data shows.
The same is true for capital adequacy ratios, as nine of the 13 FHCs that reported the data logged declines. Cathay Financial's ratio fell the most, dropping 22 percentage points to 127.11%. Three reported slight improvements in their capital adequacy ratios, while Taiwan Financial Holding Co. Ltd.'s ratio remained flat at 130.92%.
Although the net income of most of Taiwan's FHCs declined in 2022, they all paid a higher percentage of their full-year net income to equity holders as dividends compared to the previous year, according to Market Intelligence data. Shin Kong Financial saw a 298-percentage-point increase in dividends paid in 2022 as a percentage of net income, followed by IBF Financial Holdings Co. Ltd. and Cathay Financial, with increases of 103 and 100 percentage points, respectively.
Once implemented, the new proposed rules will have varying impacts on individual FHCs, depending on their financial and capital positions, Zhao said. The FSC, for instance, requires listed financial institutions to set aside "special reserve" from "unappropriated retained earnings" when the yearend "other equity" is negative. Those with large deficits of "other equity" could find it difficult to maintain their original dividend plans, Zhao said.
"Special reserve" refers to the amount required to be set aside for dividend payment purpose, while "unappropriated retained earnings" refer to the leftover portion of earnings that is not earmarked for specific purposes. "Other equity" includes capital investments such as holdings in international organizations that are not part of the company portfolio or direct investments.
"We expect Fubon Financial, Cathay Financial, China Development Financial Holding Corp. and Shin Kong Financial to be relatively vulnerable" to the rules, as they reported double-digit decline in net profits in the first half of 2023 amid continual losses in their life insurance units, Zhao said.
On the other hand, Zhao expects Yuanta Financial Holding Co. Ltd. to be largely unaffected due to its above industry-average capital and debt metrics.
Fubon Financial President Jerry Harn Wey Ting said at a Nov. 17 conference the FSC's proposal had no impact on the firm, as it has no plan to use capital or surplus reserves as dividend bases. Further, Fubon spokesperson Vincent Wu told Market Intelligence the company's dividend distribution plan would be based on internal growth needs and external requirements, adding that the company has accumulated undistributed earnings, a source of dividend distribution.
The companies' dividend payments will significantly depend on their ability to boost their earnings.
"FHCs can still pay dividend by using the annual profits, hence the impact will not be significant," said Andy Chang, senior director at S&P Global Ratings. "The purpose of the regulation is mainly to restrict FHCs using legal reserve to pay dividend when earnings are not sufficient."
Cathay Financial declined to comment, while Shin Kong Financial and China Development Financial did not respond to Market Intelligence's inquiries.