KEB feared to suffer loss in corporate value

Korea Exchange Bank (KEB) has again raised concerns that its payment of too generous dividends might damage its growth potential and dilute its corporate value. On Friday, the nation's fifth-largest lender decided to pay out 1,510 won ($1.42) per share for the second quarter.
The decision enables KEB's largest shareholder Lone Star to earn 496.8 billion won ($466 million). It came after the bank paid 1,085 won per share last year. The U.S. private equity fund received 357 billion won in dividends from the KEB in 2010.
No one objects to such payments as long as the bank shows remarkable performances and makes huge profits.
The KEB recorded 1.02 trillion won in net profit last year, up from 892 billion won in 2009 and 782 trillion won in 2008. However, its debt ratio also increased considerably to 725 percent last year, from 548.4 percent in 2009 and 434.7 percent in 2008.
Banks and companies paying exorbitant dividends are compared to those living from hand to mouth. These people cannot become rich as they don't have money saved for the future. The same is true of banks and firms which set aside a large part of their profits to pay dividends to shareholders.
Shareholders are happy to receive higher dividends but this means that banks and businesses suffer from the outflow of profits to them. The outflow could lead to a financial drain which will sap growth potential. This will inevitably do more harm than good.
It is important to pay appropriate dividends in order not to undermine the firm's future growth and corporate value. Banks and businesses are required to accumulate a certain share of profits as internal reserves that can be utilized to replenish capital or reduce debts.
KEB's internal reserve ratio stood at 184 percent in 2010, far lower than other major banks which boasted 500 to 1,000 percent. It would be better for KEB to mobilize its profits to reduce its debts instead of paying out dividends.
It is regrettable that the generous payments have touched off an anti-foreign capital sentiment among Koreans. It is not desirable for the public to be jealous of Lone Star making handsome returns on its 2003 purchase of the KEB.
Koreans should not be obsessed with their xenophobic attitude toward foreign investors. They need to see the positive side of foreigners' role in the Korean capital market and economy. In the case of the KEB, Lone Star ran the risk of investing in the local bank that was shaky in the aftermath of the 1997-98 Asian financial crisis.
Lone Star's profit-oriented policy has in fact contributed to arousing public sentiment against what is seen as foreign predators. But, it is not good for the nation to drag its feet in approving the fund's plan to sell KEB and exit the Korean market.
Of course, the authorities have to wait for the court procedure to determine Lone Star's eligibility as the biggest shareholder of KEB. If a court decision is delayed further, KEB and the local financial sector might sustain a more serious setback. The buyout fund may try for further returns by seeking additional dividends.
Is there any way of making both Lone Star and KEB winners? Policymakers, regulators and all the related parties had better do their best to set a good precedent for foreign investment in Korea. Otherwise they may scare away foreigners.
(END)