The South Korean National Pension Service (NPS) has increased its holdings in the country’s regional banks.

The pension fund has raised its stake in DGB Financial Group from 6.02% to 10.28% and JB Financial Group from 6.03% to 9.22% for the past six months, according to regulatory filings. It has also increased a BNK Financial Group stake from 10.7% to 12.85% during the same time, which made NPS the largest shareholder of the financier.

The move is a bid to capitalize on undervalued bank stocks because NPS expects the price of bank shares, which plummeted amid the Covid-19 market turmoil, to recover as markets stabilize, industry watchers said.

“Bank stocks, which were widely considered undervalued, apparently attracted attention from NPS which has a longer-term investment horizon,” an industry insider said.

NPS is not allowed to hold more than a 10% stake in large financial holding companies, according to local regulations. As it already holds 8-9% of each of the country’s big four financial groups – Shinhan Financial Group, KB Financial Group, Hana Financial Group and Woori Financial Group – there is little room to raise holdings in these companies. However, the pension fund can own up to 15% of a regional financial holding company.

Rising dividend payments could have played a role in the NPS decision to buy more shares of regional banks. In 2019 BNK Financial Group’s dividend payout ratio rose to 20.87%, DGB Financial Group to 21.2% and JB Financial Group to 17.1%.

An increase in NPS’ holdings in regional banks could mean the pension fund can engage more actively with them in the future based on the stewardship code adopted in 2018.

NPS’ investment committee also approved guidelines for shareholder engagement activities in 2019, in which the pension fund reaffirmed it would actively engage with the board and management of portfolio companies if there are concerns that could damage shareholders.

In 2018, NPS voted against appointing a former justice of the Supreme Court to Shinhan Financial Group’s board of directors at the general shareholders meeting. The same year, it also voted against one of the independent director nominees proposed by BNK Financial Group. (Reporting by Jang-jun Lee)