Capital raising is a pressing requirement for state-owned commercial banks to comply with Basel II in the short term, and to maintain their leading position in the long term. However, each bank has its own difficulties.
Difficult even to large banks
Among the four largest state-owned banks, Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) is considered to be the most advantageous when the bank’s room for foreign investors is still intact. This advantage has been promoted in practice when BIDV was approved by the government to sell 17.65 percent capital to KEB Hana Bank of Korea at the end of 2018. After the issuance, BIDV’s charter capital will increase to 40.22 trillion dong, State shareholders will reduce their ownership to 80.99 percent, foreign shareholders hold 15 percent of capital, and other shareholders 4.01 percent.
However, there has not been any more information about this deal so far. At the Conference of banking industry’s responsibilities in 2019 taking place at the beginning of the year, Phan Duc Tu, Chair of BIDV, proposed the government to remove the conditions binding foreign investors so that BIDV can complete the capital sale transaction as soon as possible. In addition, BIDV continues to ask the government to consider dividend payment by shares to increase capital.
Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) has also successfully sold three percent of its capital to two foreign investors at the end of 2018. After this deal, Vietcombank increased its capital to 37.1 trillion dong, of which state ownership fell from 77.11 percent to 74.8 percent while the ownership of foreign investors increased to 17.55 percent, in which strategic shareholder Mizuho continued to maintain 15 percent ownership and GIC 2.55 percent.
With this structure, Vietcombank still has a large room to sell capital to domestic and foreign investors to raise capital. Although the bank was recognised by the State Bank of Vietnam (SBV) as meeting Basel II standards, Nghiem Xuan Thanh, Chair of Vietcombank, still proposed to pay stock dividends to increase its charter capital to maintain the capital adequacy ratio (CAR) and also proposed for other state-owned commercial banks to raise capital from business supporting funds.
Vietnam Joint Stock Commercial Bank of Industry and Trade (Vietinbank) is in the most difficult situation to raise capital. The current room for foreign investors in this bank has been depleted, the ownership ratio of state shareholders fell to 64, 46 percent, lower than the minimum holding requirement of 65 percent for state shareholders at state-owned commercial banks in the period from now to 2020. Not receiving approval from state shareholders, this bank has not increased any capital for the past three years.
Vietnam Bank for Agriculture and Rural Development (Agribank) is in an equally difficult situation. The capital increase of this bank is closely associated with the equitisation process. The equitisation process of Agrribank is currently facing many difficulties from business valuation to strategic shareholders’ finding. Due to the slow equitisation, this bank has the lowest charter capital among the ‘Big Four’, currently only about 30.77 trillion. ‘If the charter capital is not supplemented, the bank will not meet the minimum capital adequacy ratio in 2019. It will also affect its credibility and the ability to expand credit,’ stressed Trinh Ngoc Khanh, Chair of Agribank.
How to raise capital?
According to Moody’s calculations, if the capital is not increased, the tier one capital of the state-owned banks will be ranked down to only 6.1 percent instead of 6.9 percent as at the end of 2017. ‘The weakening capital structure will reduce the competitiveness of state-owned banks and affect their credit quality,’ warned Moody’s.
Emphasising the need to raise capital for state-owned banks, a banking expert said that state-owned commercial banks play an extremely important role in the current money market, not only dominating market shares, but also being a tool for the government and the SBV to carry out monetary policy. Therefore, if these banks cannot raise capital, it will reduce their leading position, and even putting the system at risk.
According to the expert, to raise capital for the state-owned banks, there are several measures. Firstly, the government supplemented these banks’ capital from its budget as proposed by Nghiem Xuan Thanh. Secondly, state shareholders can reduce ownership or divest for existing and new shareholders by issuing shares to raise capital. The third measure is to allow banks to retain profits to raise capital by paying stock dividends.
Analysing each measure more deeply, the expert said, the first solution is not feasible because the National Assembly does not allow the government to use the state budget to increase charter capital for state-owned commercial banks, and does not put the need for additional capital for state-owned commercial banks into the medium-term public investment portfolio. Moreover, this measure is also contrary to the policy of equitisation and divestment of state shareholding that the government is currently implementing aggressively.
The second measure is considered the most comprehensive when, at the same time, achieving the goal of equitisation and withdrawal of state’s investment at banks, and allowing banks to raise capital and obtain strategic shareholders. However, this measure also encounters many obstacles, such as the selection criteria for foreign strategic investors, foreign ownership limit, and selling prices calculation, which are difficult to solve in a short time.
The third solution, though not as comprehensive, is considered reasonable for banks because it does not depend on any party other than the banks, and can be done immediately as long as the State shareholders agree.
‘Allowing state-owned commercial banks to retain profits combined with withdrawing state capital is the most effective solution to increase capital for those banks,’ the expert concluded and emphasized. A few years ago, the state budget balance was tight, so the capital increase for banks was delayed. However, for the past few years, the budget has become less tight so the government should consider this solution.
