Under the provision of Circular 41/2016/TT-NHNN, in addition to calculating credit risk by credit ratio compared to capital, banks need to include market risk and operational risk. This will make the capital adequacy ratio (CAR) of banks more stressful than before. Commercial banks will have to calculate plan to raise the tier one capital or the tier two capital to improve this index and at the same time balance many other risk indicators.
When banks have to raise Basel II requirements, they must maintain a minimum CAR of eight percent. Although CAR of many banks is over nine percent, however, according to the new calculation in Circular 41, this ratio is only six percent to sevent percent. Therefore, banks are making great efforts to raise capital.
According to the State Bankof Vietnam (SBV)’s statistic, by the end of April 2019, the charter capital of the whole banking system increased by 1.05 percent to 582.379 trillion dong; equity capital increased sharply to 5.66 percent to 851.795 trillion dong. In which, leading the charter capital is the joint stock commercial bank group with 268.872 trillion dong (up 0.61 percent compared to the end of 2018); State-owned commercial banks were 149.001 trillion dong (up 0.75 percent) and foreign joint-venture banks were 116.619 trillion dong (up 2.76 percent).
In fact, increasing capital is still the story that many banks have to consider but not easy. Recently, the difficulty of raising Tier one capital has caused many banks to consider raising Tier two capital through bond issuance.
At the end of last May, Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) was approved by SBV to issue bonds in 2019 with a total par value of 10 trillion dong. Asia Commercial Joint Stock Bank (ACB)’s Board of directors also approved the plan to issue the first phase of private bonds in 2019 with 2,500 bonds worth 1 billion dong per bond, equivalent to the total value of 2.5 trillion dong. In the first six months of 2019, HCM City Development Joint Stock Commercial Bank (HDBank) implemented four non-convertible bond issuances, no collateral. A total of 4.4 trillion dong of bonds were issued.
However, an expert shared that even for convertible bonds and secondary debt, not all banks could do it. There would be differentiation. Banks that were reputable and strong enough would issue secondary debt or convertible bonds. Banks with insufficient financial capacity would find it hard to do.
That expert said that, according to Circular 19/2017/TT-NHNN, the exclusion from individual Tier two capital includes convertible bonds issued by other credit institutions, secondary debts issued by other credit institutions or foreign bank branches that fully meet the conditions for calculation of Tier two capital x that the credit institutions buy and invest.
According to the roadmap, the total value of the purchase or investment of convertible bonds and secondary debt would be deducted from tier two capital from 2021. This would also affect bank equity, and adjust CAR.
Currently, about ten banks have been awarded the decision by SBV to apply Circular 41 on the regulation of minimum CAR according to Basel II international standards. The pressure to raise capital and ensure the requirements according to standards will be fiercer for banks, when the 2020 deadline is not too far away.
It is necessary for banks to actively improve capital and meet the criteria set out in Circular 41 to strengthen the system and improve financial capacity. For commercial banks recognised to apply Basel II, this is also a way for these banks to affirm them at a different level than the rest. At this point, when the deadline for applying Basel II arriving (from January 1, 2020), it will no longer be a race but a battle.
The banking sector development strategy by 2025, orientation to 2030 also emphasized: “increase capital and improve the quality of equity capital of commercial banks and non-bank credit institutions, ensure that the charter capital is not lower than the legal capital level and fully meet the minimum CAR in accordance with international law and standards”.
According to Nguyen Tri Hieu, the Vietnamese banking system needed to have a really strong shift and restructuring so that Vietnamese banks gradually approached international practices, thereby improving their position and prestige on the international financial market.
Recently, the restructuring of credit institutions has continued to be promoted. Nguyen Trong Du, deputy Chief Inspector of the Banking Supervision Inspection Agency (SBV) said that the restructuring results of credit institutions created the stability and safety of the system, reflected in the following aspects: Strengthened financial capacity, charter capital and the scale of credit institutions gradually increased over the years. In addition, internal governance and risk management capacity of credit institutions enhanced to approach international standards. Transparency in operation of credit institutions had been enhanced.
Along with restructuring, effective solutions for bad debt settlement contributed to increasing financial capacity for credit institutions. From 2012 to the end of March 2019, the whole system handled 907.33 trillion dong of bad debt. In particular, in 2018, the system handled 163.14 trillion dong of bad debt. The internal bad debt ratio by the end of March 2019 was 2.02 percent.
An expert acknowledged that in the past time, commercial banks had made great efforts in improving the quality of their own capital, but there were still remarkable things. One problem was that the bank’s equity was not properly represented, making the banking system vulnerable.
Circular 13/2018/TT-NHNN regulating the internal control system was an important document in completing the legal framework, improving the effectiveness of the internal control system, completing the independent protection model in banking activities, changing cultural control, risk management and assessment of internal capital safety assessment process under Basel II, thereby making daily business decisions of commercial banks and foreign bank branches.
