Many banks have been reformed and profitable. They control bad debts and other loans and pay dividends 20-30 percent per year in cash plus stocks for investors at their fingertips. There is a group of weak banks making no progress after three to five years. Even some banks are getting worse than before.
The macro management of banking authorities has improved a lot. Exchange rates, interest rates, inflation are reasonably controlled and positively contribute to GDP growth. However, in the system reform, the handling of credit institutions being compulsorily bought such as Dong A Joint Stock Commercial Bank (DongA Bank) is relatively slow.
In the session on May 21, 2019, the Central Steering Committee on Anti-Corruption requested a focus on investigating and prosecuting a series of serious cases, including “violations of regulations on banking activities and others related to banking activities “occurred at Southern Bank. This was the first time the name Southern Bank had been officially mentioned since the time it was merged into Saigon Thuong Tin Joint Stock Commercial Bank (Sacombank).
In such a context, bank stocks continued to differentiate. For good banks, stock market prices can remain at current levels. With weak banks, stock prices will fluctuate. The difficulty is that most weak banks are unlisted, so it is not easy for investors to observe the movement of their stock prices daily.
What are the impacts of weak banks on the banking system in general? Firstly, these banks need to maintain large deposits to compensate for bad debts that have not been recovered yet. They are forced to offer higher savings interest rates than other banks to attract depositors. Accordingly, big banks have to raise their interest rates to keep up with the rates of weak banks. Therefore, the interest rate level cannot be reduced compared to the current level.
Secondly, the absolute number of total outstanding loans of the banking sector is relatively high, up to 7.3 quadrillion dong, and the State Bank of Vietnam (SBV) is drastically controlling credit growth of 14 percent for this year and lower for the following years to manage risks. The credit growth target of SBV is appropriate. However, weak banks still receive a target credit growth not lower than the industry average because they need to continue lending, in many cases debt rollover.
Thirdly, the handling of banks that are forced to buy through maximum transfer to 100 percent of foreign capital requires an independent audit and must wait until cases related to them such as Construction Commercial One Member Limited Liability Bank (Construction Bank), Ocean Commercial One Member Limited Liability Bank (Ocean Bank) ends.
Unlike other sectors, the credit institutions’ currency trading has a relationship with each other and interacts among them with a chain. A weak bank has liquidity problems, other banks must be cautious. In principle, currently weak banks have been “quarantined”, but that is not an absolute “isolation”.
Bank stocks, therefore, are not only diversifying but also subject to negative effects from weak banks. In addition, some banks have recently issued shares to foreign investors at high valuations, now adjusting to the general price level of the stock market, more or less affecting the price of other bank stocks.
Expecting a higher price than the current level for banking stocks seems unrealistic, especially in the first quarter of the year, risk provision set up at a large proportion of banks was lower than the same period. About four to five banks did not make provision for the first quarter but profit still only reached a few dozen billion dongs.
Looking back at the year 2012 when the bank’s profit was “booming” and reached its highest level until that time, the banks then turned into a difficult period for five years. Now there are a lot of similarities of 2012 in some credit institutions. It is worth mentioning that in 2012, the size of the banking system was smaller, in terms of total mobilised capital, credit balance and role in the economy.
