The declining macroeconomic indicators of April 2020 have clearly shaped banks’ difficult and fierce activities in the near future.
The recently released April Industrial production index showed a decrease of 13 percent compared to March. Accordingly, the accumulated industrial production index in the first four months of the year only increased by 1.8 percent over the same period of last year the lowest level in recent years.
Also being in a downtrend, the Purchasing managers’ index (PMI) in April was only 32.7 points the lowest since this index was surveyed in Vietnam.
Tourism is one of the areas that are most heavily affected by the Covid-19 epidemic. In the first four months of the year, the number of tourists to Vietnam dropped by 37.8 percent with decline in all key markets such as Asia (40%), Europe (24.5%) and America (37.6%).
In addition, the retail sales of consumer goods and services in April sharply fell compared to the previous month to 20.5%. This was the third consecutive month in decline of retail sales.
Regarding Foreign Direct Investment (FDI), in the first four months of 2020, the registered FDI (including newly registered and adjusted capital) grew by 31 percent over the same period of last year. However, the realised FDI decreased by nine percent, and the capital contribution fell by 65%.
Meanwhile, the investment capital from the State in April was 23.214 trillion dong, slightly down compared to the 23.262 trillion dong in March. In the first four months of the year, the investment from the State only increased by two percent over the same period of last year.
Notably, the Consumer Price Index (CPI) in April significantly decreased by 1.54 percent compared to March, nearly halved from the peak of 6.4 percent at the end of January 2020.
Answering the question of Dau tu Chung khoan newspaper about the operation of the banking system before the newly released macro figures, general director of a private joint stock banks said that this information is not surprising because banks are often proactive in macro research.
“The impact in April will continue to get worse in May and June, so it is difficult for the economy to recovery quickly, although the State has decided to stop social distancing. On the other hand, the majority of people and businesses are facing due to the impact of the pandemic, while support resources from the State are limited. The current important thing is to create a favourable business environment for people and businesses after the crisis, said the general director.
Sharing the same view, Chair of the Board of directors (BOD) of a private joint stock bank shared that “the use of services at credit institutions (CIs) has increased at a lower rate than before, because people and businesses are still worried. This has led to the fact that the demand for loan is unlikely to increase in the context when banks are looking for ways to lend, even though the risks of bad debts may shift to the coming years.”
A study by Bao Viet Securities Company (BVSC) also pointed out that the banking system liquidity is expected to be abundant in May due to the continued weak credit growth, while a large amount of capital is expected to return to the system this month via bill channel (issued in February on 91-day term).
Accordingly, the interbank interest rates will be maintained at low levels. Nevertheless, the demand for loans of businesses will remain relatively weak due to the impact of the pandemic.
“The upcoming business situation of banks will be very difficult and fierce. On one hand, banks will continue support customers to recover their business activities. On the other hand, banks will have to restructure debts for customers under Circular 01. This greatly affects the revenue and quality of banks’ revenue. In addition, banks will also have to compete fiercely, look for new customer segments to offset the revenue loss in the first four months due to Covid-19 pandemic,” said a general director of a private joint stock bank based in the South.
Strategic director of a bank said that in the context of the complicated movements of the Covid-19 pandemic which have negatively affected the international and domestic economies and many economic sectors, the business situation of the finance and banking sector in the second quarter of 2020 will be less positive than the previous quarters.
The reason is that customers’ demand for using products and services has slowed down, especially in the credit demand. Meanwhile, the risk levels of customer groups are forecasted to increase immediately in the first quarter 2020 and follow a stronger uptrend from the second quarter of 2020.
In the talk with Dau tu Chung khoan newspaper, in addition to the concerns of the pandemic, what makes bank leaders most worried is that increasing capital is becoming more and more difficult, because the retained profit this year will not be as expected, as a result of the suspension of production and business activities, and the decline of profits of the banking system.
According to bank leaders, the option to increase Tier-2 capital is only appropriate when banks’ liquidity is in shortage, but it is currently fairly plentiful
At the same time, due to the high cost of issuing Tier-2 capital, the plan to increase Tier-2 capital this year will not be effective.
The most feasible solution in the current context is to increase Tier-1 capital by suspending the payment of dividends in cash (should be paid in shares) and by issuing new shares.
“The shifting payment dividends from cash to shares has the backing of the regulator, but it is not enough, while issuing new shares to investors is an impossible task at this time, said Chair of BOD of a private joint stock bank.
Meanwhile, if the Capital Adequacy Ratio (CAR) if lower than Basel II’s regulation, banks will have to restrict or may even stop granting credit.
This leads to a greater consequence, which is the impact on the demand for investment capital for socio-economic development, particularly when Vietnamese businesses are mainly small and medium sized.
There are not many opportunities to raise capital by issuing shares or bonds, so the development of businesses still depends heavily on bank credit.
“The difficulties of businesses pose a risk of bad debt increase, which reduces the capital size of banks. Thus, if the problem of increasing capital of banks is not solved, it can lead to a double recession for the economy,” said an economic expert.
Particularly, raising capital is very difficult for four state-owned banks the key CIs of the market.
In the report to the government in April, Governor of the State Bank of Vietnam (SBV) asked the Ministry of Finance to soon give comments on the draft proposal to the National Assembly Standing Committee of the SBV on increasing charter capital for Commercial Joint Stock Bank for Agriculture and Rural Development of Vietnam (Agribank) from the State budget source for the SBV to soon complete and send it to the National Assembly’s Office for the next meeting.
At the same time, the SBV’s Governor asked the Ministry of Finance to urgently complete and submit to the government to amend and supplement Decree 91/2015/ND-CP to create a legal basis for the increase of charter capital for three other state-owned banks including Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), and Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank).
In fact, after the sale of 15 percent of stake to KEB Hana Bank from South Korea, BIDV became the bank with the highest charter capital in the system, reaching 40.220 trillion dong; followed by VietinBank with 37.234 trillion dong; Vietcombank with 37.089 trillion dong; and Agribank with 30.591 trillion dong.
BIDV continued to be the leading bank in terms of total assets with nearly 1,500 trillion dong, followed by Agribank with over 1,450 trillion dong, VietinBank with 1,240 trillion dong, and Vietcombank with 1,220 trillion dong.
However, the average CAR under Basel I standards of BIDV, Vietcombank, VietinBank and Agribank is currently close to the minimum level of 9.4 percent as required and lower than the average level of the system of CIs which is 13%.
In particular, the most urgent case is VietinBank because the bank has the slowest rate of capital increase among state-owned banks and has not been supplemented charter capital since 2014.
The State ownership ratio at VietinBank has now fallen to the minimum level of 65 percent according to the government’s policy.
