From January 1st 2020, Circular 41/2016/TT-NHNN will officially take effect. Although the circular only requires banks to ensure minimum Capital Adequacy Ratio (CAR) of eight percent instead of nine percent at present, the CAR is calculated under Basel II standards with much stricter regulations.
Accordingly, in addition to credit risks, banks must also have sufficient capital to handle both operational risks and market risks. Therefore, although the current CAR of banks is currently above the minimum required limit of nine percent, many banks will fail to meet the CAR under Circular 41. Raising capital is considered to be the most effective solution at the present time for banks to quickly meet the CAR requirement under the Basel II, because narrowing down the size of assets is not what banks expect because it will affect revenues and profits.
That is the reason why raising charter capital has always been one of the top objectives of banks in recent year. For example, year 2018 witnessed a strong wave of capital raising of private joint stock banks. The most impressive case is Vietnam Technological and Commercial Joint Stock Bank (Techcombank) as the bank managed to increase its charter capital by threefold to 35 trillion dong. Vietnam Prosperity Commercial Joint Stock Bank (VPBank) also raised its charter capital by 10.5 trillion dong to 25.3 trillion dong while Military Commercial Joint Stock Bank (MB) increased charter capital by more than 3.4 trillion dong to 21.6 trillion dong.
According to statistics of the State Bank of Vietnam (SBV), the charter capital of the entire banking system increased by 63.9 trillion dong to 576.338 trillion dong (equivalent to 14.47 percent increase). In which, the charter capital of private joint stock banks was raised by 52.443 trillion dong to 267.234 trillion dong (equivalent to 24.42 percent increase), eight times higher than the charter capital growth of joint venture and foreign banks and 300 times higher than that of state-owned banks.
In addition to increasing charter capital, many private joint stock banks have promoted bond issuance to raise Tier-2 capital. Thanks to that, their equity also rose by 16.63 percent to 338.183 trillion dong.
Along with raising charter capital and equity, to improve the CAR, banks have also tried to limit the total asset growth. Accordingly, the total assets of private joint stock banks only increased by 13.07 percent to 4,554.977 trillion dong in 2018, much lower than the 17.62 percent growth recorded in 2017, and also lower than the growth in charter capital and equity of this bank group.
Despite the efforts, the CAR of private joint stock banks has not only improved but decreased to 11.24 percent in late 2018 from 11.47 percent in late 2017. On the contrary, the charter capital of state-owned banks was almost unchanged, only increasing by 0.08 percent to 147.890 trillion dong. The equity of this group only increased by 5.48 percent to 268.599 trillion dong, while the total assets rose up by 6.42 percent to 4,863.353 trillion dong. However, by the end of 2018, the CAR of this bank group remained the same at 9.52 percent recorded in 2017.
That can only be explained by the fact that the assets of private joint stock banks had a much higher risk level in the past year. It is understandable that in the past year, many banks in this group also boosted real estate lending, consumer lending, etc. the segments having higher profit margins but also higher risk levels.
The fact also showed that raising capital is not enough to help banks improve CAR, if they do not actively make their balance sheets in the direction of higher safety and efficiency.
Even if banks meet the CAR requirement (including ensuring sufficient capital for credit risk, operational risk and market risk), they can only satisfy the first pillar of the Basel II. It means that there are two more pillars that banks need to comply with, including to improve operating capacity, risk management, internal control, etc. (pillar 2); and to increase publicity, information transparency about banks’ operations, and comply with market discipline (pillar 3).
That is why many banks strongly increased charter capital in 2018, only three banks were recognised as meeting the Basel II standards by the end of the year, including Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam International Commercial Joint Stock Bank (VIB), and Orient Commercial Joint Stock Bank (OCB).
Circular 41 will officially be effective in less than 10 months. Although the time is not much, it is not difficult for banks to meet the requirements of this circular. The problem is whether banks are willing to sacrifice immediate benefits (profits in short term) to pursue a long-term goal.
