Carrying out Mergers and Acquisitions (M&A) to enhance competitiveness is an option that should be taken into account by small banks to meet the Basel II standards.
The goal of restructuring the banking sector by 2020 is to ensure that 70 percent of commercial banks fully carry out the Basel II, etc. However, up to now, among the 10 banks selected to pilot the Basel II implementation, only five banks on the list including Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam International Commercial Joint Stock Bank (VIB), Asia Commercial Joint Stock Bank (ACB), Vietnam Prosperity Commercial Joint Stock Bank (VPBank) and Military Commercial Joint Stock Bank (MB); and two banks not on the list which are Orient Commercial Joint Stock Bank (OCB) and Tien Phong Commercial Joint Stock Bank (TPBank) have announced to complete the implementation of the capital and risk management methods under the Basel II standards. The remaining banks promise to complete this task this year.
In fact, banks want to raise capital, but the capital increasing plans, despite being approved by shareholders at the annual general meetings (AGM), are very difficult to carry out, due to market difficulties, the lack of attractiveness of bank stocks to investors and shareholders, etc.
Meanwhile, according to the provisions of Circular 41/2016/TT-NHNN, in addition to calculating the required capital for credit risks, banks also need to calculate the required capital for market risks and operational risks for which there were no regulations in the past. Therefore, the required capital for banks will certainly increase. Since raising Tier-1 capital is difficult, banks have to consider raising Tier-2 capital through bond issuance.
A banking and finance expert said that the massive bond issuances of banks in recent time are for two purposes.
Firstly, long-term bonds can be included in banks’ Tier-2 capital, thereby increasing equity and helping improve the Capital Adequacy Ratio (CAR) which is currently fairly low, especially in the group of big banks.
Secondly, banks have to mobilise more medium and long-term capital because the ratio of short-term funds used for medium and long-term lending was reduced to 40 percent from the beginning of 2019.
Huge pressure when the deadline is close
Under the Basel II standards, the minimum CAR needs to reach eight percent, one percent less in arithmetic compared to the Basel I. However, the calculation is more complicated. Report of MB Securities Company mentioned that if applying the calculation method of the Basle II, banks’ CAR (which were calculated based on the Basel I) may fall by one to three percent.
By meeting the Basel II standards, accredited banks will enjoy a more open credit growth room. The credit growth is currently considered a bottleneck in terms of profit and growth in many banks. At the press meeting in early 2019, the State Bank of Vietnam (SBV) Nguyen Thi Hong affirmed that the agency may allow higher credit growth for banks meeting the Basel II standards.
It can be seen that the wave of capital increase continues to become a fierce competition among banks due to the great demand but limited resources. In this race, the advantage still belongs to the big banks.
According to Dr Nguyen Xuan Thanh, Development director of Fulbright University Vietnam, to ensure CAR in accordance with the Basel II standards, the demand for capital increase is very high for banks, especially state-owned banks, because their CARs have approached nine percent, and they will fall below eight percent if the Basel II standards are applied.
In 2018, most banks set to raise capital, but so far, only medium and large-scaled banks have completed the target. This year, Nam A Commercial Joint Stock Bank (NamABank) aims to increase charter capital to five trillion dong from the three trillion dong at the present time. Meanwhile, Viet Capital Commercial Joint Stock Bank (VietCapitalBank) and Kien Long Commercial Joint Stock Bank (Kienlongbank) have no plan to increase capital this year.
According to banking and finance experts, the room to compete in raising capital of small banks is very narrow, because their profits remain low and distributing dividends in shares also does not considerably help increase charter capital. Meanwhile, since information of these banks lacks of transparency and the market prices of their stocks are too low, increasing capital through the issuance and offering of shares is not easy.
That makes the differentiation among banks to happen stronger and stronger, and the group of small banks is at the risk of being lagged behind more and more. In such context, Dr Le Xuan Nghia, finance and banking expert believed that small banks should consider implementing M&A to increase competitiveness.
