The roadmap to reduce the ratio of short-term capital used for medium and long-term loans under Circular 22/2019/TT-NHNN was considered to be a barrier for banks in credit activities. However, in a more important aspect, this helped banks improve capital adequacy ratio (CAR) when the pressure to complete Basel II regulations was imminent.
In 2020, when Basel II was widely implemented, CAR of many banks would be further reduced by the new formula. Therefore, meeting Basel II standards would help the bank to have a more open mechanism of credit growth limit.
For a long time, credit growth limit had been considered as a ‘bottleneck’ in the profit growth of banks. Therefore, according to financial and banking analysts, the key point in Circular 22/2019 was to require banks to raise CAR, rather than focus on controlling the ratio of short-term capital to medium and long-term lending.
Can Van Luc, a financial and banking expert, said that the short-term capital reduction roadmap for medium-long-term lending according to Circular 22/2019 created favourable conditions for banks to restructure their capital sources. The implementation would be continued until October 2020 and begin to carry out the next tightening roadmap, instead of starting as early as 2020 as originally planned. However, in the near future, the State Bank of Vietnam (SBV) would not manage the capital of banks as at present but would manage by CAR ratio as prescribed by Basel II. Meanwhile, the control of the ratio of short-term capital to reduce medium and long-term loans would not mean much, Luc emphasized.
According to Circular 41/2016/TT-NHNN stipulating the CAR for banks and foreign bank branches, January 1, 2020 would be the time when banks had to comply with Basel II regulations. According to SBV, there were 17 banks applying for Basel II standard and so far 15 banks had been completed, including 13 domestic banks, namely Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Technological and Commercial Joint-Stock Bank (Techcombank), Asia Commercial Joint Stock Bank (ACB), Vietnam International Commercial Joint Stock Bank (VIB), Vietnam Maritime JointStock Commercial Bank (MSB), HCM City Development Joint Stock Commercial Bank (HDBank), Orient Commercial Joint Stock Bank (OCB), Tien Phong Commercial Joint Stock Bank (TPBank), Vietnam Prosperity Joint-Stock Commercial Bank (VPBank), Vietnam Thuong Tin Commercial Joint Stock Bank (Vietbank), Viet Capital Commercial Joint Stock Bank (Viet Capital Bank), Southeast Asia Commercial Joint Stock Bank (SeABank) and two foreign banks are Shinhan Bank Vietnam Limited, Standard Chartered Vietnam Limited.
According to Basel II standards, banks need to achieve a CAR of at least eight percent, one percent reduction in arithmetic compared to Basel I, but the calculation was more complicated. According to SBV, the CAR ratio of the whole system was currently at 12 percent (the minimum requirement was nine percent). In particular, the CAR of the banking sector with state capital was 9.4 percent and the private banking sector was 11.3%.
According to SSI Securities Corporation, Circular 22/2019 focused on two key changes, namely reducing the proportion of short-term capital used for medium and long-term loans (from the current 40 percent to 30%). and increasing the risk factor when lending to consumer real estate, from the current 50 percent to a maximum of 150%.
Circular 22/2019 would take effect as of January 1, 2020, with a transition period of six months. Particularly, in the case of adjusting the ratio of loan to deposits (LDR) at the maximum of 85 percent (currently at 90 percent for state-owned banks and 80 percent for private banks), the transition period was two years (before January 1, 2022).
Assessing the impact of adjusting the ratio of short-term capital to medium and long-term loans, SSI said, as of September 2019, listed banks in the Company’s research scope maintained a short-term capital for medium and long-term loans ratio was at 31 percent on average, many of which were below 30%.
According to Circular 22/2019, banks would have to bring the ratio of short-term capital for medium-long-term loans to 37 percent from October 1, 2020 and continue to decrease to 34 percent from October 1, 2021, then. to 30 percent from October 1, 2022.
Regarding the adjustment of the risk factor for consumer real estate loans when calculating CAR, the new circular stipulated that consumer real estate loans valued from 1.5 billion dong to 4 billion dong were subject to a coefficient 100 percent risk, while similar loans worth more than 4 billion dong bore a 150 percent risk weight.
SSI also noted that this calculation would only be applied to banks that had not yet met the CAR ratio under Circular 41/2016 (Basel II) effective from January 1, 2020. The new deadline for application of Circular 41/2016 to all banks had been delayed until 1 January 2023.
The challenge with the small bank
As of September 2019, the CAR ratio according to Basel II of many listed banks was higher than the minimum requirement of eight percent thanks to capital raising activities in the past two years in the context of high profits, but many banks were still facing difficulties. One of the challenges that banks faced when implementing Basel II was to meet the minimum capital requirements to improve CAR.
According to Bui Quang Tin, a finance and banking expert, the most obvious benefit that Basel II brought to Vietnamese banks was increasing the healthy competition and transparency of the system, increasing the bank’s resistance against market volatility.
However, meeting the standards of Basel II was not easy, especially for small banks, because of the fact that big banks also had to race to finish before the 2020 ends. For example, Vietinbank was having difficulties in increasing its chartered capital when foreign ownership cap threshold had been filled 30 percent and no cash dividend.
Previously, sharing at the Annual general Meeting of Shareholders in 2019, Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank)’s leaders said that if calculated according to Circular 41/2016, the actual CAR ratio had fallen below eight percent. Meanwhile, Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV)’s CAR was 9.01%, reaching the prescribed threshold of nine percent.
Regarding the adjustment of the LDR ratio, SSI emphasized that most listed banks had LDR ratio below 80 percent (excluding BIDV with 86 percent LDR as of September 2019).
The new regulation in Circular 22/2019 raised the ceiling from 80 percent to 85 percent for all banks, which was considered to be beneficial for joint-stock commercial banks. Besides the state-owned bank, in particular BIDV, SSI estimated that this bank would reduce the LDR to below 85 percent thanks to the new capital raised by 2020.
In addition to the above 17 names, there were still many banks that had not yet completed Basel II, most of which were small banks such as Bac A Commercial Joint Stock Bank (Bac A Bank), Nam A Commercial Joint Stock Bank (Nam A Bank), Kien Long Commercial JointStock Bank (Kienlongbank), Bao Viet Joint Stock Commercial Bank (Bao Viet Bank), National Citizen Commercial Joint Stock Bank (NCB), Saigon Bank for Industry and Trade (Saigonbank), and so on. Because these banks were in the process of restructuring or had not been able to increase capital to improve their financial capacity.
According to statistics of SBV, the reduction in the ratio of short-term capital sources for medium and long-term loans according to the roadmap as the regulations had little effect on the ability to expand medium-long-term loans of banks. The maximum ratio of short-term funds used for medium, long-term loans as of September 30, 2019 of the state-owned banks was 29.79%, that of the joint-stock commercial banks was 30, 89%, joint venture banks were 28.97%, that of banks with 100 percent foreign capital was 7.53%. Thus, the goal of reducing the ratio of short-term capital for medium-long-term loans to 30 percent in the next two to three years was not too much pressure on banks, but the more important thing was to meeting the coefficient CAR to extend credit.
At present, Basel II was the best practice in bank risk management in Vietnam. When applying Basel II standards, the bank not only measured the risk of a loan, a transaction or an investment but also assessed and measured risks of each portfolio and each segment, as well as all transactions.
This meant that the bank could both reduce the probability of occurrence of risks and at the same time create its own shield against possible risks.
