The investment bank, JP Morgan Chase, had identified Vietnamese banks as an attractive investment opportunity thanks to its fast growth and high profitability. The return on equity (ROE) of Vietnamese banks was quite high, higher than the asset growth rate, Harsh Modi, co-head of Asia Financial Research at JP Morgan, told CNBC.
According to Harsh Modi, that also meant that Vietnamese banks would not need to raise capital in theory to finance current growth. However, Vietnamese banks had continued to improve the capital adequacy ratio (CAR) as well as meet legal requirements. As a result, investors would not need to spend a lot of money, but the assets of Vietnamese banks still maintained their growth momentum for a while with reasonable high stock prices. That was the attraction of Vietnamese banks, the expert concluded.
In a note published in November that Modi co-authored, JP Morgan analysts also expected that the ceiling equity of Vietnamese banks would reach between 15 percent and 21 percent in the next two years. JP Morgan especially appreciated the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Technological and Commercial Joint-Stock Bank (Techcombank), and Asia Commercial Joint Stock Bank (ACB).
The above assessment of JP Morgan was entirely accurate. For the last two years, Vietnamese banks had made every effort to be able to apply Circular 41/2016/TT-NHNN, stipulating the capital adequacy ratio promptly.
Officially effective from January 1, 2020, although Circular 41 only required banks to maintain a minimum capital adequacy ratio of wight percent, the risk calculation method was much stricter. Many because in addition to credit risk, the bank must also include market-risky assets, risky assets.
Strict capital safety regulations under Basel II had forced Vietnamese banks to increase capital during the past two years. Not only raising tier one capital, but banks also had to accelerate the issuance of bonds to increase capital tier two. As a result, the growth rate of the equity capital of banks was much higher than the growth rate of total assets. Indeed, according to the latest statistics of the State Bank of Vietnam (SBV), as of the end of September, the total assets of the system of credit institutions reached over 12 quadrillion dong, an increase of about 8.48 percent compared to the end of 2018. Meanwhile, The system’s equity capital increased by 94.7 percent during this period to nearly 882.5 trillion dong. Thanks to that, the CAR of the system had been improved to 12.02%.
Not only increased capital but banks also actively restructured the balance sheet towards leaner, higher efficiency, lower risk level. Asset quality had improved, a sharp decline in non-performing loans had contributed to advancing the profitability of banks. According to a banking expert, the return on assets
(ROA) and ROE ratio of the Vietnamese banking system had doubled compared to five years ago, reaching the average level of the Asean region.
All of these were the main reasons why global credit rating agencies continuously improved the ratings of Vietnamese banks. For example, in November 2018, Moodys upgraded the credit ratings of many Vietnamese banks because these Vietnamese banks had made progress in strengthening their credit capacity, especially in solving bad debts. Along with that, Moodys also expected banks’ profits would improve in the next 12 to 18 months due to the reduction of credit cost burden.
Not only the judgments, the belief in the Vietnamese banking system was also expressed by foreign investors with specific actions. The fact that the Korean Exchange Bank (KEB Hana Bank) spent 20.3 trillion dong to own more than 603.3 million shares (equivalent to 15 percent of charter capital) then became a strategic shareholder of Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) was a clear example.
Earlier in the year, Vietcombak also successfully issued 111,108,873 new shares for GIC Private Limited and Mizuho Bank Ltd to collect about 6.2 trillion dong (equivalent to approximately $265 million). As for Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), the bank’s strategic shareholder, Mitsubishi UFJ Financial Group (MUFG) from Japan, also expressed its desire to support VietinBank to increase its charter capital by raising its ownership in VietinBank to 50%, instead of nearly 20%.
Indeed, the attractiveness of Vietnamese banks would increase when, from the beginning of 2020, Circular 41 with strict capital safety requirements would officially take effect. That helped Vietnamese banks standardise their operations according to international standards as well as and further improve profitability.
Besides, there was another crucial factor contributing to the attractiveness of Vietnamese banks that the senior official of JP Morgan mentioned in the assessment. It was the fast pace economy growing, while the macroeconomic stability, inflation under control which would also help improve the business activities of banks.
