Paying dividends in shares or in cash, or paying dividends or not, etc. is always a hot issue before the annual general meeting (AGM) of each bank.
For state-owned banks (including Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) and Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV)), dividends are often partly paid in cash and partly paid in shares, because the Ministry of Finance (MOF) always wants to get cash dividends to ensure revenue for the big shareholder (the State). In contrast, the banks’ leader board often prefer to pay dividends in share in order to increase charter capital to meet business requirements.
For the banking industry, in order to expand the size of total assets while ensuring capital adequacy ratio (CAR), increasing charter capital (or equity) from the dividend source (retaining profits not paying dividends, or paying dividends in shares) is the best option. Thus, in recent years, a mixed plan of paying dividends both in shares and cash has been selected.
For the group of private joint stock banks, shareholders are in similar situation, especially when the stock prices do not increase, the requirement to pay cash dividends will overwhelm. Very few banks have the consensus like shareholders of Vietnam Technological and Commercial Joint Stock Bank (Techcombank). Despite attaining very high profit compared to other banks in the system, the bank does not pay dividends most of the years. The retained profit is used to supplement equity, improve operational capacity. Until 2018, after seven years of implementing this policy, Techcombank’s shareholders were surprised by a dividend payment at an unexpected rate of 1:2, certainly still in shares to increase charter capital.
This year, in Directive no.02/CT-NHNN issued on March 31st 2020 on urgent solutions of the banking industry to strengthen prevention and overcoming difficulties caused by the Covid-19 pandemic, the Governor of the State Bank of Vietnam (SBV) requested credit institutions (CIs) to proactively review and cut operating costs, especially salaries and bonuses, to promptly adjust business plans, financial plans to be appropriate with the actual situation before holding the AGM. Particularly, in the immediate future, dividends shall not be paid in cash to focus resources on sharply reducing interest rates on current loans and new loans.
This means that banks will automatically have a source to increase charter capital (if paying dividends in shares) or increase equity (if not paying dividends).
For banks with pre-tax profit reaching up to tens of trillion dong in 2019 such as Vietcombank, Techcombank, Vietnam Prosperity Commercial Joint Stock Bank (VPBank), etc., they will clearly have a large source of capital to supplement the operation this year.
However, it is not enough. Retaining profits to increase capital is a point to mention in 2020, but in addition to this solution, banks are using every possible way to improve their financial capacity. This is a mandatory requirement, because to meet Basel II standards, banks still need to further increase their charter capital.
According to statistics at the end of 2019, the average CAR of four state-owned banks including Vietinbank, Vietcombank, BIDV and Commercial Joint Stock Bank for Agriculture and Rural Development of Vietnam (Agribank) according to Basel I standards was only 9.4%, slightly higher than the prescribed minimum CAR of nine percent. This level is much less than the CAR of private joint stock banks (12.1%) and lower than the average CAR of the entire CI system (13%).
According to Dr Nguyen Xuan Thanh, director of Development of Fulbright Vietnam, if calculating based on Basel II standards, CAR of the above banks will fall below eight percent.
For BIDV, after successfully selling 15 percent of stake to KEB Hana Bank in 2019 to collect over 20 trillion dong of new capital, the bank is planning to sell about six percent of charter capital (after the issuance) but the success of this deal largely depends on the stock price developments.
Vietcombank last year also sold stake to two foreign investors including GIC and Mizuho for 6.2 trillion dong, raising the charter capital to 37.1 trillion dong. It should be added that this charter capital level is just slightly higher than Techcombank’s (over 35 trillion dong) and VPBank (over 28 trillion dong), while Vietcombank’s total asset size is four times higher.
For Vietcombank, in addition to the expected large amount of dividends for raising capital, the bank and VietinBank this year will receive capital from the State. The government has agreed to allocate 10 trillion dong to increase capital for the two banks in 2020.
For the group of private joint stock banks, raising capital from shareholders is achieving positive results because their stock prices have mostly been higher than market prices. Therefore, this year, in addition to the three main channels which are retaining profit, issuing additional shares to foreign partners and divesting capital contributions, raising capital can be a carried out by issuing shares to the public.
At the meeting with investors held recently, VPBank’s leader board said that the bank is discussing in Initial Public Offering (IPO) or a transfer of shares to the strategic partner of FE Credit (wholly owned by VPBank). According to VPBank’s leader, the bank is awaiting approval and expects the plan to be implemented this year. The parent bank of VPBank expects a significant amount of surplus to considerably supplement capital for the bank’s development in the near future.
Similarly, Saigon Hanoi Commercial Joint Stock Bank (SHB) has announced the plan to divest in its finance company (SHBFC) to a major foreign partner. According to SHB, the sale of shares to the major foreign partner is in line with market trend and the current operation of the company under SHBFC’s Establishment scheme approved by the SBV. SHBFC’s charter capital is one trillion dong, the company is 100 percent owned by SHB. Currently SHB has not released the value of the transfer as well as the partner. However, the bank said that it will gain large profit from this deal. Thus, after divesting in SHBFC, SHB will have a large amount of capital to increase charter capital.
Nam A Commercial Joint Stock Bank (NamABank) was also approved by the SBV to increase its charter capital from over 3.890 trillion dong to five trillion dong. Specifically, NamABank will offer 43.9 million shares to existing shareholders, carry out a private placement of 50.3 million shares, and issue 16.76 million shares under the Employee Stock Ownership Plan (ESOP). According to the bank’s leader, the bank also has plan to increase charter capital to six trillion dong, including a sale of capital to foreign investors at a ratio of 20%.
Southeast Asia Commercial Joint Stock Bank (SeABank) has completed the share offering to raise charter capital from 7.688 trillion dong to 9.369 trillion dong. The charter capital of Vietnam International Commercial Joint Stock Bank (VIB) has been increased from 7.834 trillion dong to 9.245 trillion dong. Orient Commercial Joint Stock Bank (OCB) was also approved to increase charter capital from 7.898 trillion dong to 8.767 trillion dong (equivalent to 11 percent increase) via a private offer to foreign investors.
The story of raising capital this year is fairly clear and just waiting for the plans to be submitted to the general Meeting of Shareholders. Some issuance plans perhaps may be adjusted due to the impact of the pandemic, or because existing shareholders are not willing to contribute more, or strategic investors reconsider their investment plans. However, in medium term, raising capital is still an existing pressure for banks. The goal of the banking industry is to complete the application of Basel II by 2025. Therefore, the plans to increase charter capital of banks must be implemented faster to meet this requirement.
