Risks when banks to not raise sufficient capital
Generally assessing the Vietnam’s banking and finance system in 2019, general director of HSBC Vietnam Pham Hong Hai said that the average Capital Adequacy Ratio (CAR) of the banking sector has gradually fallen over the years when the fast growing bank assets does not go along with the banks’ ability to raise Tier-1 capital.
This issue is even bigger in state-owned banks which hold about 50 percent of the economy’s outstanding credit. Their average CAR as of May 2018 was 9.4 percent, and the minimum CAR may fall below eight percent when the Basel II standards are applied.
A senior leader of the Banking Inspection and Supervision Agency under the State Bank of Vietnam (SBV) said that as of December 31st 2018, the CAR of four state-owned banks was respectively 9.85 percent at Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), 9.65 percent at Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank), 9.02 percent at Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), and 9.54 percent at Commercial Joint Stock Bank for Agriculture and Rural Development of Vietnam (Agribank).
VietinBank has not increased its charter capital during the past three years, and the growth indicators of the bank have been exploited close to the limit, especially credit. VietinBank’s CAR had been at the minimum level from September 2018 to the end of 2018. Therefore, it is understandable when the bank reported the lowest profit in the system of about 6.8 trillion dong in 2018.
While VietinBank’s CAR has reached the minimum limit, the measures to increase equity (including Tier-1 and Tier-2 capital) have been fully exploited to the limits in accordance to legal regulations.
The biggest problem for healthy banks in the next two years is to increase equity to meet the requirements of the State,” said economic expert Dr Le Xuan Nghia.
A senior leader of the SBV admitted that the banking system is under huge pressure in meeting the CAR under the Basel II requirements, especially state-owned banks. He said that capitalising state-owned banks is a priority and may become an existing risk when year 2020 is approaching. If banks are unable to raise sufficient capital by that time, the government may have to inject capital for banks. According to the International Monetary Organisation (IMF), increasing capital for state-owned banks may reduce the Gross Domestic Product (GDP) growth by one to 1.5 percent. However, if capital is not increased, the CAR may fall below the minimum level of eight percent when the Basel II standards are applied in 2020.
The need to open financial market
Dr Nguyen Tri Hieu, an economic expert and advisor of the Board of directors at National Citizen Commercial Joint Stock Bank (NCB) said that in order to raise capital for state-owned banks without using the State capital, the government should open financial market for foreign investors.
Currently, the government still controls the ceiling ownership at 65 percent, which means that the state ownership at state-owned banks is not less than 65 percent, and thus banks still have to rely on the state budget. To call for foreign capital while the State still holds the right to decide, such ceiling limit should be lowered to 51 percent.
“In fact, since state-owned banks are still implementing policies of the government, the control should still belong to the State. In addition, these banks bring significant revenue to the State budget. Therefore, at this time, the government is not willing to sacrifice the decision-making right and income, so the State should consider divesting from these banks in the future,” said Dr Hieu.
Nguyen Xuan Thanh, a lecturer at Fulbright University Vietnam pointed out that the importance to make the banking system healthier is raising capital, thereby improving CAR. However, the increase of capital should avoid previous lessons where capital was not raised by real money but in the form of cross-ownership and cross-investment.
In the end of 2018, the SBV approved the plan to increase charter capital of Vietcombank through selling shares to a GIC investment fund of Singaporean government and strategic shareholder Mizuho. In particular, GIC expected to hold 2.55 percent of the shares calculated according to the charter capital after the deal, and Mizuho would buy the remaining shares to balance and maintain an ownership of 15 percent after the issuance. The State Securities Commission has allowed Vietcombank’s private placement with the first batch of shares for foreign strategic partners.
Not as lucky as Vietcombank, the plan to issue new shares for KEB Hana Bank strategic partner of BIDV has not been completed in 2018 and even if it is completed, the bank still needs to carry out more private placements to continue mobilising capital.
For VietinBank, its strategic shareholder MUFG is waiting for the government to facilitate international financial institutions to invest in the banking sector. MUFG is ready to support VietinBank to increase charter capital to create favourable conditions in business.
“Lack of capital is an increasing risk of Vietnam’s economy in the context when the growth strategy is still mainly driven by credit. Attracting more capital investment, especially from foreign strategic investors, plays an important role in raising capital for state-owned banks. However, this poses an urgent need for reform, such as improving the quality and transparency of books as well as measures to ensure macro security to continue reducing bad debts and releasing secured assets,” said HSBC’s general director.
According to Eric Sidgwick, Country director of Asian Development Bank in Vietnam, Vietnam has a pilot programme for 10 commercial banks to meet Basel II standards by the end of 2020. The SBV allows private commercial banks and foreign investors to buy shares of state-owned banks.
The reform in the banking sector is going strong, in order to reduce bad debt ratio in commercial banks, settle outstanding bad debts, enhance efficiency of commercial banks, and raise the safety ratios that banks must comply with. In addition, the management agency have also strengthened inspection and supervision at commercial banks.
“In general, the Vietnam’s banking sector has been improving, but still needs attention as it is an important part of Vietnam’s finance. Banks may draw more attention and participation from private investors. The question is not only the ownership at state-owned commercial banks but whether the way of operating of those banks with the participation of owners will follow the principles of Basel II or the reform requirements of the management agencies or not,” said Eric Sidgwick.
