Only about three months to the effective date of Circular 41/2016/ TT-NHNN stipulating the capital adequacy ratio (CAR) for banks and foreign bank branches, and the banks will have to calculate CAR according to Basel II standards with much stricter regulations than before.
To fix the disadvantages of Basel I, Basel II measures risks more accurately and comprehensively. Accordingly, Basel II is based on three main pillars: (1) minimum capital requirements; (2) review and supervision and (3) market principles. Although the CAR is still eight percent as Basel I, but the risk is calculated based on three main factors that the banks face: credit risk, operational risk and market risk.
Not only are requirements more stringent in terms of capital adequacy to absorb risks, Basel II also requires banks to develop their own risk assessment models (pillar 2). At the same time, it must comply with market discipline, through increasing information disclosure of banks (pillar 3).
That is the reason, although all banks (except for weak banks under special control) have CAR ratios higher than the minimum level of nine percent prescribed by the Circular. Circular 36/2014/ TT-NHNN, but so far only 10 banks recognised by the State Bank of Vietnam (SBV) have met Basel II standards. In which, there are only seven banks in the group of 10 pilot banks: Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam International Commercial Joint Stock Bank (VIB), Military Commercial Joint Stock Bank (MBMBBank), Asia Commercial Joint Stock Bank (ACB), Vietnam Prosperity Joint-Stock Commercial Bank (VPBank), Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) and Vietnam Maritime JointStock Commercial Bank (MSB). The remaining three banks not in this group are Orient Commercial Joint Stock Bank (OCB), Tien Phong Commercial Joint Stock Bank (TPBank), and HCM City Development Joint Stock Commercial Bank (HDBank).
According to KB Securities Company, by the end of June 2019, Vietcombank’s CAR was 9.81 percent, VIB (9.2 percent), MBBank (10 percent), ACB (11.7 percent); VPBank (11.2 percent), Techcombank (15.6 percent) and MSB (9 percent). In addition to the above 10 banks, VietBank has now submitted documents to SBV for application of Basel II standards from the beginning of the second quarter of 2019; while many other banks such as ABBank, Kienlongbank, BacA Bank, NCB, Viet Capital Bank and Nam A Bank expect to finish Basel II soon this year. However, so far, management agencies have not been published one more name in the list of Basel II, which is due to the difficulty of raising capital.
Although from the beginning of this year, most banks have set targets to raise capital, but so far only a few banks have realised their goals, such as: VIB increased capital to 9.425 trillion dong; ACB raised its capital to 16.627 trillion dong and ABBank increased the capital to 5.713 trillion dong.
While there are still many banks with chartered capital not more than the legal capital of three trillion dong, such as Saigonbank (3.08 trillion dong); VietCapital Bank (3.171 trillion dong); KienlongBank (3.237 trillion dong); Nam A Bank (3.353 trillion dong); and VietBank (4.19 trillion dong).
Not only small banks but also some big state-owned banks face many difficulties in raising capital. In particular, in VietinBank, because it has run out of room for foreign investors, the capital increase of this bank depends entirely on State shareholders. For many years now, VietinBank has urgently requested to retain profits to increase capital, but has not been approved by the State shareholders and there is no further information.
Because it is difficult to raise capital, there will certainly be many banks unable to comply with Basel II standards by January 1, 2020, not even excluding the names in the group of 10 pilot banks that are supposed to comply with Basel II from the end of 2018. “Even banks that have been recognised to meet Basel II standards cannot be subjective due to the change in CAR, even every hour according to the operation of banks”, a banking expert warned and cited, the fact that many banks saw very high credit growth in the first months of this year, which would bring the CAR down.
In fact, SBV seems to have foreseen this issue, so in the Draft Circular replacing Circular 36/2014/ TT-NHNN stipulating limits and prudential ratios in the operations of credit institutions, the management agency proposes to add the subjects that have not applied in Circular 41 besides the banks under special control. They are the banks that have not met CAR ratio according to Circular 41 and are governed by the SBV Governor on a case by case basis.
“It is a necessary setback because hardening under the old rules will lead to a race to raise capital of banks, pushing up the interest rate level. If capital cannot be raised, banks will be forced to narrow their assets, thus affecting the banks’ ability to provide capital, ” the expert said.
