The story of raising capital of banks, particularly state-owned banks has never become as urgent as it is now, when all four biggest commercial banks simultaneously “called for help” at the conference summarising the banking sector with the prime minister.
In fact, banks’ capital raising story to meet the Basel II requirements in 2020 has been mentioned many times in the last two to three years. When private joint stock banks have made efforts and recorded many achievements in the recent time, typically Vietnam International Commercial Joint Stock Bank (VIB) and Orient Commercial Joint Stock Bank (OCB) which have completed the application of Basel II one year ahead of schedule, big banks except for Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank) are still struggling to increase capital.
The limitation in terms of capital makes banks not only to fail to meet the Capital Adequacy Ratio (CAR) requirement but also hinder business activities because they have to meet a variety of other regulations. Thus, in many meetings, leaders of the above banks and leader of the State Bank of Vietnam (SBV) all expected the State to create conditions to raise capital through distributing dividends in share and lowering the state ownership to less than the current level.
Closing the year 2018, all four state-owned commercial banks reported high profits. Vietcombank’s profit even doubled the sum of profits of its two following banks. Although profit increased, those banks all proposed to increase capital because capital is always considered bank’s vitality.
At the conference on deploying banking tasks in 2019, in addition to the reports of the SBV’s leaders, representatives of some state-owned banks also made reports on business activities in 2018. In particular, a proposal given by all four big banks is raising capital.
Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) is perhaps the most urgent case in terms of raising capital. According to Le Duc Tho, Chair of the bank’s Board of directors (BOD), the Capital Adequacy Ratio (CAR) of the bank is currently close to the minimum prescribed limit and in order to not violate the regulations, in the fourth quarter (Q4) of 2018, the bank had to lower its outstanding loans to the economy to 26.4 trillion dong, making the bank’s credit growth to be only 6.1 percent in 2018.
However, the current difficulty of VietinBank is the limited room left for other investors, including foreign investors, when its state ownership rate is currently only 64.46 percent, even lower than the minimum state ownership requirement in state-owned commercial banks in the period from now until 2020, which is 65 percent.
Increasing capital is also an urgent need for Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) as the bank’s total assets reach nearly 1,283 trillion dong but its charter capital is just nearly 34.2 trillion dong the lowest level among three equitised state-owned banks. The advantage is that BIDV still has a fairly large room for foreign shareholders when the State still holds up to 95.28 percent of the bank’s charter capital. However, BIDV has not been able to raise any charter capital in the last three years, even though every year the bank’s BOD proposed three-four charter capital increasing plans.
In 2016, BIDV and VietinBank proposed to their biggest shareholder the State to change the 2015 dividend payment in cash to in shares in order to raise capital. This proposal was approved by the management agency but later rejected by the Ministry of Finance for the reason of having tight budget.
In 2017, BIDV continued to submit numerous plans, from Employee Stock Ownership Plan (ESOP), offering shares to existing shareholders, paying dividends in shares or conducting private placement for strategic shareholders. However, by the end of the year, no plan was implemented.
Currently, BIDV has found a strategic partner KEB Hana bank from South Korea. Nevertheless, since there are still some obstacles, Phan Duc Tu, BIDV’s Chair of BOD proposed to firstly remove the difficulties in order to complete the deal as soon as possible.
Tu also proposed to develop the stock market as a major long-term capital channel of the economy to meet the demand for investment capital, production and business of enterprises, sharing the long-term capital pressure with the banking system.
For Commercial Joint Stock Bank for Agriculture and Rural Development of Vietnam (Agribank), due to the slow equitisation, the bank’s charter capital is the lowest among four biggest state-owned banks, reaching only 30.770 trillion dong. Agribank’s Chair of the Member Board Trinh Ngoc Khanh said that if Agribank’s charter capital is not supplemented, in 2019, the bank will not be able to meet the minimum CAR, not to mention that it will affect the bank’s reputation and the possibility to expand credit to the economy.
The capital increase of Agribank will probably be closely linked with the equitisation process but this process is also facing many difficulties, of which the biggest difficulty is the issue of business valuation. In addition, according to Khanh, since Agribank is the last 100 percent State-owned bank to carry out equitisation, finding foreign strategic partner is very difficult.
Vietcombank is perhaps the least urgent case as it attained a record high profit of over 18 trillion dong in 2018, up by 63 percent compared to 2017.
In addition, Vietcombank is also one of the first bank recognised by the SBV to have successfully applied the Basel II ahead of schedule.
However, Nghiem Xuan Thanh, Chair of Vietcombank’s BOD still proposed to pay dividends in shares in order to increase charter capital to ensure CAR requirement and also proposed for other state-owned banks to be allowed to increase capital from the fund to support businesses.
The system risk
Continuing to call for help from the government, VietinBank’s head analysed that since the CAR of VietinBank has been at the minimum level since September 2018 until now, VietinBank cannot expand credit, while the capital demand of the economy is growing very large, particularly when the country’s economy continues to improve in the near future.
“If VietinBank cannot develop lending, there will be huge impact on the satisfaction of meeting capital demand of the economy, the partition in funding for important projects of the country thereby greatly affecting the economic growth and the State budget revenue as businesses will face difficulties in accessing credit”, said Tho.
VietinBank’s head said that in the short term bank expects to be allowed to distribute dividends in shares for the year 2017 to 2020, and to be allocated capital for raising charter capital. The bank also expects its profit distribution based on the principle that the bank can retain profit to increase capital or to pay dividends in share if the CAR is not sufficient to ensure the credit growth to support the economic growth under the government’s goals. The cash dividend payment can only be performed when the bank is able to ensure the CAR in accordance with the law.
According to statistics, the CAR of state-owned banks is 9.39 percent, while that of private joint stock banks is 11.34 percent. Since the four state-owned banks account for about a half of the total assets and 40 percent activities of the banking system, if the banking system does not increase, or even fall, the entire system will be at risk.
Therefore, banking and finance expert Nguyen Tri Hieu believed that if the capital is not increased soon and this situation continues, the system will be at risks. The reason is that if complying with the Basel II standards, banks must accurately account fees, etc. bad debts and risky loans will “erode” the equity of state-owned banks. The capital, thus, will even be lower.
Even leaders of foreign banks in Vietnam also see the problem very urgently. Pham Hong Hai, general director of HSBC Vietnam said that the profitability and asset quality of the banking and finance sector have been much improved in the recent time, but capital safety is still a matter of concern.
Hai believed that capital shortage is an increasing risk of Vietnam’s economy in the context when the strategic development plan of the government plan is credit-led. Attracting more investment capital, particularly capital from foreign strategic shareholders is very important in raising capital for state-owned banks. However, this will set an urgent need for reform, such as improving the quality and transparency of books; for solutions to ensure macro-situation to continue reducing bad debts and releasing secured assets.
