According to the goal of boosting the restructuring of the banking industry by 2020, besides reducing bad debts, reducing the number of weak commercial banks is required to ensure that 70 percent of banks fully carry out Basel II. However, among ten commercial banks piloted by the State Bank of Vietnam (SBV), only Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam International Joint Stock Commercial Bank (VIB), Orient Joint Stock Commercial Bank (OCB), a bank outside the pilot list, announced to complete the implementation of capital and risk management methods according to Basel II standards.
In fact, it is not that banks do not want to raise capital, they have summited the plan to shareholders for approval in previous general meetings, but it is difficult to carry out.
Meanwhile, according to Circular 41/2016/TT-NHNN, in addition to calculating the required capital for credit risks, banks will need to calculate the required capital for market risks and operational risks that have not been previously regulated. Therefore, the required capital for banks will increase.
According to Fitch Ratings, Vietnam’s banking system needs $20 billion in additional capital, equivalent to 9 percent of gross domestic product (GDP) to meet Basel II requirements. Difficulties in increasing share capital (tier one capital) forces banks to consider increasing tier two capital through bond issuance. A financial and banking expert said that many banks recently issued bonds with two main reasons.
Firstly, long-term bonds can be included in the tier two capital of the bank, thereby increasing equity, improving the capital adequacy ratio (CAR) which is quite low. Secondly, banks have to mobilise more medium and long-term capital because the ratio of short-term capital on medium and long-term loans decreased to 40 percent from the beginning of 2019.
However, the wave of capital increase continues to become a fierce competition among banks due to the large demand and limited resources. In this race, the advantage still belongs to large banks.
Dr Nguyen Xuan Thanh, Development director of Fulbright University in Vietnam, said that in the effort to restructure and deal with bad debts over the past time, banks have improved their profits to prepare resources to handle bad debts. However, it is important for the banking system to be healthier that banks have to increase equity to raise capital adequacy ratio. The capital increase must avoid exceptions, ‘postponing’, and raising capital by cross-ownership and cross-investment.
According to Thanh, in order to ensure CAR ratio according to Basel II standards, the demand for capital increase of banks is very large, especially for state-owned commercial banks. CAR of state-owned banks has reached closely 9 percent. If Basel II is applied, it will drop below 8 percent.
In the past year, most banks have set a plan to raise capital, but so far, only medium and large banks have achieved their goals. According to financial and banking experts, the chance to raise capital of small banks is very narrow. Firstly, the profitability of these banks is low, so the dividend payment by shares does not help the charter capital increase much. Secondly, the information of these banks is less transparent; the share price is too low; thus, the increase of capital through issuing shares is not easy.
That spiral will cause larger differentiation between banks and small banks are likely to lag behind. In that context, Dr Le Xuan Nghia, an economist and financial expert, suggested small banks to consider merge and acquisition (M&A) as a solution to improve competitiveness.
Dr Bui Quang Tin, a financial and banking expert, expected that the SBV would boost credit institutions to carry out M&A on a voluntary basis and become large-scale institutions with better management. That is one of the solutions outlined in Project 1058 on restructuring credit institutions and dealing with bad debts in the period of 20162020 approved by the government. In 2018, M&A in banking sector was relatively quiet. However, this activity may be exciting again.
‘Applying Basel II capital standards is a great pressure, but also a motivation for many banks to merge and grow stronger. A few years ago, governing authority suggested the possibility that the whole system only needs 15 to 17 banks with relatively large scale and strong financial health,’ Tin said.
Financial analysts commented, currently, the number of banks in the system is still large. Proper implementation of the roadmap set out to comply with capital safety standards of Basel II would certainly enable natural selection. Small banks that do not have enough internal resources to meet capital requirements will have to consider a merger plan.
