Not only weak banks but also small-scaled banks are waiting for new capital inflows. The problem is still raising capital to upgrade the banks in the future.
Shareholders of Dong A Commercial Joint Stock Bank (DongABank) finally have the opportunity to sit down together at a recent annual general meeting (AGM). The last AGM of DongABank was held in 2015. Shortly after that, the bank was put under special control by the State Bank of Vietnam (SBV), while the case against former banks officials was still ongoing.
In May 2019, DongABank recorded new developments when the SBV assigned new personnel to chair the Board of directors (BOD), general director and Board of Supervisors. The given reason is to strengthen the bank’ operation and risk management after a series of incidents in recent years.
Although the content of the meeting has not been released, at least ones can expect that the opportunities are brighter for weak banks. Previously, there was information that foreign investors have eyed Ocean Bank or Construction Bank. These developments show the urgent need before 2020 the deadline to carry out the Scheme to restructure the system of credit institutions (CIs) associated with bad debt settlement in the 2016 2020 period with the key targets of thoroughly handle bad debts and weak CIs, while the process so far is assessed to be fairly slow by many experts.
In addition to DongABank which is under special control, and three banks including Construction Bank, Ocean Bank and Global Petro Bank (GPBank) which were fully acquired by the SBV, there are still three or four CIs need to be kept an eye on. That is not to mention the other small banks which are self-restructuring themselves under the approved schemes. Those banks certainly will have to self-upgrade them if they want to survive.
For many years, the market has been having about 15 small banks with charter capital of less than six trillion dong, of which nine banks have charter capital of less than four trillion dong. Of course, the small scale in terms of absolute numbers does not mean that these banks lack security (measured by safety ratios), but in the past, the group of small banks used to stir the market when doing differently in terms of deposit rates.
In the recent two years, the market has mentioned many large banks with the pressure to raise capital to meet new operating criteria, but forgotten banks with small-scaled capital size, which are also under significant pressure. The business performance of these banks is not favourable in the context when the competition in the banking sector is becoming fiercer and fiercer. For example, in the audited semi-annual financial statement in 2019 of Viet A Commercial Joint Stock Bank (VietABank) showed that the bank’s after-tax profit in the first half of this year was only 65 billion dong, down by nearly 26 percent over the same period of 2018, partly because the net interest income (banks’ main revenue) declined by 15.2 percent over the same period of 2018.
This number of Bao Viet Bank was just above 10.6 billion dong, down by 42.4 percent over the same period of last year. The outstanding credit of the bank also dropped by 3.1 percent compared to the beginning of the year, reaching 24.650 trillion dong, similar to the size of the total assets.
Another case is National Citizen Commercial Joint Stock Bank (NCB). The bank’s consolidated pre-tax profit increased by nearly 32 percent over the same period of last year, but the main contribution was the decline of provisioning expenses (over 40 percent), while the net profit from business activities before deducting provisioning costs dropped by nearly 31 percent.
In general, in contrast to medium to large-scaled banks which have consistently reported higher profits, small banks’ profits were relatively modest. Moreover, the strategy to compete of small banks currently does not have much difference compared to big banks, only developing retail segment. Some products that medium-sized banks have developed for a long time but small banks have only started to launch to the market.
Nevertheless, the biggest challenge for small banks is the mobilisation source. Some banks with small capital scale has issued certificates of deposits (CDs) with high interest rates. That is perhaps going against the market and has been warned by the management authority. Personnel is also a problem of small banks. In the last few years, senior personnel of those banks has changed continuously. BaoVietBank or An Binh Commercial Joint Stock Bank (ABBank) are recent examples. Obviously, this group needs time to standardise their activities under the stricter requirements. But an important question, which has never been outdated, is where to get the capital to raise charter capital.
DongABank’s AGM is considered as a good signal for the market, not merely for shareholders who have not been allowed to trade shares when DongABank is under special control. It is likely that the coming meeting will discuss the restructuring plan, in which the key content is how to raise sufficient charter capital to continue operations.
Talking to the press many times before, the leaders of the management agency of CIs said that they had submitted to the government the scheme of restructuring DongABank in various plans. Regardless of the plan, real additional capital is required. Shareholders must contribute to this source of capital, or they will lose control of the bank which is having negative equity. Another possible alternative is to merge with another joint stock bank. There were many rumours about DongABank merging with another private bank. After all, DongABank has its own foundation, a large customer base and a brand which has been built over the years in the southern market.
Currently, state-owned banks are in charge of supporting weak banks which were sold to the SBV, such as Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank) is supporting Construction Bank, and Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) is supporting Ocean Bank and GPBank. More positively, private banks can join this task. Their size can be enlarged, but there are challenges in terms of asset quality.
Some bright private banks (which are expecting to scale up, being able to handle bad debts, and having good operating platform) can be named as Vietnam Prosperity Commercial Joint Stock Bank (VPBank), Vietnam Technological and Commercial Joint Stock Bank (Techcombank) and Asia Commercial Joint Stock Bank (ACB). Typical deals many years ago were the merger of Habubank into Saigon Hanoi Commercial Joint Stock Bank (SHB), Mekong Development Commercial Joint Stock Bank (MDB) into Maritime Commercial Joint Stock Bank (MSB), or Phuong Nam Bank into Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank). However, in the recent years, there have been no new deals. Although the management agency has approved in principle the merger of Petrolimex Group Commercial Joint Stock Bank (PGBank) into HCM City Development Commercial Joint Stock Bank (HDBank), the deal has not yet been carried out.
In addition to DongABank, the handling of weak banks is getting more and more noticeable signals. For example, J Trust investors has recently expressed the interest in participating the restructuring of Construction Bank. The transfer and restructuring options have been discussed, with the option of selling 100 percent of capital, but so far have not been finalised.
More notably, the merger in small banks has also had new signals when CMC Group has recently announced to divest all of its shareholding (over 10 percent) in BaoVietBank. There is no reliable information but there is rumour that the new shareholder will be a foreign investor, after a subsidiary of Samsung Group officially owned about 30 percent stake of CMC.
Small banks themselves are difficult to attract capital as they have to compete with big banks which are also calling for capital. In addition, the lack of information transparency and the traditional family-management model also hinder small bank to issue more shares. At this time, many banks from small to large are using their profits to handle bad debts faster (repurchasing debts from Vietnam Asset Management Company (VAMC) to thoroughly and quickly settle market issues.
However in the near future, to develop business and meet the new capital requirements of Basel II, calling for more capital is a must. Thus, even large banks are struggling with capital raising, so it is understandable if small banks draw less attention. In addition, the merger of banks sometimes brings certain advantages, but can also be a burden for the banks which receive the weak bank, such as the case of Phuong Nam Bank and Sacombank. Saigon Commercial Joint Stock Bank (SCB)’s case (a consolidation of three weak banks) is also not a typical model of handling CIs.
Since domestic capital inflows have slowed down for many years, the market is awaiting foreign capital. However, foreign investors always expect higher ownership rate to join more deeply in bank management. The ceiling rate of 30 percent for many years has always been referred to as a barrier which prevents foreign capital flowing into banks. Meanwhile, for weak banks, the negotiation takes even longer time.
Another important development is that the SBV has recently reduced operating interest rates, such as refinancing and rediscount rates. These are interest rates that CIs borrowing the SBV must pay. Report of Saigon Securities Incorporation (SSI) said that this move of SBV is actually to support banks in cutting capital costs, rather than a specific signal about loosening monetary policy. In fact, over the years, small banks have always offer the highest deposit rates in the market, and also made other banks to join the race if they do not want to lose customers. The SBV’s move helps small banks borrow more easily, thereby indirectly stabilise the market in general.
The market is currently waiting for year 2020 which is a milestone for many new important policies for the banking industry, from settling bad debts to balancing cash flows. The deeper international integration requires the game to be changed significantly, and requires bank owners to not only have money but also change their thinking about competition and management.
