Basel II is becoming a factor that strongly affects the orientation and operation of banks.
2019 is the deadline for 10 pilot banks including Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Joint Stock Commercial Bank of Industry and Trade (Vietinbank), Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), Military Commercial Joint Stock Bank (MB), Saigon Thuong Tin Joint Stock Commercial Bank (Sacombank), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Asia Commercial Joint Stock Bank (ACB), Vietnam Prosperity Joint Stock Commercial Bank (VPBank), Vietnam International Joint Stock Commercial Bank (VIB) and Maritime Commercial Joint Stock Bank (Maritime Bank) to apply Basel II according to the roadmap of the State Bank of Vietnam (SBV).
So far, only two of the 10 banks mentioned above which Vietcombank and VIB are announced by the SBV to satisfy Basel II standards, joint by another bank not in the pilot list, Orient Bank (OCB).
One of the most important requirements of Basel II is to ensure the minimum capital adequacy ratio (CAR) of at least 8 percent. There are two ways to do it.
The first is to reduce the total risk assets, which is not the prevailing method that can solve the bank’s problem, especially in the context of 2-digit credit growth.
The second method used by many units is to increase equity capital through issuing private shares to strategic partners, existing shareholders or dividends, bonuses by shares.
The countdown starts making banks rush to carry out measures to meet Basel II standards and the SBV is also pushing by showing “favour” to units that completed ahead of time. How to raise capital is said to be the story that will “heat up” the bank meeting this year.
In the past 2-3 years, a number of banks pursuing Basel II continuously increased their chartered capital by the main method of stock dividend stock bonus.
Most recently, despite the Basel II standard, VIB continued to raise capital by issuing bonus shares at the rate of 18 percent, the previous year it paid bonus shares at the rate of 36 percent. Many other banks also do the same like VPBank with 62 percent ratio, Techcombank with the ratio of 1:2, ACB with the ratio of 15 percent, and HDBank with the ratio of 20 percent, etc.
Not many banks have announced specific plans this year but under the pressure of capital increase, the move may continue to repeat. For example, ACB expects to continue paying share dividends after three years of implementation. The bank also plans to sell treasury shares to raise capital. Meanwhile, Techcombank this year is not expected to pay dividends.
For non-state-owned banks, the increase in capital by this way is relatively simple and depends on the minds of major shareholders who are often private individuals or organisations. However, the story is more complicated with State-owned banks.
VietinBank and BIDV, two banks with the most urgent needs in raising capital to improve credit adequacy ratio (CAR), have to pay dividends in cash in two recent years as designated by SBV and the Ministry of Finance in accordance with the collection plan for budget spending.
The above developments put BIDV and VietinBank in a difficult position for many years. While BIDV has recently found a strategic shareholder KEB Hanaa Korean bank to issue 15 percent of its chartered capital separately, VietinBank is still struggling to find a way.
Recently, SBV is seeking the Draft Circular on the purchase, sale and handling of bad debts of Vietnam Asset Management Company (VAMC), which regulates that organisations selling debt for special bonds cannot pay dividends in cash to improve financial capacity and create bad debt handling sources until special bonds are paid.
BIDV and VietinBank are two of the banks that hold large amounts of VAMC bonds with total value of 14.138 trillion dong and 13.426 trillion dong respectively. Thus, the new circular can be balance the request of the Ministry of Finance and SBV.
In the efforts to promote the application of Basel II, SBV is starting to offer incentives to early banks. Recently, the agency said it would prioritise credit targets for banks that perform ahead of time the regulations on CAR, in the overall plan of credit growth of 14 percent for the whole year.
VIB, at the annual general shareholder meeting, approved a credit growth plan of 35 percent. This is the highest number among banks to date. According to the explanation of the Chair of VIB, Dang Khac Vy, the basis for the bank to set this target is the fact that VIB is one of the first three banks to complete Basel II. Vietcombank is also expected to maintain credit growth at 15 percent, higher than the average level.
On the other hand, VietinBank, which is struggling to meet Basel II standards, plans to raise “modest” new credit with growth of only 6-8 percent, lower than in 2018 at 9 percent.
At the conference for summary of business activities in 2018 and business tasks for 2019, Le Duc Tho, VietinBank Chair said right from the fourth quarter of 2018, since SBV has not approved the capital raising plan, the bank’s credit decreased by 26 trillion dong compared to the previous quarter. The failure to solve the Basel II problem caused this bank to be cautious in asset growth, curbing business targets.
The impact of Basel II on banks is getting clearer, from raising capital to doing business. At this year’s shareholders’ meeting season, many questions will wait for bank leaders to respond to shareholders.
