In 2018, Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) carried out eight bond issuances. While the bank’s capital raising bottleneck has not yet been removed and it still has to ensure the Capital Adequacy Ratio (CAR) to develop business and preserve market share, the deadline to apply the Basel II standards is approaching.
Last week, the State Bank of Vietnam (SBV) has approved VietinBank’s plan to issue bonds to the public in 2019 with a total issuance face value of 10 trillion dong.
The bond yields are decided by VietinBank, but must be consistent with the provisions of law, ensuring business efficiency and banking operation safety.
Under the approved plan, bond buyers are Vietnamese and foreign organisations and individuals. Notably, the buyers of bonds issued by VietinBank on the primary market do not include credit institutions (CIs), foreign bank branches, subsidiaries of VietinBank and subsidiaries of other CIs.
The exclusion of the above objects is to avoid the situation that CIs raise Tier-2 capital and improve CAR via bonds, as mentioned in the recent report of the State Audit as a limitation.
According to the approved plan, VietinBank is allowed to repurchase bonds in 2019 in accordance with the law; is responsible to use the capital from the bond issuance for the right purpose, ensuring efficiency and operational safety.
Previously, VietinBank had eight bond issuances, including two issuances of ordinary bonds and six issuances to increase Tier-2 capital. The total issuance value was more than seven trillion dong.
By the end of the first quarter (Q1) of 2019, VietinBank had 46.216 trillion dong of valuable papers, 32.165 trillion dong of bonds, and over 14 trillion dong of certificates of deposits (CDs).
High-cost capital mobilisation turnover
According to Circular 41 of the SBV, the deadline to apply the Basel II standards (January 1st 2020) is approaching. So far, seven banks have been approved to apply the Basel II standards. As expected, some banks will also be allowed to early apply the Basel II standards in June. However, VietinBank is not yet on the list.
At VietinBank’s 2019 Annual general Meeting (AGM) held in the end of April, the bank’s Chair Le Duc Tho said that by the end of 2018, the separate and consolidated CAR of VietinBank was respectively 9.6 percent and 10 percent. Nevertheless, if the Circular 41 is applied, the bank’s CAR is below eight percent.
“From 2013, VietinBank’s capital has not increased. The bank has implemented many alternative solutions to improve the risk-weighted assets in accordance with the State regulations and market conditions. In the recent time, the bank has restructured its equity, issued secondary bonds to supplement Tier-2 capital. However, this segment has also been exploited to the allowed level”, said Tho.
Obviously, the need to increase capital of VietinBank is existing and it is now urgent, but the bank’s room to increase charter capital in usual way has been used up. The state ownership at VietinBank has reached the ceiling level (64.46 percent) while the foreign ownership has also been filled up.
Issuing shares to increase capital is almost impossible because the State does not have the plan to spend more budget for commercial banks. The option to retain profits for supplementing capital has not been fully approved by the competent authorities as it is related to budget revenue and expenditure issues.
To ensure the CAR for business growth and market share preservation, VietinBank has to rely on short-term solution and continuously issued bonds to supplement the Tier-2 capital.
In addition to the short-term characteristic, the solution to supplement capital by long-term bonds is creating continuous capital turnovers with high interest rates at VietinBank. Normally, the yields of this type of bonds are much higher than mobilisation rates.
This solution is also limited. As regulated, the proportion of Tier-2 capital shall not exceed 50 percent of Tier-1 capital when calculating balances. If calculating the Tier-1 capital equivalent to the equity of 70.125 trillion dong at the end of Q1 2019, the total Tier-2 capital that VietinBank can mobilise is 35.062 trillion dong. The room to supplement Tier-2 capital has become limited as the bank’s total number bonds with a term of over five years owned by the bank has reached 32.165 trillion dong.
However, the capital turnovers must continue and overlap according to the volume of bonds issued in the previous years. That can only reduce the load if VietinBank’s capital raising bottleneck is removed or the bank must continue to restructure its assets more aggressively such as withdrawing accrued interests and temporarily sending a large amount of debts to Vietnam Asset Management Company (VAMC) like in late 2018.
