Big 4 banks lack billions of dollars in capital needed to maintain 10% CAR
State-owned banks once again want to retain all profits to increase their charter capital. Too thin charter capital is eroding resilience, and is shrinking the market share of state-owned banks.
The pressure to increase capital is so great that since 2016, some state-owned commercial banks have proposed not to pay dividends in cash but by stock to increase capital. However, the proposal has been repeatedly rejected by the Ministry of Finance.
Until January 2022, BIDV, VietinBank and Vietcombank, besides paying stock dividends, still had to pay cash dividends (dividend for 2020) to their shareholders.
Regarding dividends in 2021, only the Bank for Foreign Trade of Vietnam (Vietcombank) has completed paying a dividend of 8% in shares, while the Bank for Investment and Development of Vietnam (BIDV) and the Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) have not announced the dividend rate approved by the State Bank of Vietnam (SBV).
In 2022, the documents of the General Meeting of Shareholders have not been published, but almost certainly, all state-owned banks plan to increase capital by shares.
At the National Conference with State-owned Enterprises (SOEs) last week, Vietcombank Chairman Pham Quang Dung said that currently, the market share of capital mobilization and credit of state-owned commercial banks accounts for nearly 50 percent of the total size of the banking industry, but the total charter capital of state-owned commercial banks only accounts for 23.6% of the charter capital of the entire banking system. Lack of capital leads to a very thin CAR ratio of state-owned banks, which is far behind banks in the region.
Earlier this year, the Vietnam Bank for Agriculture and Rural Development (Agribank) and BIDV also applied to increase charter capital.
“The increase in charter capital is very urgent for Agribank. Currently, there are joint-stock commercial banks with total outstanding loans equivalent to only one quarter of Agribank's, but their charter capital is higher than Agribank’s,” said Mr. Pham Duc An, Agribank Chairman.
The market share of the group of state-owned banks has decreased by 4% in the past four years and is at risk of falling further. Meanwhile, the pandemic shows that state-owned commercial banks are playing a particularly important role in the national financial lifeline. Debt restructuring, interest rate reduction and customer support over the past two years have been mainly thanks to these banks.
According to the plan announced by the State Bank of Vietnam, this year, the State Bank will implement a plan to increase capital for the big 4 banks. Accordingly, it will increase capital from the state budget for Agribank and increase capital from after-tax profits, after setting up funds for the period of 2021-2023 for the remaining three banks.
Vietcombank’s Chairman Pham Quang Dung also suggested that, in the context of difficult budget resources, the Government should allow state-owned commercial banks to use all of their after-tax profits and profit after contributing to funds to increase their charter capital. He once again raised the issue of expanding the foreign capital room to 35%, instead of 30% as at present, in order to enable banks to sell capital to foreign partners to increase capital.
For a long time, paying cash dividends helped the budget have an additional thousands of billions of dong to increase capital. However, if these banks are allowed to pay dividends entirely in shares to increase capital, the budget will lose a significant amount of revenue. However, according to experts, it is necessary to accept a shortfall in revenue for several years to solve the capital stress for banks.
Currently, the CAR of the state-owned banking sector, which has complied with Basel II in Vietnam, is only 9.2%. This is much lower than the 19.4% average for banks in major markets in Southeast Asia. For the whole system, Fitch estimates that Vietnamese banks will need additional capital of up to 10.7 billion USD to ensure loan risk provision to cover possible losses from all problematic loans, while maintaining a CAR at 10%. Of which, the additional capital is mainly in the state-owned banking sector.
Dr. Vo Tri Thanh, a member of the National Financial and Monetary Policy Advisory Council, said that in the past two years, state-owned banks have had to shoulder many responsibilities while increasing risks. Therefore, the pressure to raise capital will be more urgent in 2022; otherwise, it will be difficult for these banks to grow safely and sustainably.