Foreign fix to banks’ capitalisation ails

A string of Vietnamese banks, particularly state-owned lenders, are facing capital shortfalls but upcoming tie-up deals with foreign investors could give the financial sector some much-needed momentum.

1495p21 foreign fix to banks capitalisation ails
A batch of major banks in Vietnam face gaps in succeeding with attempts to gain Basel II standard status. Photo: Le Toan

Vietnamese lenders will likely run into choppy waters in raising external capital. They have a 30 per cent foreign ownership limit, which constrains efforts to raise equity from overseas investors and makes them reliant on capital issuance in the shallow local market.

Previously, the Vietnamese government rolled out plans to allow state-owned lenders to pay dividends in shares or retain dividends in a bid to accumulate capital and meet regulatory minimum capitalisation thresholds.

However, thin capital buffers still ail several major banks. According to global rating firm Fitch Ratings, should Vietnamese banks continue to make timely provisions for newly impaired loans, some Fitch-rated local banks may fall up to $2.5 billion short of Basel II requirements. Basel II provides guidelines for calculation of minimum regulatory capital ratios and confirms the definition of regulatory capital and an 8 per cent minimum coefficient for regulatory capital over risk-weighted assets.

State-owned banks are expected to face the largest gap. For example, by late March, Agribank’s capital adequacy ratio (CAR) was only 6.9 per cent, which failed to meet the minimum requirement of 8 per cent. Needless to say, Agribank is now falling short of the large capitalisation stipulated by Basel II for 2019-2021.

“Despite being a wholly state-owned lender, Agribank has not increased its charter capital in the past nine years, which made the CAR plummet below the industry standards. The bank needs an injection of VND3.5 trillion ($152.2 million) from the Vietnamese authorities in 2020,” said Nguyen Thi Phuong, deputy general director at Agribank.

Likewise, VietinBank seems to have been bogged down in its struggle to reach Basel II. Earlier this year, the International Finance Corporation (IFC) reduced its shares in VietinBank from almost 6.49 to 4.99 per cent.

At its latest general annual shareholder meeting, VietinBank signalled ambitions to preserve capital by only offering stock dividends this year, while reinvesting all profits into operations after paying taxes and setting aside the obligatory reserves for capital supplementation (5 per cent), financial reserves (10 per cent), as well as bonus and welfare funds.

“VietinBank has agreed with the government and relevant ministries to add its earnings from 2017-2018 to its charter capital. The bank awaits amendments from state capital investment to clear legal hurdles before increasing paid-in capital,” noted Harrison Kim, head of Equity Research at KB Securities.

In past years, stronger profitability and internal capital generation, amidst a benign economic environment, have helped some banks to raise their capital ratios recently. However, internally generated capital tends to be depleted by rapid credit growth, and many banks have resorted to issuing local tier-2 instruments to bridge the gap.

 

Surging overdue loans from the pandemic-induced economic fallout threaten Vietnamese banks’ earnings and capital accretion momentum, with many banks likely to face capital shortfalls should the weak economic conditions persist. Increased slack in the labour market is also putting mounting pressure on the quality of banks’ assets and profitability, especially given the rapid growth of the retail and consumer banking segment in recent years, Fitch Ratings said.

Looking on the bright side, many foreign lenders have expressed their eagerness to jump on the local bank bandwagon. The EU-Vietnam Free Trade Agreement (EVFTA) and the EU-Vietnam Investment Protection Agreement are set to amplify European giants’ presence in Vietnam. After the trade deal comes into force, Vietnam will lift foreign ownership limits at local banks to 49 per cent in the next five years, with the exception of the four joint-stock commercial banks in which the state still holds a controlling stake.

Experts stated that some private lenders could gain the upper hand thanks to the EVFTA, such as Techcombank, ACB, VIB, or VPBank. Fortunately, these lenders have satisfied Basel II requirements, while still possessing strong retail banking arms and reporting upbeat performance. Some high-profile names from the European continent include BNB Paribas, Standard Charted, HSBC or Societe Generale SA, which also stand to see tailwinds from the deal.

Vuong Dinh Hue, Secretary of the Hanoi Party Committee, said that 100 per cent foreign-owned banks would not be allowed to be established in Vietnam from 2020. Thus, mergers and acquisitions (M&A) seems to be the most feasible way for foreigners to enter the Vietnamese financial sector. Hue also encouraged strategic tie-ups between overseas investors and distressed local lenders, such as GPBank, Construction Bank (CBank), or OceanBank.

Japan-based J Trust Group has revealed intentions to partner with CBank in 2019, while Singaporean private investment group Clermont Group has expressed keen interest in the emerging Vietnamese financial segment. MARUHAN Group, a Japanese conglomerate which has broadened its banking subsidiaries in some Southeast Asian countries, has also been paying attention to Vietnam. Recently, commercial lender Ocean Bank was mulling the sale of 11 per cent of its charter capital to Japan-based Aozora Bank Ltd., which is listed on the Tokyo Stock Exchange with around $3.16 billion of market capitalisation.

DGB Financial Group, a listed South Korean banking holding company, applied for a license in Vietnam last December, to prepare for extending its reach to the country, after hitting Cambodia and Laos.

“We are looking for opportunities in Vietnam the way Shinhan Bank did,” said DGB’s representative, adding that there are a lot of cultural similarities between South Korea and Vietnam – which is one of the reasons why the group is seeking to launch services here. VIR

Celine Luu

VN banks upbeat about charter capital hike in 2020

VN banks upbeat about charter capital hike in 2020

Banks, especially State-owned banks, are expected to increase their capital significantly this year as they are allowed to retain profits or pay dividend in shares instead of cash as previously.

Local banks expect credit growth extension

Local banks expect credit growth extension

Many commercial banks are proposing the central bank to extend credit growth limits as they have nearly reached the allowed threshold.

 
 

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