Moody’s Investors Service has said that Vietnamese banks will face capital shortfalls over the next 12-18 months and that such a situation continues to represent a key credit burden for the industry.

The SBV headquarters

“The banks’ rapid loan growth rates will widen their capital gap, according to our baseline scenario of robust economic growth in Vietnam over the coming 12-18 months,” said Ms. Daphne Cheng, a Moody’s analyst.

Moody’s also estimates that at end-2016, Vietnam’s banking system had a total capital gap of $9.5 billion, representing 4.6 per cent of GDP.

It defines the gap as the amount of external capital needed for banks to replenish their Tier 1 ratios back to 8 per cent after they utilize their balance sheet reserves to absorb expected losses on impaired loans, and at the same time take an up-front write off on all Vietnam Asset Management Company (VAMC) bonds, which banks receive by swapping out their non-performing loans.

Moody’s predicts that that the system could see a capital shortfall ranging from $5.1 billion-$6.1 billion by end-2017, representing 2.5-3 per cent of GDP.

In such a situation, and absent external capital injections, Moody’s-rated Vietnamese banks’ Tier 1 ratios would fall to an asset-weighted average of 6.1 per cent by fiscal year ending December 31, 2017, from an asset-weighted average of 7.8 per cent in fiscal year 2016.

“The banks’ capital generation capacity is weak, because of the system’s modest net interest margins, low fee income contribution, and still-substantial provision charges,” Ms. Cheng added. “Under these circumstances, it will take several years to replenish the system’s capital shortfall through internal capital generation.”

Moody’s points out that the banks’ capitalization profiles have continued to deteriorate. For example, at end-2016, Moody’s-rated banks reported an asset-weighted average Tier 1 ratio of 7.8 per cent - under Basel I - from 8.5 per cent at end-2015 and 10.7 per cent at end-2013.

In a move to adopt new prudential regulations issued by the State Bank of Vietnam (SBV) to improve banks’ health, Vietnamese banks, whether large or medium-sized, have had plans to increase their charter capital during 2016-2017, either via additional issues of bonds, shares, or certificates of deposits.

In May 2016, the SBV issued amendments to its 2014 circular regulating prudential ratios for credit institutions. The new rules raised the risk index of receivable lending for real estate and securities from 150 per cent to 200 per cent; well below the 250 per cent that was originally proposed.

A second, concurrent circular from 2016 issued regulations to taper down the maximum ratio of short-term funds that can be used for medium- and long-term loans, from 60 per cent to 40 per cent, with the ratio cut to 50 per cent from January 1, 2017, and to be cut by another 10 percentage points at the start of 2018.

An SBV circular in preparation for the adoption of Basel II standards by the banking system stated that banks must have a capital adequacy ratio (CAR) of at least 8 per cent by 2020, added to an increase in charter capital.

Moody’s projects that real GDP growth in Vietnam will average 6.4 per cent in 2017 and 2018, up from 6.2 per cent in 2016, with loan growth at 26 per cent in 2017 and 2018, in line with growth seen in 2016.

On April 15, Techcombank announced it would raise its charter capital by VND5 trillion ($220 million) to VND13.88 trillion ($611 million) this year by selling more shares. Chairman Ho Hung Anh said the capital increase is needed to improve its financial strength and competitiveness.

The Hanoi-based VP Bank has disclosed plans to issue nearly 329.4 million shares for VND1.4 trillion ($61.6 million) this year to increase its charter capital to VND14.06 trillion ($619 million). The money will be used to ensure the bank’s business activities are well-funded and also help meet various ratio requirements, a spokesman said.

Vietcombank and ACB, meanwhile, successfully issued ten-year bonds last December and raised VND2 trillion ($88 million) and VND3 trillion ($132 million), respectively. In February and March this year, Sacombank and Nam A Bank issued certificates of deposits for seven years.   

VN Economic Times