Vietcombank and VIB are the first two commercial banks in Vietnam that qualify for capital thresholds in accordance with Basel II.

These are leading banks in terms of quality, managerial capabilities and market share. Vietcombank is a partially State-owned credit institution renowned for quality growth and profit prospects. The trust that market players place in Vietcombank is reflected in its superior market capitalization, as well as price-to-earnings (P/E) and price-to-book (P/B) ratios. Meanwhile, VIB is a rising star among joint stock banks by virtue of its automobile loans and has emerged among the top three banks in life insurance sales. Its retail credit growth is the most stellar in the sector. Vietcombank and VIB are among the first five banks to complete buying back bad debt sold to the Vietnam Asset Management Co. (VAMC). These two banks have received ardent support from strategic foreign shareholders, leading banks in Australia and Japan, in terms of banking and risk management.

Long-term benefits offset rising costs

Apart from Vietcombank and VIB, many banks have unveiled their road maps for Basel II implementation. These include establishing committees in charge of the process, expanding capital and improving systems for risk management, information infrastructure and database management.  The SBV may allow some other banks to apply Circular 41/2016/TT-NHNN over the next few months, ahead of schedule. The active adoption of Basel II standards is ascribed to both the SBV’s requirements and each bank’s internal needs. Just as a healthy diet is crucial for a person’s health, so an approach that reduces reliance on risky sources of income (such as realty, securities and BOT project loans) and increases dependence on sustainable and beneficial factors (such as owners’ equity, medium-term and long-term loans, and service fees) will strengthen a bank. A bank with a high safety threshold and a risk management system that is effective, transparent and consistent with market discipline resembles regular exercise that will enable a bank to cope better with external shocks. Implementing Basel II means banks must deal with more stringent requirements, but they will also emerge stronger in the process.

According to Circular 41/2016 and Circular 13/2018, commercial banks not only need to satisfy capital thresholds but also have to improve their information and data systems, as well as qualitative regulations on risk management and information disclosure. This will speed up the implementation of Basel II but it requires banks to be ready in terms of finance, human resources and information technology. The process will also translate into higher costs for credit institutions.

Although the costs and effort involved in complying with Basel II are substantial, the long-term benefits are clear. Better health and greater resilience in the face of risks will help banks foster sustainable development despite adverse market conditions. A capable bank that meets risk management standards in line with the norms in developed countries will win the trust of clients and partners and, in so doing, succeed in raising revenue, pushing up profit and slashing costs. Basel II also plays a vital role in luring investors in case a bank wants to mobilize more capital.

Road maps: similarities and differences

There are two phases in the implementation of Basel II.

Phase 1: By the end of 2018, 10 banks in the pilot program (Vietcombank, VietinBank, BIDV, MB, Sacombank, Techcombank, ACB, VPBank, VIB and Maritime Bank) must meet the basic requirements of Basel II.

Phase 2: By 2020, commercial banks will have aligned their owners’ equity with Basel II standards, with at least 12-15 commercial banks successfully adopting Basel II (in line with the National Assembly’s resolution dated November 8, 2016 on restructuring the economy in 2016-2020). Completing this road map will be a challenge.

2018 is drawing to an end, but only two out of the 10 banks in the pilot program have received approval in terms of capital thresholds in line with Basel II. Some of the remaining banks have completed preparations while some struggle to mobilize capital. In particular, VietinBank’s foreign stake has hit the limit and there is little room for issuing bonds to further raise capital. In fact, a few banks have to embark on restructuring efforts due to problems that emerge after they have joined the pilot program.

The greatest challenge for the remaining banks lies in enhancing their owners’ equity to ensure capital thresholds in line with Circular 41/2016, in effect from January 1, 2020. Inept banks will face even more problems in meeting Basel II capital thresholds since some of them have negative charter capital (the magnitude can be trillions of dong). For these credit institutions, the immediate goal is to cut losses and restore their capital as set by the law.

The deadline for Phase 1 will be extremely hard to meet. The deadline for Phase 2 may also need adjustments, with differentiation for various groups of banks.

SGT