It is the bank shareholders meeting season, and topping the agenda, besides the dividend payout ratio, is increasing their regulatory capital. 

Viet Nam Prosperity Joint Stock Commercial Bank (VPBank) has disclosed plans to issue nearly 329.4 million shares for VND1.4 trillion this year to increase its capital to over VND14 trillion ($622 million).-

On April 15 Techcombank announced it would hike its charter capital by VND5 trillion (US$220 million) to nearly VND14 trillion ($616 million) this year by selling more shares.

Ho Hung Anh, its chairman, said the higher capital is needed to improve financial strength and competitiveness.

Viet Nam Prosperity Joint Stock Commercial Bank (VPBank) has disclosed plans to issue nearly 329.4 million shares for VND1.4 trillion this year to increase its capital to over VND14 trillion ($622 million).

The money would be used to ensure the bank’s business activities are well funded and also help meet various ratio requirements, a spokesman said.

Banks have also been issuing debt instruments like bonds and certificates of deposit that make up their tier II capital.

Vietcombank and ACB, for instance, successfully issued 10-year bonds last December to raise VND2 trillion and VND3 trillion respectively.

In February and March this year Sacombank and Nam A Bank issued certificates of deposits for seven years.

But analysts said despite their efforts banks would find it very difficult to increase their capital, with bad debts remaining the biggest hurdle, causing apprehension in the minds of investors about putting their money in banks.

Not long ago three struggling banks were bought by the State Bank of Viet Nam (SBV) for zero dong.

Other banks have been placed under the SBV’s control to manage possible risks and prevent the erosion of their assets because their bad debts are almost equivalent to shareholders’ capital.

Why are banks looking to increase their capital at this difficult juncture?

The answer lies in the series of new regulations issued or to be by the central bank to improve banks’ health.

One of them is a road map for reducing from 60 per cent to 40 per cent the maximum ratio of short-term deposits that can be used for medium- and long-term loans. The 60 per cent ratio will remain unchanged this year before being reduced to 50 per cent next and 40 per cent in 2018.

Some 85-90 per cent of banks’ deposits are short-term (up to 12 months), while long-term loans account for 65-70 per cent of the total.

In this scenario a sudden decrease in the ratio of short-term funds used for medium- and long-term loans would cause an increase in loan interest rates and hit credit growth.

The SBV has issued a circular in preparation for the adoption of BASEL II standards by the banking system.

It says banks must have a capital adequacy ratio (CAR) of at least 8 per cent by 2020. CAR is the ratio of capital to risk-weighted assets.

As of last December, the average ratio stood at 12.8 per cent.

To be able to adopt Basel II standards, banks would have to increase capital as their capital adequacy ratio (CAR) would reduce.

This is because the capital requirements are stringent and the assets they have are risk-weighted, meaning the riskier the assets, the greater value they are assigned.

Lenders like BIDV, for instance, which has a CAR of around 9 per cent, would definitely have to increase their capital.

It goes without saying that increasing the capital will also help the banks improve their lending ability. 

Analysts believe the banks’ effort to increase their regulatory capital is the first step in preparing for a new period of development.

VNS