Vietnam Banking Report 2018: Amidst earnings announcement, concerns about capital adequacy remains

Vietnamese banks have been seeing positive news, one after another. Over the first half of 2018, the sector witnessed VND 35,524.84 bn, or USD1.53bn in net profit, equivalent to 64% of the previous years’ income. Thanks to improved financial efficiency, progresses made in bad debt resolution, effective digitization and thriving bancassurance partnerships, bank stocks have become attractive again. By September 2018, the sector saw its stock price performance rising by 22% since the start of the year.

Click here to explore full Vietnam Banking Report 2018 

In August 2018, Vietnam earns an upgrade in sovereign rating, from B1 to Ba3 at Moody’s and from ‘BB-‘ to ‘BB’ at Fitch, thanks to strong fundamentals, healthy export incomes, growth potential and lowering government debt levels. In tandem, 14 banks also got their credit rating upgrades at Moody’s. Overall, banks have come back stronger in 2017 and are looking forward to an equally rewarding 2018.

Amid the cheers, words of caution were voiced. The problem of capital adequacy remains and with the ongoing strong credit growth, is getting worsened. In 2017, only six out of 14 banks managed to raise their charter capital by USD613mn (41% of planned). According to Moody’s, given the current credit growth, Vietnamese banks will need an approximate additional US$7-9bn to ensure Tier 1 capital ratios at 11% in 2018 and 2019. Without external capital injections, the Tier 1 capital adequacy will reduce to 8% for JSCBs and 6.1% for SOCBs by end of 2019, from 9.4% and 6.9% from the end of 2017.

Most banks had their CAR reduced by 1-2% in 2017 ...

... after a period of strong credit growth in 2017

Source: StoxPlus

To comply with the government’s plan to be Basel II compliant by 2020, in 2018, banks continue to devise plans to raise Tier 1 and Tier 2 capital. At the beginning of 2018, 10 banks have announced plans to raise their charter capital by at least US$1.4bn.

In order to keep in retained earnings, banks managed to increase their charter capital by giving out stock dividends.  This is to continue the string of years as banks pay stock dividends and bonus shares, trying to keep as much cash in-house as possible. Given the performance of banking stocks in the past year, shareowners are just as happy to receive the additional shares as well as receiving cash dividends.

However, while stock dividends and bonus could only move funds from treasury shares to charter capital keeping Tier 1 capital intact, ESOP and new common shares issued could increase Tier 1 capital. In the first months of 2018, several banks all had their IPOs, taking advantage of the bullish stock market to add more fund to their Tier 1 capital, such as HDB, TPB, and TCB.

 

Banking sector’s 2018 Plans to increase capital

Meanwhile, issuing stock dividends and having IPOs are not a case for State Owned banks- VCB, CTG and BIDV. Although these banks have been petitioning to pay dividends in stocks rather than cash since 2015, with the national budget in deficit, the Ministry of Finance has been asking the banks to pay dividends in cash to contribute to the national budget. The story continues in 2018 when VCB announced its dividends payment in cash in early September, with CTG and BIDV expected soon to follow.

Given the tight situation, SOCBs have been issuing long-term bonds with terms from 5-10 years to maintain its capital adequacy levels. BIDV has recently completed its second bond issuance in 2018, adding a total of VND430bn, or US$18.5mn to its Tier 2 Capital. Vietinbank issued VND 2,435.10bn worth of bonds, or US$105mn addition to Tier 2 Capital.

This method also has its restrictions, as Tier 2 capital cannot be higher than Tier 1 capital. While Tier 2 Capital has been inching up since the last quarter of 2016, it is bound to hit the Tier 1 ceiling soon.

Banking Sector’s Capital Raising Results (VNDbn)

SOCBs’ Capital Raising Results (VNDbn)

The situation for banks’ capital adequacy in Vietnam, especially those of SOCBs, continues to be a difficult story without the support the Government. To meet the Basel II compliant deadline of 2020, the banks need to seek capital from external sources, be it from the Government’s budget itself, from being allowed to retain their cash earnings, or from overseas injections. To get more up to date information on the banking sector as well as its key issues and trends, please go to our report at http://bit.ly/VNbankingreport2018.

Dung Vu

« Go Back