State-owned banks are out of breath in the race to increase capital

The Government proposes to increase charter capital by more than VND 20,000 billion for Vietcombank – one of four state-owned banks – to meet minimum capital adequacy ratios and support the restructuring of weak credit institutions. The source of increase comes from the bank’s accumulated remaining profits until the end of 2018 and remaining profits in 2021.

In the last half decade, the capital size rankings of banks have had a strong disturbance. The state-owned banking sector, which held the leading position in terms of total assets, loan scale and capital over the previous two decades, was gradually overtaken by the private sector.

In 2018, for the first time, a private bank entered the top 3 in terms of charter capital in the banking industry. In the second quarter of this year, after more than 5 years, the two leading positions belong entirely to this group, with VPBank and Techcombank reaching a capital scale of more than 79,300 billion and more than 70,400 billion VND, respectively. This level is 20,000 billion higher than BIDV – the state-owned bank in the top 3.

The story of increasing capital of state-owned groups has been mentioned for many years, but there has been no satisfactory solution. Increasing charter capital is usually done in three main ways: issuing shares to existing shareholders, issuing private shares or paying dividends. But with state-owned banks, these methods are all problematic. The difference from the rest is that State ownership needs to be kept at a minimum of 65%.

Issued to existing shareholders forces shareholders to buy additional shares according to their holding ratio. If the capital scale increases by tens of thousands of billions of VND, the State needs to contribute a corresponding amount of capital to maintain the ownership ratio. However, budget barriers make this not easy to do. If you do not participate, State ownership will decrease.

The same is true for stock dividends. State-owned banks, which are considered the “milk” of the budget, are under pressure to pay dividends in cash. In the past 7-8 years, there have only been two times this group has been able to increase its charter capital by distributing stock dividends, which are 2021 and 2023, the remaining years are mostly paid dividends in cash. In the period 2016-2018, banks all want to increase charter capital through stock dividends. However, this proposal was rejected by the Ministry of Finance on the grounds of budget constraints.

In the private placement plan, in the state-owned group, VietinBank cannot do it when the State ownership is 64.46% – reaching the minimum level according to regulations (65%). Vietcombank and BIDV still have room as the State holds 74.8% and 80.99% respectively. But for many years, both of these banks have been “stagnant”.

Vietcombank mentioned a private placement for strategic shareholders from 2019, but so far it has not been implemented. BIDV mentioned this plan two years ago, but it continued to be postponed. The analysis team of MB Securities Company (MBS) believes that this year, these capital increase plans cannot yet be implemented. Vietcombank leaders once said that the problem also lies in price negotiation. The issuance price is not lower than the market value and valuation, and strategic shareholders when purchasing will be subject to a one-year transfer restriction clause.

Compared to state-owned groups, private banks have an easier time raising capital. Increasing capital of this group only requires shareholder approval and meeting regulations on ownership limits. As in the case of VPBank, it only took more than two years for this bank to become the leading bank in terms of charter capital. At the end of 2022, VPBank will issue shares to shareholders from undivided profits and funds at a rate of 50%, increasing capital by more than 22,000 billion VND. A year later, this bank issued nearly 1.2 billion shares to strategic shareholder Sumitomo, further increasing capital by nearly 12,000 billion VND.

Similarly, Techcombank, with a “tradition” of not paying dividends to fund large capital increases, has just completed doubling its capital from 35,200 billion to more than 70,000 billion VND in one batch.

In fact, for banks, the size of charter capital is considered a “risk buffer”. This is the component that evaluates a number of operational safety indicators. No capital increase, while credit continues to expand, causes some safety indicators of state-owned groups to remain low, especially the capital adequacy ratio (CAR).

The CAR coefficient is calculated according to Circular 41 of 2016, approaching Basel II standards, with a minimum of 8%. According to the project to restructure the system of credit institutions associated with handling bad debts by 2025, the target CAR of commercial banks in 2023 is at least 10-11%, this rate will be 11-12% in 2023. 2025. However, for state-owned groups, CAR is currently around 9-11%.

Like VietinBank, this bank’s CAR in the most recent three years is about 8.6-8.9%, according to KB Vietnam Securities Company (KBSV). This index for BIDV is more than 9%, while Vietcombank is about 10-11%. Meanwhile, the top private banking group after the recent capital increase reached a CAR ratio of 13-15%.

Facing pressure on capital, the State Bank and the Ministry of Finance recently approved a group of state-owned banks to increase their charter capital partly from retained profits in recent years. This is the most feasible solution that does not affect State ownership.

According to Vietcombank Securities (VCBS), BIDV’s charter capital can increase to more than 70,000 billion VND if dividends are paid and additional shares are issued. VietinBank’s capital scale also increased by more than 11,000 billion if using retained profits in 2022, not including the following years. However, even if these plans are approved, the capital scale of the state-owned group is still lower than that of some private banks, limiting the growth rate of this group.

On the other hand, not raising enough capital while safety ratios are near the minimum level can make it difficult for state-owned banks to achieve ideal credit growth. Like Vietcombank – the leading bank in terms of system-wide profit scale, not increasing capital enough can cause credit and asset growth in the coming years to reach a maximum of around 10%. Not to mention, if dividends are not paid in shares but instead in cash, this bank’s CAR ratio may fall below the minimum level of 8%.

This situation with VietinBank is more serious when State ownership is already at a minimum level, the capital scale can only be improved from dividing accumulated profits or increasing tier 2 capital (additional capital) through the bond channel. Maintaining growth and expanding scale will not be an easy problem to solve.