More on banks - capital needed
/So following on from my post yesterday, there are a few concerns with the banking sector in Vietnam. In some ways its gotten better. Loan-to-deposits are generally low, non-performing loans are coming down (albeit slowly), and returns are improving. That means that building capital is not that hard. Banks could just lower dividends, adding capital organically. Or they could raise more equity, which is easier when you have good results.
But there does seem to be an increasing gap between the state-owned commercial banks (SOCBs) compared to the private ones. Looking at the CAR by type of financial institution. The SOCBs have a CAR of less than 10% (see chart below), and it is very likely that this will fall with the change in the calculation of CAR. Basel II changes the calculation of CAR by making the weighting on some assets different (lower/higher, depending).
But of all of the private banks, it looks like there are a few that meet the Basel II requirements, but even they probably need more capital to grow. Bascially, if a bank is right at that 8% requirement, then they can’t lend out until they get more capital. So even the private banks that are doing well need to get more capital. And to do that, they will need to raise money in the capital market.
Here are some estimates for the amount needed.
Fitch: Vietnamese banks will need USD4.1bn of additional capital, assuming they target a minimum 8% Tier 1 capital ratio and continue to rapidly grow their balance sheets.
These are very high amounts and most banks are not able to source this much from the domestic market. In the case that foreigners need to invest, there are some hiccups. Mainly, the foreign ownership limits (FOLs) are already low. The current limit is 30%. There has been some talk about the government raising it to 49%. Even this higher level would probably not be enough. The IMF says that foreign banks probably want control, which would mean the limit needs to be 51%.
If the Vietnamese really want to upgrade their banking system, and they probably should, they should raise the FOLs to 51% for at least some of the banks. And to 49% for all the banks. Hopefully that will bring in the capital and potentially result in better banking overall (more services, better quality controls, etc).
Of course, I really haven’t thought through what this will mean for the stability of the system as a whole, but long-term capital in the banking system may actually be pretty good for Vietnam.
As of April 2019. Source: State Bank of Vietnam