Can Vietnamese banks plug their massive capital shortage ahead of Basel II?

The banking system could face a $20b capital shortfall by 2020.

Although Vietnam is making steady strides to reinvigorate its banking sector, the perennial issue of capital shortages hounding its lenders remains a key point of their structural weakness which is further highlighted by the looming Basel II deadline. 

The implementation of Basel II by January 1, 2020 lays bare the capital shortfall of almost $20b or around 9% of GDP that Vietnamese lenders may need to plug to meet regulatory norms, according to ratings agency Fitch. Moreover, capital raising is expected to slow as a consequence of loan growth outperforming capital production, Moody’s Investors Service said in an earlier erport. 

Banks have been stepping up capital issuance over the past year to improve their capitalisation levels with large banks raising around $1.7b in equity capital in 2015-2017 but are hampered by a lack of depth in domestic capital markets.

“The large size of the Vietnamese banking system relative to its still-developing capital market limits banks' ability to raise capital domestically,” Fitch observed.

Total system assets were more than 200% of GDP at end-2017, whilst the total market capitalisation of the Ho Chi Minh Stock Exchange index was about 45% of GDP. Free-float adjusted market capitalisation was considerably lower, at 15% of GDP, which means that banks would have no choice but to depend on foreign investors as a source of Tier-1 capital, making the 30% ceiling on foreign ownership a challenge, especially for banks near or at the limit like Vietinbank and ACB. 

In fact, Fitch-rated banks alone may need to raise $4.1b in capital which could easily increase to $6.5b if they were to also raise their allowance coverage to 5.0% of gross loans and Vietnam Asset Management Company (VAMC) special bonds from 2.3% at end-2017.

“The capital needs of the whole banking system could be as much as three times larger than that of Fitch-rated banks, which accounted for 40% of total system assets at end-2017,” the rating agency said in a report.