Capital crunch clouds Vietnamese banks' stellar half-year profit results

Lenders have been turning to IPOs and bond issuances to plug the gap.

Vietnamese bank earnings ballooned by 64% YoY to $1.53b (VND35.5t) in the first half of 2018 as lenders made headway with their bad debt burdens owing to effective digitisation initiatives and bancassurance tie-ups, reports Biinform Ratings. 

Capital adequacy, however, remains a glaring problem for the country’s lenders despite the boost in profitability as lending still outpaces capital generation. The implementation of Basel II by January 1, 2020 lays bare the massive capital shortfall of almost $20b or around 9% of GDP that Vietnamese banks need to plug to meet regulatory norms, according to ratings agency Fitch.

“Without external capital injections, the Tier 1 capital adequacy will fall to 8% for JSCBs and 6.1% for SOCBs by end of 2019, from 9.4% and 6.9% at the end of 2017,” the firm added.

Also read: Vietnamese banks intensify capital raising activities as Basel II deadline looms

At least 10 banks have announced plans to raise charter capital by at least $1.4b at the beginning of the year through a variety of measures including stock dividends. Some lenders like Ho Chi Minh Development Joint Stock Commercial Bank, Tien Phong Bank and Techcombank have turned to IPOs in an effort to add more funds to their Tier 1 capital.

On the other hand, state-owned banks have been issuing long-term bonds with terms from 5-10 years to weather the capital shortage. BIDV has recently completed its second bond issuance in 2018, adding a total of $18.55m (VND430b) to its Tier 2 Capital whilst Vietinbank issued $104.83m (VND2.43t) worth of bonds. 

However, Fitch warns that their inherently limited expertise in the capital markets field may dampen such activities. “The large size of the Vietnamese banking system relative to its still-developing capital market limits banks' ability to raise capital domestically.” 

 “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.