2 State-owned banks allowed to increase charter capital

Monday, Feb 24, 2020 08:54

The Government has decided to allow Vietcombank to increase their charter capital in the first quarter of this year.— Photo vietcombank

The Government has decided to allow Vietcombank and Vietinbank to increase their charter capital by VND10 trillion (US$434.8 million) in the first quarter of this year, Deputy Prime Minister Vuong Dinh Hue said last month.

But it has not said how they could do so.

Analysts said the Government’s decision was in response to lenders’ insistent demand that they should be allowed to increase their capital.

But the decision to allow Vietcombank to do so has surprised many since just last year it increased its capital by selling a stake to Singapore sovereign wealth fund GIC.

For Vietinbank, the Government’s approval comes as big relief since its capital adequacy ratio (CAR) has been close to the State Bank of Viet Nam (SBV)’s minimum prescription of 9 per cent since the fourth quarter of 2018.

CAR is based on the Basel accords, an international business standard that requires financial institutions to maintain enough cash reserves to cover risks.

It includes two types of capital: tier 1 capital, which can absorb losses without a bank being required to cease trading, and tier 2 capital, which can absorb losses in the event of a winding-up.

Its modest CAR has made it difficult for Vietinbank to contemplate increasing its credit growth rate.

It once even had to reduce its loans outstanding by VND26 trillion to fall in line with the central bank’s CAR norms.

So what are the options for the two banks to increase their capital?

Some industry insiders said they could pay stock dividends to existing shareholders.

The Government’s financial position has improved significantly and so the finance ministry is unlikely to force them to pay dividends in cash as it has in recent years.

Another benefit of this is it would not dilute equity, which disadvantages existing shareholders.

But many experts said it might be preferable and advantageous for both sides for the banks to sell more equity to the Government.

It would cause foreign ownership ratios to fall, enabling the Government to sell more stakes to foreign investors.

Vietcombank is a typical case.

In early January 2019, Vietcombank successfully completed a private placement of 111,108,873 new shares to Singapore’s sovereign wealth fund, GIC Private Limited, and one of Japan’s largest financial services providers, Mizuho Bank Ltd, raising a total of VND6.2 trillion (approximately USD265 million) equity investment.

In particular, GIC purchased 94,442,442 new shares and now owns a 2.55 per cent stake in Vietcombank, Vietnam’s largest bank by market capitalisation. Mizuho purchased additional 16,666,431 new shares to maintain its existing 15 per cent stake in Vietcombank.

After those events, Vietcombank’s ownership ratio at the lender was down from VND77.1 per cent to 74.8 per cent.

Foreign shareholders have significantly contributed to its outstanding performance in recent years.

Last year, for instance, its profit was US$1 billion, or VND23.16 trillion, and its target this year is 15 per cent higher at 26.6 trillion.

According to the current law, foreign ownership of state banks is capped at 30 per cent, but for Vietcombank the rate is now only 17.55 per cent.

Vietinbank is the only State-owned lender that will not be able to make a private placement of new shares since the Government only owns a 65 per cent stake in it, the threshold below which it cannot go.

So if the bank wants to increase its charter capital, it has only two options: issue shares to existing shareholders by paying dividends in stock or sell more shares to the Government.

There is also another intriguing question. If it does, at what prices will the Government buy the shares of Vietcombank and Vietinbank: face value or market value?

Paying the par value would be unfair to existing shareholders, analysts said.

But the market price, especially of Vietcombank, is very high.

It is not going to be an easy decision to make.

Foreign investment a mixed bag for VN economy

According to the General Statistics Office, foreign direct investment in 2019 was worth US$20.8 billion, a 6.7 per cent increase from the previous year.

In December alone a total of $7.1 billion was pledged, and analysts said this was unusual since foreign investors usually stop disbursement at the end of the financial year to close their accounts and seek shareholders’ opinions on the next year’s business plans.

Foreign and local experts have cited many reasons for the large foreign investment inflows in 2019, which allowed the State Bank of Viet Nam to buy $20 billion worth of foreign exchange, increasing the country’s foreign reserves to $79 billion.

But the biggest factor arguably was the US-China trade war. It caused many foreign companies in China, especially American, to relocate their production facilities to Viet Nam to avoid high tariffs.

But not many large foreign projects have been initiated recently, except for a $2.4 billion thermal power plant in Quang Tri province in November by Thailand’s EGATI International Company Limited and Iphone and AirPods assemblers Foxconn, Nintendo and Goertek moving part of their production facilities from China.

New FDI projects averaged investment of just $5 million, most of them from China and in trading rather than production.

According to many analysts, Chinese investors expect to set up projects in Viet Nam, import materials from their country, do some minor work in Viet Nam, and label them as originating in this country to export to third countries.

But Vietnamese authorities discovered that several products like electric bicycles, plywood and solar cells were not eligible for labelling as made in this country.

This means Vietnamese products face a high risk of being slapped with high tariffs in the US if strict control is not exercised.

A lot of the FDI went into mergers and acquisitions in the real estate sector, a high-risk area and one in which the Government does not want to encourage investment.

Besides, a large amount of money coming into the economy in a short time seemed to drive consumer prices up.

The inflation rate was 5.2 per cent year-on-year in December, up from 3.5 per cent in November, and even higher at 6.43 per cent in January. —VNS

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