Bank sector hopes of bolstering capital dashed

Monday, Jul 14, 2014 08:33


At their annual shareholders meetings last year many banks agreed to increase their capital this year to improve their financial capacity and cope with the imminent competition arising out of the banking sector restructure.

Small banks want to become stronger to avoid a hostile takeover by the big players, the larger banks want to have more funds to strengthen their competitiveness.

But the desire has remained just that, with many of the banks failing to achieve their plans to hike capital due to various reasons.

BacABank has been one of the few banks that have managed to increase their capital, and in June duly received approval from the State Bank of Viet Nam (SBV) to increase in capital from VND3 trillion (US$141.5 million) to VND3.7 trillion ($175 million).

Success stories like this have been few and far between.

At its annual general meeting in 2012, DongABank shareholders approved a hike in capital by VND1 trillion ($285 million), and the bank then received approval from the SBV and the State Securities Commission for this.

But, at the end of 2013, when the deadline for the capital hike came the shareholders only contributed VND90 billion to a rights' issue after promising VND700 billion. In April the bank had to abandon its plans to raise capital.

Despite much effort, VietABank has for years been unable to issue 40 million shares to increase its capital to VND3.5 trillion ($164.7 million).

Eximbank faces the same predicament though the capital hike is effected through the issue of bonus shares.

This year some other lenders such as Sacombank and NamABank also have plans to increase capital by VND1 trillion, but are unsure if they can achieve them on schedule.

Economists blamed the banks' failure in their efforts to hike capital on the fact that their shares have recently lost glitter.

The chief of a HCM City-based bank, who did not want to be named, agreed with this assessment, saying that some banks are in the process of restructuring and so have to deploy all the resources available for this and cannot pay dividends – hence their declining attractiveness.

With their share prices and liquidity low – many have receded to below face value – banks are unable to persuade existing shareholders to subscribe to rights issues.

For instance, DongABank's issue was at the face value of VND10,000 while its shares were traded on the Over-the Counter (OTC) market at only VND8,500.

The bank has been hit by low profits and an increasing bad debts ratio.

Analysts said bank shares are no longer popular among investors, who are also unhappy with their lack of transparency.

To regain trust, banks have to carry out the restructuring process efficiently and hope for the economy to recover at the same time.

Bad debts

Despite the efforts of the Government, State Bank of Viet Nam, and banks, the bad debts ratio has risen relentlessly this year, and this is blamed mainly on the ways the banks treat their non-performing loans (NPLs).

According to the central bank, NPLs climbed to 3.74 per cent in January, 3.86 per cent in February, 3.93 in March, and 4.03 per cent in April.

Economists offer various reasons for the rise, especially the fact that companies'business and production plans have been affected by the economic situation, and hence lack the funds to clear their debts. And in this, new bad debts are piling on top of old.

Meanwhile, Circular No.09/2014/TT-NHNN on the classification of bank assets, setting up of risk provisions, and use of provisions against credit risks forces an increase in risk provisioning.

Under this document, which took effect on June 1, banks' investments in corporate bonds are also treated as outstanding debts and significantly increase the bad-debts provisions at many banks.

Vietinbank has corporate bonds that account for up to 8.5 per cent of its total outstanding debts. In the first quarter of this year, the bank's bad debt ratio increased from 1 per cent by late last year to 1.78 per cent because the bank classified their debts to prepare for the implementation of the Circular 09.

To reduce its bad debt ratio, Vietinbank recently decided to sell VND1.2 trillion worth of bad debts to the Viet Nam Asset Management Company (VAMC).

But the VAMC clearly cannot buy up all of the banks' bad debts.

The Asia Commercial Bank, for instance, has VND3.504 trillion ($165 million) worth of bad debts on its books, of which VND2.311 trillion ($109 million) has been identified as irrecoverable debts. But the lender sold only bad debts worth VND423 billion to the VAMC for VND318 billion last year and another VND80 billion this year.

Why did not sell the rest of the bad debts? A VAMC official said that many of ACB's bad debts are not backed by collateral.

Many other banks too come up against this hurdle when trying to sell their bad debts.

FDI dominates electronics

The electronics industry has grown by leaps and bounds in recent years due largely to the foreign-invested sector, and the country is striving to strengthen supporting industries to further bolster the sector.

According to statistics from the Ministry of Information and Communications, exports of phones and phone parts amounted to US$10.6 billion in the January-May period, a year-on-year increase of 30.6 per cent.

The Vietnam Electronic Industries Association (VEIA) noted that the electronics industry has seen steady growth in exports — from US$3.4 billion in 2010 to $20.5 billion in 2012 and $32.1 billion in 2013.

Of the $32.1 billion last year, mobile phones and parts accounted for $21.5 billion.

With Vietnamese electronic companies accounting for less than 20 per cent of the domestic market and 10 per cent of the exports, the robust growth has been down to the sterling performance of foreign companies like Samsung, Canon, Nokia, and LG.

But their value addition is not high and the industry's contribution to the GDP is not commensurate with its contribution to exports.

They make the most of the country's cheap labour and the Government's incentives, and thus their value addition mainly lies in the use of labour and energy.

To increase value addition in the electronics sector, the country needs to develop supporting industries quickly since the competitive edge will dissipate when the labour cost increases. — VNS

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