Vietnamese banks to raise charter capital from retained earnings

Several commercial banks in Vietnam are using retained earnings to raise their charter capital as the deadline for applying Basel II norms draws near.

The capital hike plans of local banks have made headlines at this year’s annual general meetings.

Last month, the Vietnam Prosperity Joint Stock Commercial Bank (VPBank) and Military Commercial Joint Stock Bank (MBBank) received the State Bank of Vietnam’s approval to raise their charter capital. VPBank could raise it to VND25.3 trillion ($1.11 billion) from the current VND15.7 trillion ($690 million). MBBank was allowed to raise its charter capital to would see its capital to more than VND21.6 trillion ($950 million) from VND18.2 trillion ($800 million).

The two lenders plan to raise equity by issuing shares for dividend payments as well as bonus shares from their retained earnings and reserves.

These are not the only banks resorting to the use of retained earnings to raise capital from owners’ equity.

Shortly after its market debut on Monday, Techcombank announced that it would hold an extraordinary meeting to seek shareholders’ approval to increase its capital to VND35 trillion ($1.5 billion) from VND11.7 trillion ($515 million).

Earlier this year, Saigon Hanoi Commercial Joint Stock Bank (SHB) issued nearly 84 million shares to pay dividend to its shareholders and raised its capital by VND900 billion ($40 million) to VND12 trillion ($527 million). It is seeking to increase its charter capital to more than VND13.2 trillion ($580 million) by the end of this year.

Local credit institutions are now under great pressure to hike capital to keep their capital adequacy ratio (CAR) from falling below the minimum level stipulated by the SBV, which is in line with Basel II standards.

The capital adequacy ratio (CAR) is the ratio of a bank's capital to its risk-weighted assets. SVB has required all commercial banks to maintain a CAR of at least 8 percent by 2020, when the capital and risk management methods under Basel II norms will apply to he whole banking system.

But raising equity is not an easy task for local banks given the fact that foreign investors have been losing their appetite for them for several years now, given foreign ownership limits and hassles in negotiating the deals.

Vietcombank, for example, has not been able to complete the transfer of a 7.7 per cent stake to Singapore’s sovereign wealth fund GIC though the deal was closed in 2016.

Another reason is that the banking sector had gone through a tough time a few years ago. Its poor business performance together with a high level of non-performing loans had dragged down banking stocks, making shareholders more cautious about investing in them.

In this situation, using cumulative earnings to raise charted capital is a more likely choice. Bank owners prefer this as their cash is kept at the banks and is on hand for other investments.