Credit Growth Is Tough for Capital-Short Lenders in 2019

2:29:26 PM | 7/3/2019

As all banks have to apply the Basel II capital adequacy ratio (CAR) in 2020, they will not be able to provide credit when their CAR reaches the limit if they cannot raise their capital base. However, capital shortage is still a tough issue for banks since capital increase is a challenge for big lenders.

Unsolvable vicious spiral

While private joint stock banks like MB, VPBank, Techcombank, OCB and VIB achieved enormous successes in capital increase, State-run banks (except for Vietcombank) have faced difficulty in this work. Therefore, capital constraints not only make banks unable to meet CAR requirements but also hinder business operations because they have to meet a variety of other operation regulations.

Dr. Tran Du Lich, Member of the Prime Minister's Economic Advisory Group, said, the targeted credit growth of 14% in 2019 matches economic performance as lenders face no credit growth pressure from demand stimulus as before. However, funding needs to be controlled, particularly for non-manufacturing sectors like real estate, to limit bad debt risks. For Vietnamese banks, the first and foremost conditions are management capacity, financial capacity and progress towards Basel II standards.

Mr. Le Duc Tho, Chairman of VietinBank, said, the bank’s CAR has reached a minimum, enabling it to boost lending since September 2018. Its credit growth was just 6.1% in 2018. In the fourth quarter, the lender witnessed a decrease of more than VND26 trillion because it could not raise the capital. This is also one reason for this bank to revise its business targets and reduce profit targets in 2018. VietinBank earned over VND6,800 billion of profit before tax in 2018, leaving the Top 5 profit earners in the industry.

VietinBank has actively adopted consistent measures to increase equity but its measures have reached the limit. The State interest has been at a minimum (64.46%) and foreigners’ interest has peaked at 30%. Therefore, in order to improve its financial capacity and ensure capital sources for business growth to support economic growth and meet CAR requirements, VietinBank needs a permit from the Government to raise its registered capital. Its foreign strategic shareholder, MUFG Bank of Japan, stated that it is willing to support VietinBank to raise the capital. Given the urgency of capital increase, the lender has paid stock dividends from 2017 to 2020.

Vietcombank targets credit growth of 15% and an ambitious pre-tax profit of VND20 trillion in 2019. But, the lender must attempt to raise capital to raise CAR and expand credit first.

BIDV also sought to remove foreign ownership constraints to complete share sales soon. The bank got the green light to sell its stake to KEB Hana Bank of South Korea to raise capital. In 2018, its credit growth was 14%, lower than previous years.

Besides, its bad debt hindered its effort for capital expansion while limited financial capacity restrained it from handling bad debts. This is a vicious spiral for banks in 2019.
According to former Governor of the State Bank of Vietnam (SBV) Le Duc Thuy, investors are reluctant to invest in banks partly because of their bad debt burdens. This has hindered them from capital expansion. Besides, the cross ownership in the banking sector has not been handled completely. “Banks controlled by business groups will not focus on capital for major causes of the nation like industrialization, modernization or development targets. The National Financial Supervisory Commission (NFSC) should give a warning against this issue as it is also the biggest obstacle to banking governance reforms when only a few banks do well and most are caught into hardships as a result of cross ownership,” he noted.

What is the way out?

According to Mr. Nguyen Xuan Thanh from Fulbright University Vietnam, the concern of the banking system is capital expansion, not bad debt, because strong financial capacity will kill bad debts. When a bank has abundant fund and meets Basel II standards, the SBV should loosen the credit quota to an extent that fits its capacity. Otherwise, its credit growth will be squeezed. This will be a driving force for banks to increase their owner’s equity.

In addition, according to banking expert Le Xuan Nghia, operating costs currently account for 14-20% of bank’s total cost, much higher than in other countries in the region with less than 14%. To lower costs, credit institutions must focus on technology solutions and digitalize from training and management to control processes and credit operations, particularly in services. Instead of going directly to banks, customers can perform transactions right from their home, thus reducing time and costs for both banks and customers.

Mr. Thuy added that digitization is the only way for the banking industry to improve its profitability and quickly have additional equity sources to meet Basel II standards. Nevertheless, currently, only a few small private banks are starting to adopt digital technology, but they are just entering the digital environment rather than commercial banking businesses. For the time being, banks are trying to seek permission for opening new branches and employees while paying little attention to reducing staff and enhancing digitalized governance. Currently, no bank in Vietnam has fewer than 1,000 employees, making payrolls a big sum of costs.

Mr. Phan Duc Tu, Chairman of BIDV, said, the stock market should be further developed to become a major long-term funding channel for the economy and for companies to ease funding pressure for banks.

Quynh Anh