Bank Shares to Fuel Confidence in Local Stock Market

Bank Shares to Fuel Confidence in Local Stock Market

Vietnam currently has only 24 companies listed on the local stock market with a total face value of VND1,178 billion (US$75 million) or total market value of VND3,600 billion (US$229.3 million), accounting for 0.2 per cent or 0.6 per cent of the gross domestic product, respectively. Of the shares, few are regarded as blue chips companies. Could the introduction of high quality bank shares increase the bourse's popularity?

To lay down a legal foundation for joint stock commercial banks (JCBs) listed on the Ho Chi Minh City Securities Trading Centre, the State Bank of Vietnam issued Decision 787/2004/QD-NHNN dated June 24, 2004 referring to temporary regulations for JCBs' listing register and issuance of shares to the public. Under the decision, those which are eligible to float on the stock market are banks that have operated for at least five years, made profits over the past two years, suffered a bad debt ratio of no more than three per cent out of its total outstanding loans in the past two years, been rated 'A' class (the best ranking) by inspectors of the State Bank of Vietnam, and have met several other requirements. 

The criteria are considered relatively strict, since out of the 36 JCBs in Vietnam, only seven meet all the requirements. Administrators, analysts and stock investors have hoped for a long time that the listing of JCBs will make the local bourse more attractive. Stock dealers have a new opportunity to invest in shares worth trillions of dong, most of which are profit-making after their restructuring and pay an annual dividend of more than 10 per cent.

However, several local financial experts say the charter capital of banks is still small, given that the combined charter capital of all JCBs in Vietnam stands at just VND4,000 billion (US$254.8 million), compared to an average charter capital of more than VND1,000(US$63.7 million) of banks in other regional countries. The small capital will make it difficult for JCBs to mobilize deposits. According to prevailing regulations, banks must frequently maintain the proportion of equity of the total asset value at eight per cent upwards. For this reason, the small capital will affect the banks' growth rates.
Banks must raise their charter capital because the bigger the capital, the greater ability they have of withstanding unforeseen difficulties. The larger capital will help banks to compensate for losses, expand business activities, and allow them to apply risky business strategies to seek larger profits.  It also helps consolidate the trust of people in banks, and ensures the compensation for risks faced by depositors.

Another weak point of many JCBs in Vietnam is their poor management, outdated technology and few convenient banking services. JCBs in the country now offer some 300 services, much lower compared to over 2,000 services provided by banks in developed nations. Understanding that advanced technology helps diversify services and enlarge their scale, many banks have recently invested more money in renovatinging banking technologies and have participated in the inter-bank electronic payment system. Services using information technology such as home banking, mobile banking, phone banking and Internet banking have been launched. However, renovating technologies has been conducted by only large-scale banks in major urban areas due to the huge costs. The initial expense for designing software to connect all systems with one another and offering electronic banking services stands at several million dollars. Huge costs pose great difficulties to small-scale banks in Vietnam, especially in the context of international and regional integration. 

Under the Vietnam-US Bilateral Trade Agreement, US banks will be allowed to establish wholly foreign-owned banks in Vietnam from December 2010, instead of only joint ventures with the capital contribution proportion of 30-49 per cent as they do currently. US financial institutions and domestic ones will be treated equally regarding the provision of banking services in the Vietnamese market. Vietnam will not restrict the number of banking service providers, the number of banking services, the total value of banking service-related transactions, and the capital distribution of the foreign elements. Vietnamese banks will, however, face fierce competition, especially from foreign banks operating in the fields of international payment, trade sponsorship and project investment.

However, Vietnamese banks have many advantages over foreign banks thanks to their wide network of representative branches, good traditional relations with customers, a better understanding of their needs and capabilities, and familiarity with the culture and customs of local customers. Therefore, both local and foreign investors have poured large amounts of money into buying shares in JCBs, especially in recent years when the banks have shown a healthy business performance. Foreign entities, including Connaught Investors, Dragon Financial Holdings Ltd., and the International Finance Company (IFC), have held 24 per cent of the Asia Commercial Bank (ACB). The IFC and Dragon Capital are shareholders of the Saigon Commercial Bank (Sacombank) and the IFC has invested US$3 million in Sacombank.

ACB and Sacombank are making necessary preparations for listing on the Ho Chi Minh City Securities Trading Center in 2004. Sacombank now has the biggest charter capital of VND505 billion (US$32.2 million) which is scheduled to increase to VND700 billion (US$44.6 million) this year. It made after-tax profits of roughly VND90.2 billion (US$5.7 million) in 2003, a year-on-year increase of 67.3 per cent, and paid a dividend of 13 per cent. ACB, which reaped pre-tax profits of nearly VND185.5 billion (US$11.8 million) last year, plans to increase its charter capital to VND557 billion (US$35.5 million) some time this year from the current VND481 billion (US$30.6 billion).

• Tri Dung