Vietnamese Banks Advancing toward Basel III Standards

8:59:05 AM | 9/7/2023

In September 2018, Fitch Ratings released a report highlighting that the Vietnamese banking system might lack about US$20 billion of capital to meet Basel II standards. However, a majority of commercial banks in Vietnam have now passed the requirement.

Basel III risk management standards help banks improve their capital capacity and test their resilience in worst-case scenarios to better manage liquidity risks

Decade-long value growth

With about VND450 trillion (US$20 billion), at the reporting time of Fitch, the total equity of the banking system was only around VND800 trillion (US$35 billion). In the report released on March 31, 2023, the value was approximately VND1,600 trillion for banks that applied Circular 41 ( issued by the State Bank of Vietnam, which provides guidelines on the application of Basel II standards for capital adequacy ratio calculation for commercial banks).

The capital scale doubled after five years, showing the strong growth of Vietnamese banks, especially in private joint stock commercial banks. This comes from the internal resources of members but there is very deep diversity.

Before the 2028 report was released by Fitch, in late 2017 and early 2018, Ho Chi Minh City Development Commercial Joint Stock Bank (HDBank) made an important milestone in the system: The second largest successful IPO of US$300 million in history, just after the biggest deal made by Vietcombank a decade earlier (in 2007).

HDBank’s milestone was important because it marked a large flow of IPOs launched by Vietnamese banks, followed by Techcombank, Vietcombank and BIDV. This series of IPO deals brought in a huge surplus value, enabling banks to boost capital requirements to meet Basel II standards.

The Vietnamese banking system has made impressive strides in the past five years, with strong profit growth fueling an impressive series of capital increases. The profit was added to capital strength, according to the dividend policy directed and approved by the State Bank of Vietnam (SBV). Previously, the profit of banks was dispersed through the cash dividend policy. In the past decade, the SBV required banks to pay stock dividends, thus helping banks add capital strength.

That dividend policy might not meet the aspirations of some investors and shareholders when they wanted cash, but it helped the banking system to accrue great resources and great value to boost banks’ internal strength and reach Basel II and even higher standards. And, when this target was achieved, the SBV allowed some banks to return cash dividends to their shareholders, like HDBank, VIB and MB.

HDBank has successfully completed the comprehensive implementation of Basel III Reforms 

Stress tests

When Vietnam’s first commercial banks achieved Basel II, Dr. Nguyen Tri Hieu, a financial expert, said: “This is good for depositors because they can be sure that banks have higher credit rating and better capital adequacy - an internationally recognized standard for banks.”

A large-scale test came as soon as banks passed Basel II. The crisis of the COVID-19 pandemic hit, with far-reaching and long-lasting impacts on banks. Adversities continued to come. Turmoil on the corporate bond market, interest rate changes and exchange rate fluctuations posed renewed challenges in 2022.

Vietnam’s commercial banks have been deeply differentiated after adversities. Many members witnessed declined profit, increased bad debt, and slowing capital accumulation. However, some lenders continued to affirm their resilience and strength in business and moved toward a new level: Basel III.

On July 24, HDBank announced that it had completed the comprehensive implementation of Basel III Reforms. Currently, some Vietnamese commercial banks have also started to apply this standard, aiming for comprehensive implementation.

Basel III is not mandatory in Vietnam like Basel II which was stipulated in Circular 41. However, this is a goal for capable and pioneering banks. Basel III risk management standards help banks improve their capital capacity and test their resilience in worst-case scenarios to better manage liquidity risks.

More impressively, some Vietnamese banks have progressed to comprehensive Basel III amid an unfavorable context and conditions, impacted by the COVID-19 pandemic, global market uncertainties, and domestic market difficulties. This unfavorable circumstance actually revealed the achievements and efforts of Vietnamese banks in the eyes of investors and international credit rating agencies. Basel III must also be a plus point for the SBV to take into consideration annual credit growth targets along with a more favorable dividend policy for shareholders.

By Le Phuong, Vietnam Business Forum