The Hanoitimes - The Vietnamese banking system could face a capital shortfall of almost US$20 billion, equal to 9% of the country’s GDP to meet the requirement on capital adequacy following Basell II standards, which is scheduled for implementation on January 1, 2020.
Vietnamese banks, particularly small banks, are in dire need to increase charter capital, and this would lead to greater pressure for merger and acquisition (M&A) among them in 2019 for greater competitiveness.
Under the calculation of Fitch Ratings, the Vietnamese banking system could face a capital shortfall of almost US$20 billion, equal to 9% of the country’s GDP to meet the requirements on capital adequacy ratio (CAR) following Basell II standards, which is scheduled for implementation on January 1, 2020.
Due to stricter capital adequacy requirements set by the State Bank of Vietnam (SBV)'s Circular No.41, which requires banks to have adequate capital reserved for credit risk, market risk, and operational risk, the pressure are piling up for banks to increase their respective capital, stated Tran Thuy Ngoc, vice general director of Deloitte Vietnam. The circular will take effect in January 2020.
The Vietnamese central bank targets to have 12 – 15 commercial banks meeting Basel II standards by 2020. However, among the 10 commercial banks selected by the SBV to pilot the application of Basel II standards, only Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) and Vietnam International Bank (VIB) have met the target.
As of present, most banks are facing difficulties raising capital, due to the volatility of the stock market, resulting in bond issuance an unlikely option. Moreover, under the government’s request, state-owned corporations are divesting capital from the banking sector.
The growing global uncertainties also add to the cause, as foreign investors are pulling out money from emerging markets, including Vietnam.
Under this context, major banks have turned to the issuance of long-term bond, which would help to improve the CAR. Moreover, this would be increasingly important as banks can only use 40% of their short-term capital for long-term lending, instead of 45% as previously stipulated from 2019.
According to experts, options for small banks to increase capital remain limited compared to major banks. In this case, small banks would have to opt for reducing the credit growth, which currently accounts for 70 – 80% of total income of banks.
As a result, this would widen the gap between small and major banks, under which the former have to take into consideration the M&A option to meet requirements from the Basel II standard, according to economist Can Van Luc. M&A activities in Vietnam’s banking industry would heat up in the next 2 – 3 years, he added.