Banks’ moves to avoid overusing short-term funds for long-term loans

07-Oct-2017 Intellasia | Vietstock | 6:00 AM Print This Post

Banks have always been in the state of using too much short-term funds for financing long-term loans. However, this situation has been significantly changed as banks have not only actively increased their equity and sought funding from international financial institutions, but also accelerated medium and long-term mobilisation in the context when the interest rate level is currently stable and has been low for many years.

The extension of medium and long-term funds will help banks have stable resources to carry out longer term expansion strategies.

Actively increasing capital

Lien Viet Post Commercial Joint Stock Bank (LienVietPostBank, LPB) on September 25th decided to issue 20 million convertible bonds at a total value of two trillion dong and par value of 100,000 dong per bond. The purpose of the issuance is to meet the demand for loans of medium and long-term projects, increasing the scale of capital of the bank. The compulsory ratio to convert to shares is 1:10, which means that one bond can exchange for 10 shares, at convertible price of 10,000 dong per share. With the bond yield of about 8-10 percent and the current buying price of LPB shares on the Over-the-counter market (OTC) of 14,000 dong per share, it is likely to attract the participation of investors.

In another development, on September 11th, the International Finance Corporation (IFC) said it would invest 200 million USD in the Vietnam International Joint Stock Bank (VIB) in the form of a senior loan with a maturity of up to five years. Previously, in August, IFC also planned to fund a loan of up to 150 million USD to An Binh Commercial Joint Stock Bank (ABBank). In 2011, IFC also invested about 40.5 million USD in ABBank via purchasing convertible bonds, which were later converted to 10 percent of the bank’s charter capital.

In addition to the issuing valuable papers and looking for long-term financing, banks have also actively increased their internal financial capacity by raising charter capital as planned. The State Bank of Vietnam (SBV) has recently approved the Military Commercial Joint Stock Bank (MBB) to increase charter capital from 17.127 trillion dong to 18.155 trillion dong, Vietnam Prosperity Commercial Joint Stock Bank (VPBank) from 14.059 trillion dong to 15.706 trillion dong, and Orient Commercial Joint Stock Bank (OCB) from four trillion dong to five trillion dong.

Using equity

Raising capital has always been an important and thorough target in banks’ operation. At present, under the regulations, many safety ratios are limited by equity such as the minimum Capital Adequacy Ratio (CAR, 9 percent of equity), the credit limit for one customer and a related group of customers (not exceeding respectively 15 percent and 25 percent of equity), and foreign exchange status (no more than 40 percent of charter capital and reserve funds of the bank).

Furthermore, according to provisions of Circular 21/2013/TT-NHNN, the number of branches established must be based on the bank’s charter capital. Specifically, the minimum charter capital of each branch in Hochiminh city and Hanoi must be 300 billion dong per unit, while that is 50 billion dong per unit for branches in other provinces and cities. Therefore, to expand business, banks must ensure that their equity always maintains stable growth.

According to Circular 36/2014/TT-NHNN, banks’ equity includes tier-1 capital and tier-2 capital. Tier-1 capital includes major items such as charter capital, reserve fund for supplementing charter capital, fund for investing in banking operations, retained profits and equity surplus. While the tier-2 capital includes 50 percent of the difference due to revaluation of fixed assets, 40 percent of the difference due to the revaluation of the long-term capital investments, financial reserves, general reserves, and convertible bonds and debt instruments with terms of five years or more.

To raise tier-1 capital, banks often increase charter capital, do not pay dividends to retain profit; while to raise tier-2 capital, banks choose to issue convertible bonds or debt instruments with terms of five years or more. In the context when the CAR of many banks has declined in the recent time due to the reduction of asset quality and sharp rise of bad debts, raising capital has become more urgent than ever. In addition, according to Circular 41/2016/TT-NHNN which will come into force in early 2020, the calculation of CAR will be stricter in accordance with Basel 2 standards. Thus, banks must make more efforts to raise equity from now to timely meet the requirements.

Expanding medium and long-term fund

Meanwhile, obtaining financial support from international financial institutions has helped banks have stable source of foreign capital, especially when the foreign currency deposits have been partly shifted to VND deposits after the ceiling interest rate in USD was set at 0 percent per annum.

With the low-cost USD funding, banks can convert into VND to lend out at high interest rates, thereby improving the profit margin and actively influencing profits.

In addition, this funding can also help banks increase their medium and long-term funds, thereby improving the ratio of using short-term funds for medium and long-term lending. For banks like VIB and VPBank which offer consumer loans to customers buying cars, house and instalment loans, the need for medium and long-term capital is still very large. In early March, IFC also approved an additional financial package worth over 80 million USD for VPBank. Including the 125 million USD realised in 2016, the total funding VPBank received has reached over 200 million USD.

From last year until now, banks have also actively issued long-term deposit certificates to raise medium and long-term fund. With the current low interest rate level, the strategy of issuing valuable papers to mobilise medium and long-term loans is probably appropriate. When the interest rate level increases again, banks will be much benefited because they have raised a significant source of long-term fund at low cost.

Thus, it can be seen that banks have not only been striving to raise equity but also increasing medium and long-term mobilisation fund from customers and borrowing international financial institutions. In fact, raising equity and charter capital has also helped banks increase medium and long-term fund, because under Circular 06/2016/TT-NHNN, the medium and long-term fund of banks include deposits of people and economic organisations; borrowing capital from domestic and foreign financial institutions (excluding credit institutions); mobilised capital via issuance of bills, certificates of deposits, and bonds; charter capital and funds; surplus in equity capital; and retained profits.

Recently, SBV has requested banks to review their safety ratios to check whether any of them is violated, and if any, a roadmap to rectify is needed in the near future. Therefore, raising capital to improve and overcome the violations in safety ratios (if any) will continue in the next period.


Category: Finance, Vietnam

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