Banks race for survival in 2019

04-Jan-2019 Intellasia | Bao Dau tu | 6:00 AM Print This Post

No longer as calm as in 2018, a “cold battle” is expected to take place in 2019, where banks have to race to increase their capital for survival, if they do not want to be forced to reduce the profit target as a the number of banks suffered in 2018.

$10 billion shortfall and survival race

Sharing with the Dau Tu’s reporter before the New Year, the deputy general director of a joint stock bank showed his worry: “neither competition nor profit, the biggest worry of banks in 2019 is whether or not they can raise capital promptly before the due time. From mid-2018, the State Bank of Vietnam (SBV) delivered warning messages and in 2019, if it being able to raise capital, many banks will likely be forced to reduce credit targets. Capital raising is the core of all issues in 2019″.

In 2018, some banks were “suffered” when SBV tightened credit room and were forced to adjust profit targets, all of these banks are under huge capital raising pressure. Specifically, LienViet Post Joint Stock Commercial Bank (Lienviet Post Bank) had to reduce its profit target from 1.8 trillion dong to 1.2 trillion dong. Meanwhile, Vietnam Joint Stock Commercial Bank of Industry and Trade (Vietinbank) also reduced its profit target from 10.8 trillion dong to 6.7 trillion dong in the last weeks of 2018.

In 2019, the number of banks worried about profit decline may not only two banks, when SBV still applies the mechanism “credit limit” assigning depending on the level of health and the ability to increase capital of each bank.

According to calculations by BaoVietBank Securities Company (BVSC), to increase credit by 14-15 percent according to Basel II standards, listed banks must increase capital by 237 trillion dong in 2018-2019, equivalent to $10 billion. However, Le Duc Thuy, former Chair of the National Financial Supervisory Commission, said that in the last two years, banks have been struggling to gain more than $2 billion.

According to the roadmap set out, by 2020, commercial banks must have their own capital according to Basel II standards, including at least 12-15 commercial banks to successfully apply Basel II. However, by 2018 end, only Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) and Vietnam International Joint Stock Commercial Bank (VIB) were recognised by SBV for compliance with Basel II. According to some sources of the Dau Tu, there are two more banks that may be recognised by SBV for compliance in early 2019.

When due date is close, increasing capital is considered to be the fiercest and most vital race of banks in 2019. Talking to reporters of the Dau Tu, Dr Le Xuan Nghia, an economic expert, affirmed: “In 2019, the capital raising pressure will be most terrible for banks since only by increasing capital, banks can increase credit room to make profit”.

In early 2018, there were nearly 20 banks aiming to raise capital, but at the end of the year, the number of banks completed the plan was small.

In the situation that credit room was small in 2018, the market witnessed massive bond issuance of banks. This trend is expected to continue in 2019, along with the stock offering, stock dividend payment.

A series of giant merger and acquisition (M&A) deals will take place

Raising billions of dollars in just one year for banks is not easy. This is also the reason why M&A in the banking sector is expected to be active in 2019. The remarkably deal is Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) to sell 15 percent of its shares to strategic partner Keb Hana (Korea).

To clear the way for the transaction, at the end of 2018, BIDV’s high-ranking leadership was completed. At the same time, the Bank also actively promoted bad debt settlement and accelerated the provisioning rate. BIDV’s provision expense for the whole year of 2018 was estimated at 21.028 trillion dong (up 42 percent year-over-year). According to BVSC’s forecast, the sale of BIDV’s shares will take place in early 2019. If the deal is successful, BIDV will not only quickly raise capital, improve Capital Adequacy Ratio (CAR), but also expand lending, gradually regain its position in the market.

With Vietcombank, due to its recognition of Basel II standards, the pressure to raise capital is not as intense as before. However, this bank is also impatiently accelerating the private placement of 10 percent of shares to foreign partners. So far, the selling price is still the biggest obstacle and the deal will be difficult to complete if the government does not support to solve the issue.

For small banks, tough capital raising situation makes M&A pressure stronger. “From now to 2020, M&A deals in the banking sector will be exciting. The increase in capital to meet Basel II standards is growing, while the amount of capital increase is not much, forcing some banks to merge again to become bigger,” Dr Can Van Luc, chief economist of BIDV forecasted.

Earlier, sharing with foreign investors, deputy prime minister Vuong Dinh Hue also affirmed that the government encouraged small banks to merge into larger banks. The government will limit or not provide new license for 100 percent foreign-owned banks, but the deputy prime minister said, it will be open for foreign banks to buy Vietnamese banks.

Competition in retail banks will be extremely fierce

Great pressure while opportunities are few, many banks are put at risk of credit tightening in 2019. Finding competitive strategies to maintain profits will be a headache for banks, especially when the rate of net interest margin (NIM) is in danger of falling, as interest rates have risen sharply over the past time, while lending rates are difficult to increase accordingly.

Dr Le Xuan Nghia said that in this difficult situation, banks will have to restructure their loan portfolio to improve profitability. Besides, it is also necessary to promote the growth of services to reduce dependence on credit.

Ha Huy Cuong, deputy general director of An Binh Joint Stock Commercial Bank (ABBank) acknowledged, credit growth in 2018 was low, but banks still maintained good profits thanks to boosting retail sales, making NIM better. Besides, the service sector (especially insurance) flourished also improved the revenue for banks. Cuong predicted that this trend will continue and banks will compete more intensely in 2019.

“Due to Basel II pressure, banks will have to gradually reduce their dependence on credit and increase service revenue. In 2017, credit from banks accounted for 78.6 percent, but in 2018 only 76 percent and will gradually decrease”, Cuong said.

According to a forecast from investment funds, in 2019, credit growth will be assigned more to banks with abundant equity-capital, good bad debt handling and good asset quality. Conversely, a group of struggling banks will have to manage to find more non-credit revenues, boosting retail lending to improve NIM. This makes the competition in the retail market and banking services fiercer.

Another way for banks to improve profits in a credit-reduced context is digitising to reduce costs. This leads to the forecast that the wave of banking technology investment, bank digitisation will continue to take place in 2019.


Category: Finance, Vietnam

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