Race against time
In the last two months, several banks have been given the nod from the State Bank of Vietnam to increase their charter capital from dividend shares and bonus shares. Asia Commercial Bank (ACB) is set to increase its charter capital from VND 16,627 bn to more than VND 21,615 bn; BacABank intends to raise its charter capital from VND 6,500 bn to VND 7,085 bn; VIB expects to increase its charter capital from VND 9,244 bn to VND 11,093 bn; and SeABank is targeting to increase its charter capital from present VND 9,369 bn to VND 12,088 bn.
ACB will increase its capital by issuing shares to pay dividends based on 2019 profits which can be used for distribution of dividends. BacABank will increase its capital in two phases, with the first one seeing the issuance of about 46.2 million shares to pay the 2016 dividends and distribute profits withheld till 31 December 2016, and may increase capital by VND 462 bn. In the second phase, ACB will offer 3.79 million individual shares, which will add another VND 37.9 bn to its capital. SeABank will issue almost 131,17 million shares in the first phase to pay dividends to the current shareholders, which is 14% of undistributed after-tax profits of 2019. In the second phase, SeABank will issue a maximum of 140.7 million shares worth VND 10,000 each, to current shareholders.
It is race against time for other banks too, as they try to distribute dividends in order to raise capital within this year. Most recently, the State Securities Commission of Vietnam (SSC) received a report from the Military Commercial Joint Stock Bank (MB) saying it will issue shares to pay dividends. MB has also informed its shareholders of 6 October as its deadline for registration of receiving 2019 dividends in the form of shares. After completing its shares distribution, MB will see its charter capital increase by about VND 3,617 bn to reach almost VND 27,988 bn. Additionally, MB plans to distribute 25.6 million treasury shares to current shareholders during the period from fourth quarter of this year through the first quarter of 2021.
HDBank is also issuing shares to increase capital in the fourth quarter of the year, as proposed in the plan approved at the 2020 Annual General Meeting, which says it will distribute its 2019 dividends in shares, and issue bonus shares from surplus equity. This plan will enable the bank to lift its charter capital from almost VND 9,810 bn to around VND 12,707 bn.
Banks relieved of burden
In the last few years, the distribution method of dividends at banks has not satisfied shareholders because it has been done mostly by providing shares or by withholding profits. Commercial Banks have explained that they have had to comply with Basel II standards, and therefore the banks have had to distribute dividends in this way to increase charter capital. Additionally, some commercial banks that are restructuring are required to have their dividend distribution plan approved by SBV.
This year, the State Bank of Vietnam has issued Directive 02/CT-NHNN asking for urgent measures to strengthen the banking system so as to make it less vulnerable to the current unpredictable Covid-19 pandemic situation. This directive mandates that banks proactively review and cut down on operational costs, and for the time being, not distribute dividends in cash so that they can focus all resources to substantially reduce interests on current loans as well as new loans.
Directive 02/CT-NHNN offers banks a reprieve from shareholders demanding dividends in cash, and all banks can now target raising their capital instead. All banks have clearly welcomed this move by the State Bank of Vietnam because this plan is very feasible in increasing capital, and was earlier also proposed by several state-owned Commercial Banks. For instance, the Board of Directors of VietinBank had presented a plan to distribute dividends in shares or withhold profits to increase charter capital in their last Annual General Meeting. However, they still await all relevant legal regulations to be revised and approved.
An increase in charter capital is unquestionably a serious concern and urgent requirement for banks this year to abide by Circular 41/2016 issued by the State Bank of Vietnam. This circular requires that the Capital Adequacy Ratio (CAR) in Commercial Banks must satisfactorily comply with Basel II standards. In 2019, charter capital in state-owned banks totaled VND 155,153 bn, an increase by just 4.91% from 2018. Whereas, in private banks the charter capital was a total VND 284,698 bn, a rise of 6.54% from 2018. In late July 2020, total charter capital in state-owned CBs was VND 155,198 bn, going up by 0.03%, while in private CBs’ the total was VND 290,106 bn, an increase of 1.9%. Compared with foreign banks, this increase is very low, and the CAR in banks cannot meet the requirements.
Low Capital Adequacy Ratio indicates that banks still have much to do, and the strain is much more in the current Covid-19 pandemic scenario. By the end of June 2020, debts caused by the coronavirus made up 2% of all debts and several banks said their debts were even between 3% to 4% of their entire debts. One bank even confirmed debt had reached 10%. The average bad debts at listed banks rose from 1.7% in 2019 to 2%, and the group-2 debts went from 1.5% to 1.7% in the second quarter. However, the banks only raised their hedge funds by about 11.2% while the amount last year was 15%.
According to one financial expert, the ongoing Covid-19 pandemic will badly affect profits of banks, that is to say, mainly equity will be affected. Banks can restructure debt maturities and classify liabilities, which covers up flaws in the banking system and bad debts are only revealed when all regulations are relaxed or removed. Therefore, any bank that makes a loss while trying to withhold its hedge funds will have to take some away from its equity. When equity is hurt, it lowers the Capital Adequacy Ratio (CAR). Banks may not report losses this year because they do not transfer debts or withhold profits. Needless to say, some banks will certainly record losses, and these losses will take effect in coming years.