Fragile situation at DongABank

SGI

DongA Commercial Joint Stock Bank (DongABank) will hold an extraordinary shareholders meeting on 12 October 2019.

Fragile situation at DongABank

This information is noteable, because this is the first time DongABank  will hold a General Meeting of shareholders since it was put under special control by the State Bank in August 2015, four years ago.

Reportedly, this extraordinary shareholders meeting will focus only on presenting a plan to sell off shares to offset the negative charter capital. But given the current situation at DongABank, selling shares to raise capital will be a very difficult task to implement.

Hope rests on additional capital of shareholders

According to the report published for the extraordinary shareholders meeting,  DongABank said that it had signed a contract with Ernst & Young Vietnam Co., Ltd. (EY) to assess the financial situation and determine the actual value of the charter capital and reserve funds of the bank until 31 December 2018. According to audited data from EY, operating results of DongABank by the end of 2018 had accumulated losses and negative equity. To offset the negative equity, and ensure the real value of the charter capital to reach the minimum capital equal to VND 3,000 bn of legal capital, DongABank must supplement additional charter capital to ensure compliance with the provisions of the law.

Seeing the current performance of DongABank, the bank can only increase its charter capital by issuing shares to the public or issuing shares separately. But the bank cannot issue shares to the public, because it does not meet the conditions to sell securities to the public according to the provisions of Clause 1, Article 12 of the Securities Law No. 70/2006 / QH11, which stipulates that the business activities of the year immediately preceding the year of registration of the offering must be profitable, and there must be no accumulated losses up to the year of registration of the offering. Therefore, the bank can only choose the remaining form of offering to sell shares separately.

According to the information in the report, DongABank had placed high expectations on the support from existing shareholders in this issuance, when they identified this as a preferred offering. Only when the existing shareholder registers to buy shares but doesn’t meet the number of offered shares in the above plan, the Bank will issue to outside investors. It is easy to understand, because at this time, only existing shareholders should consider whether or not to continue to accept the plan to increase capital, or invest more money to keep control of the bank. With regards to outside investors, few people want to buy DongABank shares.

Not easy to increase capital

At this time, increasing capital is a requirement imposed on all commercial banks. In special cases like DongABank, increasing capital is still recognized as an extremely difficult estimation. Before falling under special control, DongABank issued 500 mn shares with par value of VND 10,000/share, equivalent to chartered capital of VND 5,000 bn.

In this report, the bank does not announce the number of shares expected to offer to offset the negative equity, they only said that they will sell enough shares to ensure that the actual value of their charter capital was equal to the legal capital prescribed by law at the offering price of VND 10,000/share. However, the investigating agency had determined that, as of 31 December 2015, the equity of DongABank was negative by VND 25,451 billion. Thus, the amount of shares the bank wants to issue in this phase is not small.

Since being put under special control, so far DongABank has not published any financial statements. Information about the bank business activities was disclosed through a preliminary conference, and they summarized their annual operations and announced them to the press, but not much was shown, because when placed under special control, according to regulations, the bank will not be allowed to lend, focusing only on recovering due debts and bad debts.

To be able to receive additional capital from shareholders in the current operational situation is a challenging issue, as even existing shareholders will certainly consider very carefully whether to pay more money to "rescue" the bank or retain control.
At the end of the first 6 months of 2019, the total capital mobilization reached VND 63,450 billion, up only 4.3% compared to the beginning of the year and up 3% compared to the same period in 2018. The problem is debt recovery because both principal and interest reached VND 1,870 billion, accumulated from August 2015 to June 2019 earning VND 16,350 billion.

In early October, one DongABank leader had an interview with the press saying that the safety ratios and solvency as of 31 August 2019 was higher than the regulations of the State Bank. The liquidity reserve ratio reached 19.27%, the solvency ratio for the next 30 days was 80.4%, and the solvency ratio for the next 30 days for foreign currencies reached 79.07%. However, capital mobilization of this bank has decreased compared to June. As of 31 August 2019, capital mobilization was only VND 62,286 billion, an increase of 2.35% compared to the beginning of the year. This shows that the liquidity problem of DongABank also faced many difficulties.

Moreover, at the end of 2013, DongABank was approved for increasing its charter capital from VND 5,000 billion to VND 6,000 billion through issuing shares at the price of VND 10,000/share to existing shareholders, however, later it announced to cancel the result of the issuance of shares to the public. According to a securities company in Ho Chi Minh City, the reason for the cancellation was due to the failure of the capital increase due to the issuance price at par value, while the trading price on OTC was lower than the face value (only about VND 8,500/share), and the liquidity of this share on OTC was also very low.

This time, DongABank also plans to issue shares at par value of VND10,000/share. Meanwhile, on the OTC stock exchange, the bank's share was offered at VND 3,200/share and offered to buy at only VND 2,800/share on the first day of October. The problems to be solved is the issuance price which is three times higher than the transaction price, and whether existing shareholders or outside investors are willing to spend money to buy stocks to offset equity.

But perhaps before planning to offer to sell shares, DongABank also anticipated the possibilities. In the report, the board of directors of the bank said that in case shareholders do not approve the plan to offer shares to supplement their charter capital, or if there are no existing shareholders, external investors can register to buy shares, or existing shareholders, foreign investors who have registered to buy shares but have not purchased enough shares to sell, or existing shareholders or foreign investors registered to buy shares but do not pay in time, the Board of Directors will report to DongABank Special Supervisory Board, the State Bank, for them to consider restructuring the bank under another plan in accordance with the provisions of the law.

Investors are discussing that if capital is not increased as expected, there will be a mandatory transfer. Because according to the Amending Law supplementing some articles of the Credit Institutions Law, compulsory transfer is in the plans of restructuring credit institutions under special control.

Bảo Trân

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