Small banks in Vietnam plan to raise capital levels as the whole banking system goes deeper into a restructuring process that aims to remove weak lenders from the market.
The Dau Tu Chung Khoan (Securities Investment) newspaper reported Monday that small banks are rushing to increase their registered capital.
The report cited unnamed bankers as saying that they are waiting for shareholders to approve their plans to raise capital this year. One of the lenders, for instance, has already met the exact government's capital requirement, but plans to hike it by more than 30 percent.
All banks in Vietnam were required to have a registered capital of at least VND3 trillion (US$144.7 million) at the end of 2011.
Economist Nguyen Tri Hieu said raising capital is always important for banks. But now a higher capital level will be even more meaningful as it can help banks protect themselves from being taken over, he said.
In case of mergers, a bank can gain the upper hand in negotiating the deal if it has large amounts of capital at its command, Hieu told the newspaper.
Local media this week cited State Bank of Vietnam Governor Nguyen Van Binh as saying there are nine weak lenders in the country that have been put under special watch. The central bank said it is pushing for mergers and acquisitions and may interfere if necessary.
This year, for the first time, the central bank has also assigned different credit growth limits on local banks.
It has divided lenders into four groups based on capital, management, assets and debt quality. The groups have been assigned credit growth quotas of 17 percent, 15 percent, 8 percent and zero percent.
The classifications and the assigned credit limits will be reviewed after six months, according to the central bank, which has not revealed the names of any so-called weak banks.
Vu Dinh Anh, a consultant to the Ministry of Finance, said all banks now want to earn a place in the central bank's list of top lenders, and to do so they need to have high capital levels. Large capital is an exhibition of their strength, he added.
As credit targets are set to be reviewed regularly, commercial lenders will try to prove to the central bank that they are strong, Anh said.
With the banking sector as a whole going through the restructuring process, higher capital levels will also allow banks to open new branches and become more competitive, he said.
"Whether banks can raise their capital as planned will depend on market conditions. But no matter what happens, this is a good chance to get a clearer picture of the market and banks," he said.
Vo Tan Hoang Van, deputy general director of audit firm Ernst & Young Vietnam, said local banks increasing their capital is a positive trend since they are doing so for their own good, not because they are forced or caught up in a race against other banks.
Van said the financial situation of many small banks is very weak and their bad debt ratios are high. If they want to survive, they have no choice but to strengthen their capital bases and prepare for future growth, he said.
Fitch Ratings said in a report dated March 7 that weak capital levels, tight liquidity, and deteriorating asset quality are among its main concerns in the "relatively low-rated Vietnamese banking sector."
According to the agency, smaller banks are mostly dependent on short-term interbank borrowing while liquidity in the domestic banking system remains susceptible to high inflation and confidence in the local currency. It also warned that non-performing loans are significantly understated under the country's accounting standards and could actually be three or four times higher.
One week later, S&P released a note saying recent inflationary pressures, in conjunction with several years of high loan growth and rising borrowing costs, are threatening to undermine the credit quality of Vietnam's banking industry.
"Although the banks were shielded from the banking crisis in advanced economies, Standard & Poor's Ratings Services believes that a combination of these three factors might result in a rapid deterioration in asset quality, if not properly managed," it said.
The agency pointed out that the ongoing government efforts to improve regulatory and risk management standards will result in "much-needed alignment with international norms" but added the improvements so far have been incremental.
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