Capital increase is the tactics of ‘caressing’ shareholders
From time to time failed to raise capital, many smaller banks are still “persisting” the shareholders to increase capital year after year. According to Dr Nguyen Tri Hieu, economic expert has deep insights on this story in the banking sector.
Looking back 2015, there are many banks that do not complete the plan to increase charter capital or struggling to complete in the days of years. Have you have any comments on this fact?
Not only 2015 but also this year is not a favourable time for banks to carry out a plan to mobilise capital, exception for a few, most of the banking’s stocks are trading below value for years.
10 years ago when banks brought much profit and paid dividend comfortably so investors were too interested in shares of banks, which is often called the king stock… However in reality, banks aviation sector is not highly profitable compared to many other lines of business and especially not the kind of quick investment channels.
Those who have invested their capital into the banks, have to consider capital recovered after spending at least 10 years because it is unlikely that it is difficult for investment in bank shares which price increased by 5-10 percent and over 10 percent dividend after 1 year, so it is less attractive to investors. Bank’s stocks are competing with those of other sectors, especially when real estate stocks in real estate market are recovery. Besides, there are other investment channels to attract capital from domestic investors such as gold, securities, foreign currency and deposits… therefore, it is very difficult to attract capital from domestic investors in the banking sector at this time.
How are foreign investors?
Foreign individual investors used to be very keen on bank’s stocks, but that’s the story 10 years ago. For now, they are not interested in bank’s stock as before, even foreign shareholders have divested at domestic banks.
During this previous time, there are a few Japanese banks that have invested in local banks because they can help traditional Japanese enterprises to invest in Vietnam not only because of attractive profits of these banks.
Financial market in the last few years has witnessed the situation of a foreign financial institution to buy convertible bonds of a commercial bank and then converted to shares. Currently, foreign financial institutions are in the state of dilemma because these stocks have fallen deeper than the conversion price, and if they sold shares to withdrawal, they will incur heavy losses so they had to accept to continue as shareholders of the bank.
At the annual shareholders’ meeting this year, many banks continued to make capital increase plan, so whether these plans to raise capital this year may be more feasible than in previous years?
The small banks had no choice other than to raise capital because of pressure from the State Bank and the market. In the near future, only those banks with large capital, large-scale and profitable business office still in business. Maintaining about 15-20 banks is included in the future by the SBV, and in order to join in this group, the smaller banks have only one solution of capital increase.
In order to survive and avoid the risk of a merger with other banks, small banks are forced to raise capital and then will likely increase the scale of operations and ensure the safety index of capital, liquidity and create a cushion for the risks of banking activities.
In particular, the capital increase in the banking system is very important, because this is a business with very large financial leverage ratio, approximately 10:1which means that 10 contracts from the public debt and the economy is secured by the equity of 1 VND, if the bank’s bad debt destructed 1 of its capital, the bank would have fallen right into bankruptcy. Under all the pressure on, the Executive Board and the Board of directors often plan to raise charter capital, but it could be done or not is another story.
In fact, many banks had planned to raise capital over the years but not conducted, under market pressure, this can be seen as a tactic to “caressing” of its shareholders because the boss wanted to give a message that their banks were “delicious” and now ready to increase capital.
Thus, what do shareholders need to pay attention in capital increase plan of their bank?
Shareholders should be cautious when banks submit to the Board a plan to increase capital, a capital increase plan must be convincing and feasible. Executive Board and Board of directors have to make specific plans, including the number of shares will be issued and the offer price is expected, securities companies will support the issuance of shares, the ability of shareholders buy new shares present, in addition with potential investors have the ability to absorb the shares will be released, along with the rate expected dilution if the shares are sold to investors new, and finally a concrete roadmap to carry out the plan to raise capital.
One thing all the shareholders should consider is that a capital increase plan usually makes shareholders excited, but to avoid “boomerang” in case the final plan is not implemented. A bank cannot make plans to increase capital as the market expected to generally be “penalised” and considered problem, it may reduce the credibility and reliability of the bank executives.
Another point I would like to share is that not everyone likes the capital increase, some bankers are afraid to raise capital from new shareholders, which will dilute their shareholding ratio, power and undermine their rights. Large shareholders are often unenthusiastic with the plan to increase capital, but thousands were reluctant to raise capital because they have no other way to maintain and develop their bank, or because of market pressure or pressure from the central bank to the bank restructuring.
So, how do the banks successfully raise capital?
As said, charter capital increase is a must for a credit institution to exist and develop. Given the banking system in Vietnam, I agree with the SBV regarding the system’s need for only 15-20 banks with required large capital.
A leading bank in Vietnam has to reach USD 5 billion of equity capital in order to have total assets of about USD 50 billion to compete with other regional banks. Currently, no bank in Vietnam achieves this level of equity capital. Therefore, raising capital by Vietnam banks is unavoidable.
However, the plan to raise capital can be successful only providing that Vietnam banking sector is narrowed and the banking operations are comprehensively reformed in relation to the operation way of the Board and executive management in accordance with international practice standards, risk management, making financial statements transparent and accurate to build confidence among the existing and potential shareholders.
It needs to avoid the situation that investors look at Vietnam’s banking system like looking at a black box, that it is impossible to find what is inside. Looking more broadly, Vietnam’s credit rating must be improved in the near future. Currently, the international credit rating agencies has been ranking Vietnam at “discouraging investment/ speculative” (non-Investment grad/ speculative), Vietnam’s banks, regardless of size or level of public credibility, are ranked at this level downward, since no economic sector is ranked higher than the country credibility. Given the current creditworthiness, hardly can Vietnam banks enlist investment funds, particularly foreign sources.