The Gia Dinh Commercial Joint Stock Bank plans to sell 30% of its stock to the Bank for Foreign Trade of Vietnam (Vietcombank) in late April.

Gia Dinh’s chartered capital, VND210 billion (US$13.125 million), is lowest among urban commercial joint stock banks in Vietnam at present. This bank has applied to the State Bank of Vietnam (SBV) to increase its chartered capital to VND500 billion ($31.25 million) by issuing shares. It has proposed selling shares worth VND150 billion ($.375 million) to Vietcombank, VND105 billion ($6.56 million) to its current shareholders and VND35 billion ($2.187 million) to the public in the form of auction.

Gia Dinh Bank’s network is quite modest, comprising its head office, three branches in HCM City and one in Hanoi. However, the involvement of Vietcombank would benefit the bank.

Tightening

With such a low starting point, it will be more easily for Gia Dinh to increase its capital than other banks. But this doesn’t mean that the bank doesn’t have to pass through careful rounds of appraisal, which are being tightened by the SBV.

On April 6, 2007, SBV issued Decision 3103 guiding the raising of chartered capital of credit institutions in 2007. Accordingly, banks that want to do this must submit detailed plans containing the following information:

1/ The reason the capital is needed (investing in information technology, infrastructure, etc…)

2/ The reason for the expansion of loans

3/ The reason for the expansion of business scope to other areas (securities, financial leasing etc...)

4/ The reason for the expansion of the network

In addition, banks must project business based on the new chartered capital: expected pre-tax profit, ranking results, and dividends.

SBV said that it would consider important norms when considering banks’ capital increasing schemes, for example returns on assets (ROA), return on equity (ROE), credit growth and deposit growth.

Banks must demonstrate their management and human resources cabilities. SBV inspectors will be involved in the capital increasing schemes and the plans will be only be considered by SBV after they are approved by bank inspectors.

Banks will have to make public information about their capital increasing itinerary, especially the information about the total volume of capital that they plan to increase, the date of share issuance, and stock issuance plan.

Wide but not deep

The SBV long warned it would initiate measures to control the capital increases of commercial banks; its current moves show that it is quite right to tighten the capital increases of commercial banks as service quality hasn’t caught up with expansion.

Ahead of the imminent requirement of integration and competition from foreign banks, local banks have invested more strongly in human resources, technology, and network expansion. However, their major operations and profit are still based on credit. Turnover and profit from services is still less than half of credit. Meanwhile, there are many applications for the establishment of new banks.

The boom of the stock market and the increase of banking shares in the last 6-12 months (see the below table) have created a campaign to establish banks. Many state corporations have applied to set up their own banks, financial companies and securities trading companies.

Some banks have witnessed rocketing profit, which hasn’t come from traditional monetary operations, but from securities trading. Profit from securities trading is clearly unsustainable once the financial market changes.

Le Xuan Nghia, Head of the SBV’s Development Strategy Department, in a talk in HCM City, emphasised that SBV supported the merger of local banks to make banks that are strong enough in financial potential and can compete with foreign rivals. However, there has been no merger of local banks to make a really big one so far.

The SBV can use technical barriers to lengthen the time for licencing wholly foreign-owned banking branches in Vietnam but any delay still has its deadline. There are at least two foreign banks that have sent applications to open wholly foreign-owned banking branches in Vietnam to the SBV.

In addition, a source said that Vietnam might open its securities field to foreign investors earlier. The establishment of wholly foreign-owned fund management and securities trading firms may be approved prior to January 2009 as stated in Vietnam’s WTO commitments.

Source: Sai Gon Economic Times