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The Vital Role of Increasing Charter Capital
According to Decree 141, by December 31, 2010, commercial banks (NHTM) must ensure a chartered capital of VND 3,000 billion, with an extension granted until December 31, 2011. Thus, 2011 also marked a race among banks to increase their capital to meet the VND 3,000 billion charter capital requirement, including SGB, KLB, VBB, NCB, OCB, and NAB.
Data from the State Bank of Vietnam (SBV) shows that a decade ago, in 2014, state-owned commercial banks accounted for 30% of the total charter capital, while private banks held 44%. However, as of June 30, 2024, these figures stood at 21% and 55%, respectively, indicating the remarkable growth of private banks in the charter capital race. Specifically, the charter capital of state-owned commercial banks reached VND 228,229 billion by December 31, 2024, an increase of VND 94,023 billion, or 41%, compared to the end of 2014. In contrast, private banks’ charter capital reached VND 587,850 billion, representing a substantial increase of VND 587,850 billion, equivalent to a growth rate of 67%.
Private commercial banks had a unique opportunity to surge ahead in terms of charter capital, especially during the 2017-2018 period, as banks rushed to list on the stock exchange. This move opened up avenues for capital increases and attracted potential strategic investors, capitalizing on both domestic and foreign investment opportunities.
Apart from complying with regulatory requirements, increasing charter capital is crucial for banks to expand their medium and long-term capital sources and diversify their business operations, given the tightening regulations on the use of short-term capital for medium and long-term loans outlined in Circular No. 08/2020/TT-NHNN dated August 14, 2020, issued by the SBV, amending and supplementing Circular No. 22/2019/TT-NHNN on safety limits and ratios in the operations of banks and foreign bank branches.
Source: SBV Consolidated Data
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At the same time, increasing capital serves to ensure the Capital Adequacy Ratio (CAR) as stipulated by the competent authorities, aiming to meet international standards and achieve continuous annual profit growth. Capital increases are also in line with the Project for Restructuring the System of Credit Institutions associated with Handling Bad Debts in the 2021-2025 period under Decision No. 689/QD-TTg dated June 8, 2022, issued by the Prime Minister. One of the critical objectives is to attain a CAR of at least 10-11% for commercial banks by 2023 and at least 11-12% by 2025.
After a decade of rapid charter capital growth, the CAR of private banks significantly surpassed that of state-owned banks. Specifically, in 2014, the minimum capital adequacy ratio for state-owned commercial banks was 9.4%, while it was 12.07% for private banks. As of June 2024, the capital adequacy ratio of joint-stock commercial banks (11.86%) also exceeded that of state-owned banks (9.99%), in accordance with Circular 41/2016/TT-NHNN.
(*) Since 2020, CAR has been calculated based on individual bank data and Circular 41/2016/TT-NHNN
Source: SBV Consolidated Data |
Thus, it is evident that increasing charter capital plays a pivotal role in ensuring the stability and sustainable development of banks. It not only helps banks meet legal requirements and regulatory mandates but also expands their business operations, enhances their financial capabilities, and bolsters their competitiveness in the market.
Currently, banks, especially small and medium-sized ones, are proactively seeking suitable solutions to increase their charter capital. These solutions include flexible capital increase methods, improving operational efficiency, and adhering to new legal regulations to maintain sustainable development in the current market landscape.
Increasing Charter Capital through Dividend Payouts is Gaining Traction
There are several avenues for banks to increase their charter capital, including issuing new shares, convertible bonds, and collaborating with strategic investors. However, the choice of method depends on the bank’s financial situation, strategic orientation, shareholders’ preferences, and the economic climate at a given time.
Given the current state of the stock market, issuing new shares can be challenging due to the difficulty in attracting shareholders to purchase these shares. Additionally, banks must consider the impact of new share issuances on the ownership ratios of existing shareholders and comply with regulatory requirements.
Consequently, issuing shares to pay dividends—a method that does not require external capital mobilization—is becoming a popular trend among banks, particularly after the COVID-19 pandemic. Banks can utilize accumulated dividends to issue shares to existing shareholders. This approach is sensible when banks aim to maintain shareholder unity and are reluctant to share ownership with new investors.
During the post-COVID-19 recovery phase (2021-2022), the SBV encouraged banks not to pay cash dividends to conserve resources for lowering lending rates. As a result, most banks had to switch to paying dividends in shares. In 2023, banks started paying a certain proportion of dividends in cash alongside shares. This shift was not only due to the SBV’s relaxation of cash dividend policies but also aimed to appease a segment of shareholders who were less inclined to receive share dividends given the lackluster performance of the stock market.
Among state-owned commercial banks, towards the end of 2023, the SBV permitted these banks to increase their charter capital to ensure capital adequacy ratios and bolster lending capacity. Vietcombank issued an additional 2.17 billion shares to existing shareholders as dividends, with a ratio of 38.79%. Following this issuance, the bank’s charter capital will increase from VND 55,891 billion to over VND 77,571 billion. VietinBank was also approved to utilize its remaining profit of approximately VND 11,648 billion from 2022 to pay dividends in shares, raising its charter capital from VND 53,700 billion to over VND 65,300 billion.
Similarly, Agribank received approval from the 15th National Assembly to supplement its charter capital by a maximum of VND 17,100 billion during the 2021-2030 period. If this supplementation is realized, Agribank’s charter capital will increase to over VND 51,500 billion.
Private banks have also received consecutive approvals from the SBV for charter capital increases and have completed the necessary license amendment procedures since the beginning of 2024.
In late July 2024, the SBV approved OCB’s proposal to increase its charter capital by issuing shares to pay dividends to existing shareholders at a rate of 20%, with a maximum of VND 4,109 billion. Following this issuance, the bank’s charter capital will increase from VND 20,548 billion to VND 24,658 billion.
Previously, NAB was also approved to increase its charter capital from VND 10,580 billion to VND 13,725 billion by paying dividends in shares at a rate of 25% and issuing 50 million ESOP shares at a price of VND 10,000 per share.
Meanwhile, Vietbank plans to use nearly VND 1,445 billion to pay dividends in shares and retain VND 148 billion. Specifically, Vietbank is in the process of implementing its capital increase plan through offering shares to existing shareholders (approved by the SBV in July 2023) with a total additional capital of VND 1,003 billion, raising its charter capital from VND 4,777 billion to VND 5,780 billion. As of now, the bank has successfully offered over 100.3 million shares and is in the process of requesting the SBV’s approval for license amendment, expected to be completed in Q3/2024.
Vietbank also intends to issue approximately 144.5 million shares to pay dividends to existing shareholders, equivalent to a ratio of 25%, scheduled for Q3 and Q4 of 2024. The total par value of the issuance is nearly VND 1,445 billion. If the license amendment procedure and the share issuance for dividend payment are successfully completed, Vietbank’s charter capital will increase to nearly VND 7,225 billion.
Source: Consolidated Financial Statements of Banks
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In recent years, small and medium-sized banks have been proactive in continuously increasing their charter capital. Despite joining the capital race later, their growth rate over the past decade has outpaced that of other banks, with OCB increasing its capital by 5.8 times, NamABank by 3.5 times, and ABBank, BacABank, and Vietbank doubling their capital.
Notably, Vietbank (VBB), established in 2006, has increased its capital eight times through various methods. As of June 30, 2024, VBB’s charter capital reached VND 5,712 billion, nearly 29 times higher than in 2006. This successful capital mobilization has provided the bank with the impetus to sustain and accelerate its business operations despite the unpredictable macroeconomic fluctuations. Specifically, the participation of strategic investors and the infusion of ample capital have enabled the bank to expand its business, attract talented individuals, and achieve positive financial results. This solid foundation also positions VBB favorably to attract additional strategic investors and explore future capital increase opportunities.
In the current context, charter capital is also regarded as a “buffer” that provides banks with the necessary resources to navigate challenges in an unstable economic environment. It facilitates banks’ efforts to boost credit activities and extend financial support to the economy, aligning with the government’s directives.
It is worth noting that the new Law on Credit Institutions, which came into effect on July 1, 2024, will significantly impact banks’ charter capital increases. The new law sets forth requirements and regulations on minimum capital, risk management, and credit institutions, presenting both opportunities and challenges. Banks must comply with these regulations to ensure their operations adhere to legal frameworks while enhancing risk management and improving financial capabilities.
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