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Banking & Finance

Seeking safety

Released at: 23:00, 05/12/2014

Seeking safety

Five years after revising its comprehensive prudential regulations for credit institutions, in 2010, Vietnam has once again upgraded and brought them to a new level.

Mr. Huy Mac CEO, Maritime Bank Securities (MSBS)

On November 20, 2014 the State Bank of Vietnam (SBV) issued Circular No. 36/2014/TT-NHNN, replacing Circular No.13/2010/TT-NHNN, regarding safety limits for credit institutions. Circular 36 is considered one step in the financial reform program unveiled in late 2012 by regulators following the financial crisis and its impact on Vietnam’s fragile banking system. The new Circular had a direct effect on the financial market, commercial banks, securities companies, but each in their own way. Although the new Circular is not effective until February 1, 2015, its impact has already been widely felt across the local financial market, even before it was officially issued.

What’s new?

Circular 36 makes some fundamental changes that will have a direct impact on the stock market, specifically limiting funds from commercial banks being channeled into the market. First and foremost, Circular 36 sets a limit on bank loans to finance stock investments (both listed and unlisted), at 5 per cent of the charter capital of banks. Under the old rule the limit was 20 per cent of charter capital, with securities defined as both stock and bonds. This change is significant and has become controversial in the investment community over the last week, as it is not clear how much of the above limit is currently used to finance stock investments.

Second, Circular 36 defines which banks are qualified to extend credit to fund stock investments. One of the most stringent criteria is that the ratio of non-performing loans (NPL) must be less than 3 per cent. This has also been reduced, from the previous 5 per cent under Decision No.03/2008/QD-NHNN and is considered important as Vietnamese banks have undergone a difficult period of high NPLs resulting from asset bubbles and economic slowdown. This puts pressure on banks to clean up their balance sheet and many currently fail to meet the criterion.
Third, Circular 36 states clearly that bank loans cannot be used to finance unlisted corporate bonds. In fact, most corporate bonds in Vietnam are unlisted. Fourth, bank loans to finance stock investments cannot be granted on a medium- or long-term basis and cannot be secured by bank guarantees or bank stocks. This essentially limits the financing of stock with low liquidity, especially unlisted stocks. It also tries to limit the problem of cross-holding in the banking system, where one person may buy a bank stock and then use that stock to buy stock of other banks, creating a spider web.

Fifth, bank loans to finance stock investments cannot be secured by the same stock financed by that loan. We think this is a very tough regulation and, technically, it bans banks from providing margined loans as well as stock repo (i.e. repurchase agreements) since the nature of these financing products is to use the stock purchase as collateral. It also discourages M&A activities using the stock of target companies as collateral for the loan to finance the transaction. Sixth, Circular 36 tackles the issue of cross-holding of banks. Article 20 specifically states that one bank may not invest in more than two other banks and the ownership in each bank cannot exceed 5 per cent. In addition, there are also strict conditions on when a bank may invest in another bank, such as having an NPL ratio of less than 3 per cent.

Finally, the Circular also repeats the previous rule that commercial banks cannot extend credit or assign to subsidiaries and associated entities the offer of credit to finance stock investments. Apart from the above tightened rules, Circular 36 reduces the risk weight factor on loans to finance stock and real estate investments to 150 per cent, from the previous 250 per cent. This will relieve some of the burden on the capital adequacy ratio (CAR), which banks have suffered from in the past from loans to finance stock and real estate investments.
It was also reported that Circular 36 will not apply retrospectively, and that all lending legacy positions pre-effective the date of the Circular will remain intact. In certain situations, banks have up to one year to deal with their legacy position, for example in cases where one bank holds more than 5 per cent of another bank.
Clearly, the above rules are very tight and aim at setting up a “Chinese wall” between commercial banks and investment banks or between monetary markets and capital markets. This will certainly help prevent asset bubbles, which may impact banks’ financial health due to write downs of collateral value. 

Funding flows under intense pressure

According to the State Securities Commission (SSC), the country’s financial watchdog, margin loans on the listed market reached VND17 trillion ($809 million) at the end of October. These margin loans are funded by owner equity of securities companies as well as bank loans and bonds from commercial banks. It is, however, not clear how much of this comes from the latter, but it is estimated that VND5 trillion ($238 million) worth of bank loans are used to finance the listed market. It is very unclear how much bank loans are currently used to fund OTC stocks (unlisted) but it could be a significant number. 

According to current figures reported by the media, Vietnamese banks’ total charter capital is around VND412 trillion ($19.6 billion). If a cap of 5 per cent was strictly applied, banks may extend up to VND20.6 trillion ($980 million) to finance stock investments. However, there are two important factors that bring down this theoretical lending room.
Firstly, some banks have NPLs of more than 3 per cent. According to local media there are 15 domestic banks with over 3 per cent NPLs, including big banks in the Top 12 such as Agribank, Military Bank (MBB), Eximbank (EIB), and Asia Commercial Bank (ACB). Taking out these non-qualified banks, the theoretical room for stock lending would fall to VND14.7 trillion ($700 million).

Secondly, some banks have a low appetite towards stock loans. Traditionally, some large State-owned commercial banks, while having a large capital base, have a very low risk appetite towards stock loans. If these banks retain this risk appetite it may impact on the actual usable room for stock loans.
As mentioned above, it is not clear how much lending room has been used to fund listed and unlisted stocks but our view is that many banks have hit that 5 per cent limit. Therefore, the usable room for the future, especially after the effective date of Circular 36, would be very limited.

Securities companies must look for alternative funding 

In view of the above analysis, we envisage that there will be a huge impact on the funding sources of securities companies, who will need to create a new array of long-term and more sustainable funding. This can be in the form of charter capital increases and issuing corporate bonds or convertible bonds. The problem with increasing capital is the dilution of earnings and, therefore, the stock price of securities companies. 

We therefore expect over the long term that corporate bonds will be an important way for securities companies to raise medium- and long-term funds to facilitate client trade financing as well as proprietary trading activities. One of the problems with this alternative is that securities companies do not have many available assets as manufacturing firms to use as collateral, so unsecured bonds may be an option. This will force securities companies to become more transparent in their operations and balance sheet and to apply an advanced risk management practice to convince investors.

As Vietnam will launch derivative products after 2016, we expect that structured notes and structured bonds with varying types of coupons can be introduced to the market to make corporate bonds issued by securities companies more attractive to investors. This is actually the right way and has been adopted by many developed financial markets.

Vietnam’s stock market responded negatively to Circular 36 when rumor first emerged about its existence and when it was officially issued on November 20. The local financial media has covered it in great depth, looking at it from various angles. However, since it is very long and rather technical, we think its impact will be felt gradually, as investors and banks will need time to actually understand what it means and find ways to circumvent it. We expect the market will experience another shock when the Circular comes into effect on February 1. Just like any other shock, the market will soon find its balance and move on from there.

Bank stocks: Under pressure

As mentioned above, banks will need to divest any ownership in other banks if it is in excess of 5 per cent and if a bank holds stock in more than two banks. As a transition measure, banks have up to 12 months to do this. A few banks currently hold more than 5 per cent in other banks, including Vietcombank with 9.6 per cent of MBB, 5.1 per cent of OCB, 8.2 per cent of EIB, and 4.3 per cent of Saigon Bank, etc. This, together with the pressure to reduce NPLs, will put pressure on bank stocks in the listed market over the next 12 months or so.
Where will the funding come from to access the big wave of IPOs and State non-core business divestment? Circular 36 will definitely have an impact on plans to IPO SOEs and the divestment of State non-core business, which is well under way. Many investors still rely on bank loans to finance their participation in IPOs. Vietcombank and Techcombank have also become the two largest investors in the IPO of Vietnam Airlines, the national flag carrier. It therefore remains to be seen how the new rule will impact on the wave of IPOs and divestments.

Some more questions 

Despite the above analysis, there remain some questions to be answered. One of which is whether corporate bonds issued to finance stock investments invested by commercial banks are accounted for as loans and subject to the Circular. We expect a “No” answer to this question. If this is the case then there is still a way to finance M&A activities by banks because corporate bonds can be made long term and can be secured by stock financed under the transaction itself. Both of these features are not allowed in the case of bank loans. 
Secondly, we have observed that certain transactions for buying into an asset have to be structured in the form of buying the major stock of special purpose vehicles (SPV) used to hold that asset, such as a piece of land or a project. Classifying this as financing stock investments will prevent banks from extending credit for these types of transactions, hence negatively impacting the economy.

There is no doubt that Circular 36 is a breakthrough in the development of prudential banking regulations in Vietnam towards best practice and the Basel capital accord. Specifically, the new rules have addressed many potential weaknesses of the commercial banking system, such as cross-holding in banks. It has also taken a long step towards segregating investment banking and commercial banking in order to prevent asset bubbles and their consequences on commercial banks.

But there is no free lunch. Vietnam must pay something to correct the shortcomings of the past and if it is to maintain a sustainable financial system in the long term. Circular 36 is the right thing for Vietnam to do and it should be taken positively as a major effort by the government to restore the fragile banking system and prevent future problems. It may take a toll on the stock market in the short term but it will surely find a way to move forward for the sake of long-term and sustainable development. Bank loans are not the only way to attract capital. The stock market and its market participants will need to improve their operations and transparency so that funding from investors will shift from other channels to the stock market.


  • VIB last month signed a comprehensive cooperation agreement with Vietnam Railways (VNR) under which the bank is authorized to serve VNR, including the Hanoi and Saigon railway companies and other subsidiaries. VIB will provide various services such as fare collections, cash flow management, financial risk mitigation solutions, operational cost optimization solutions, and medium and long-term credit services. 
  • Figures from the Payment and Settlement Department at the State Bank of Vietnam (SBV) show that as at the beginning of October the country had 76.13 million bank cards, an increase of 15 per cent against the end of 2013. There were 69.83 million debit cards, 3.04 million credit cards, and 3.26 million pre-paid cards. 
  • SHB has opened a new branch in the Cambodian capital of Phnom Penh. The Toul Pouk branch is the third SHB branch in the country. SHB leaders said its establishment is part of the banks’ strategy to expand its overseas network and enhance its position in the domestic financial market.
  • Indovina Bank (IVB) last month issued IVB-VISA credit cards as part of plans to expand services to domestic individual and corporate clients. The credit card is being produced based on innovative technologies under the Payment Card Industry Security Standard (PCI DSS) and 3D-secure services. 
  • Vietnam National Shipping Lines (Vinalines) will divest its capital of more than 20.1 million shares worth about $15 million in Maritime Bank. A share auction, with an initial price of $0.74 per share, will be held at the Hanoi Stock Exchange on December 8.
  • Ten Vietnamese commercial banks have been chosen by the SBV to apply international bank management standards in accordance with Basel II governance standards: Vietcombank, Vietinbank, BIDV, MB, Sacombank, Techcombank, ACB, VPBank, VIB, and Maritime Bank.

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