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.
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.