Hanoi (VNS/VNA) - TheGovernment has decided to allow Vietcombank and Vietinbank to increase theircharter capital by 10 trillion VND (434.8 million USD) in the first quarter ofthis year, Deputy Prime Minister Vuong Dinh Hue said last month.

But it has not said how they could do so.

Analysts said the Government’s decisionwas in response to lenders’ insistent demand that they should be allowed toincrease their capital.

But the decision to allow Vietcombank to do so has surprised many since justlast year it increased its capital by selling a stake to Singapore sovereignwealth fund GIC.

For Vietinbank, the Government’s approval comes as big relief since its capitaladequacy ratio (CAR) has been close to the State Bank of Vietnam (SBV)’sminimum prescription of 9 percent since the fourth quarter of 2018.

CAR is based on the Basel accords, an international business standard thatrequires financial institutions to maintain enough cash reserves to coverrisks.                                 

It includes two types of capital: tier 1 capital, which can absorb losseswithout a bank being required to cease trading, and tier 2 capital, which canabsorb losses in the event of a winding-up.     

Its modest CAR has made it difficult for Vietinbank to contemplate increasingits credit growth rate.

It once even had to reduce its loans outstanding by 26 trillion VND to fall inline with the central bank’s CAR norms.

So what are the options for the two banks to increase their capital?

Some industry insiders said they could pay stock dividends to existing shareholders.

The Government’s financial position has improved significantly and so thefinance ministry is unlikely to force them to pay dividends in cash as it hasin recent years.

Another benefit of this is it would not dilute equity, which disadvantages existingshareholders.               

But many experts said it might be preferable and advantageous for both sidesfor the banks to sell more equity to the Government.

It would cause foreign ownership ratios to fall, enabling the Government tosell more stakes to foreign investors.

Vietcombank is a typical case.

In early January 2019,Vietcombank successfully completed a private placement of 111,108,873 newshares to Singapore’s sovereign wealth fund, GIC Private Limited, and one ofJapan’s largest financial services providers, Mizuho Bank Ltd, raising a totalof 6.2 trillion VND (approximately 265 million USD) equity investment.

In particular, GIC purchased 94,442,442 new shares and now owns a 2.55 percentstake in Vietcombank, Vietnam’s largest bank by market capitalisation. Mizuhopurchased additional 16,666,431 new shares to maintain its existing 15 percentstake in Vietcombank.

After those events, Vietcombank’s ownership ratio at the lender was down from 77.1percent to 74.8 percent.

Foreign shareholders have significantly contributed to its outstandingperformance in recent years.

Last year, for instance, its profit was 1 billion USD, or 23.16 trillion VND,and its target this year is 15 percent higher at 26.6 trillion VND.

According to the current law, foreign ownership of state banks is capped at 30percent, but for Vietcombank the rate is now only 17.55 percent.

Vietinbank is the only State-owned lender that will not be able to make aprivate placement of new shares since the Government only owns a 65 percentstake in it, the threshold below which it cannot go.

So if the bank wants to increase its charter capital, it has only two options:issue shares to existing shareholders by paying dividends in stock or sell moreshares to the Government. 

There is also another intriguing question. If it does, at what prices will theGovernment buy the shares of Vietcombank and Vietinbank: face value or marketvalue?

Paying the par value would be unfair to existing shareholders, analysts said.

But the market price, especially ofVietcombank, is very high.

It is not going to be an easy decisionto make./.