International Finance Corporation (IFC), a member of the World Bank Group supported $100 million in funding to Vietnam’s Oriental Commercial Bank (OCB) for its lending program for small and medium-sized enterprises (SMEs) and women-owned enterprises.
“We are in negotiations with the IFC over loans, not only this mid and long-term facility but also a master cooperation agreement, including a short-term credit line, consultancy, and support programs on solutions for OCB to reach regional and international management standards faster,” Nguyen Dinh Tung , OCB’s CEO told media in a statement.
According to a report by Hung Cao on VNEconomictimes, OCB was just one of many Vietnam’s banks securing foreign loans over the past year. Commercial banks are now borrowing capital from foreign banks or international financial institutions when they need more medium and long-term capital. Struggling to attract domestic funds, many are rushing to seek foreign capital ahead of the State Bank of Vietnam (SBV)’s tightened policy on medium and long-term lending coming into force early next year and in the context that foreign ownership in Vietnamese banks is still restricted.
In a rush
In early September, the Saigon-Hanoi Joint Stock Commercial Bank (SHB) and the International Investment Bank (IIB) signed a five-year deal on the latter’s provision of $20 million in loans to the former to develop the latter’s infrastructure work in Vietnam and the import-export activities of goods from IIB member countries. The two sides will also share information and experience in enhancing operational efficiency and management capacity. On the same day, a framework sponsorship contract between the International Bank for Economic Cooperation (IBEC) and SHB was also signed, with an initial value of $22.7 million.
A few days prior, the Vietnam Postal Union Joint Stock Bank (LienVietPostBank) signed a contract with JP Morgan Chase Bank N.A. Singapore, which will provide it with a $50-million loan with a three-year term. The bank also received another three-year syndicated loan worth $50 million, in May, from eight Taiwanese banks headed by Cathay United Bank. “The loans help the bank integrate more deeply into the international finance market,” said Ms. Nguyen Anh Van, Deputy CEO of LienVietPostBank. “It will also supplement its medium- and long-term foreign currency resources, improve its capital mobilization structure, and partly respond to local businesses’ demand for borrowing foreign currencies.”
In July, the IFC also provided a $100-million syndicated loan to the Tien Phong Joint Stock Bank (TPBank) after outlaying $17.3 million to acquire 5 per cent of its shares in 2016. The IFC-led financing package will help the bank further extend long-term funding to micro, small and medium-sized enterprises (MSMEs) and individual borrowers through digital delivery channels, according to TPBank.
Many other lending deals were reported in 2017, including the Vietnam Prosperity Joint Stock Bank (VPBank) borrowing $100 million from Deutsche Bank, $122 million from the IFC, and $41 million from Credit Suisse. The An Binh Commercial Joint Stock Bank (ABBank), meanwhile, received $150 million from the IFC, and the Vietnam International Joint Stock Bank (VIB Bank) secured a syndicated loan of $185 million from the IFC and three foreign banks.
Even the State-owned VietinBank has borrowed capital from foreign banks, signing a contract in June last year for a $100 million loan from eight financial institutions. A year before that, it borrowed $200 million from 18 foreign banks.
Mobilizing funds from overseas can help banks tap into wider foreign and, usually, lower cost funding sources. “Many Vietnamese banks have been upgraded by international rating agencies such as Moody’s and Fitch recently,” said Ms. Nguyen Thi Thuy Anh, Research Analyst at the Viet Dragon Securities Corporation (VDSC). “The positive ratings, according to Fitch, consider the enhanced operating environment of Vietnam’s banking system, with improved economic policies. Authorities promote a stable and predictable macroeconomic environment, and we believe this contributes significantly to Vietnamese banks’ chances of coming to loan facility deals with international financial organizations.”
Lending in turn
Funding from international financial organizations is used by Vietnamese banks for lending that has strong socioeconomic benefits, including boosting financial inclusion and improving access to credit for the country’s SMEs, according to Ms. Rebaca Tan, an Analyst with Moody’s Investors Service. “While foreign loans increase banks’ reliance on market funds, we view the credit lines provided by international financial institutions like the IFC and the Asian Development Bank (ADB) as stable and helping to improve banks’ asset liability profile,” she said. “Further, Vietnamese banks seeking loans need to comply with certain financial covenants and improving financial transparency is also key in getting these loans, which are both credit positives.”
The fact that some international financial organizations are funding local banks reinforces the latter’s reputation, creditworthiness, and position not only in Vietnam but also in global markets, according to Ms. Thuy Anh. “Cross-border loans might also support the development objectives of international financial organizations and local banks’ strategies, especially those focusing on the retail and SME segments.”
For example, a loan of $185 million was provided to VIB by the IFC in 2017 to serve the unmet borrowing needs of SMEs and households, she noted. For SMEs, long-term funding is becoming more important since Vietnam wants to become a manufacturing and trade center in Southeast Asia. According to VIB, the loan facility provided by the IFC is expected to double the loan portfolio for this segment in the next five years.
In recent years, LienVietPostBank has made structural movements into retail banking. “The bank has now reached 60 per cent in the density of retail revenue per total mobilized capital and 50 per cent in lending,” said Ms. Van. “We will continue moving strongly towards the retail model, ensuring a density of retail per total mobilized capital of around 80 per cent.”
Similarly, if the loan contract between the IFC and OCB is signed, “the facility will be used for retail and SMEs’ credit lines in order to develop the private sector,” Mr. Tung from OCB said. “It will also help affirm the bank’s reputation in approaching new capital resources from new markets and investors for its long-term development.”
Generally, overseas borrowings can help banks enhance liquidity and provide flexibility within their capital structures. The goal is to satisfy regulations on improving the ratio of short-term fund used for long-term lending, and banks can retain earnings or issue long-term bonds. Funds borrowed from international financial organizations is also one way to mobilize long term, which supplements mid and long-term funding.
Local banks have been in a rush to seek cross-border borrowings to meet the Capital Adequacy Ratio (CAR) under Basel II standards, according to Mr. Nguyen Hong Khanh, Head of Analysis and Research at the Vietnam International Securities Company (VIS). “Under Basel II standards, applied as a pilot at the ten largest Vietnamese banks, in order to meet a CAR of under 8 per cent, banks must find funding, especially ‘Tier-1 Capital’,” he said. “Upgrading owners’ equity from 1.5 times to double within one or two years would put major pressure on local banks, especially the larger ones. This would require Vietnam extend the foreign ownership limit in State-owned banks. As at the end of the third quarter of this year, charter capital in listed banks had increased 17 per cent and is expected to grow 10-15 per cent in the time to come.”
Meanwhile, Ms. Tan from Moody’s said longer-term funding helps banks meet the SBV’s regulations on asset liability management, which requires they lower the maximum ratio of short-term funding for loans longer than 12 months to 40 per cent of total short-term funding by 2019, from 60 per cent in 2016. “We expect Basel II capital rules to shave 150-220 basis points off banks’ capital ratios,” she said. “The current limit on foreign ownership will pose a challenge in raising new equity capital, especially for banks that are close to the limit.”
Moreover, the ratio of short-term funds used for long-term lending under Circular No. 16/2018/TT-NHNN was to be reduced to 45 per cent by January 2018 and 40 per cent by January 2019. Interest rates on long-term mobilized capital has increased suddenly over the last two months, revealing rising demand among local banks for capital sources.
Ms. Thuy Anh from VDSC said that borrowing banks need to deal with exchange rate fluctuations. The negotiation process and procedures may also take long as there is often no precedent for local banks. In addition, the fact that there are different laws in each country and different regulatory requirements could also slow down the implementation of cross-border financial transactions.
International capital flows have now tended to run to State-owned banks in Vietnam, while some developing commercial banks are also in need of capital mobilized from overseas, according to Mr. Khanh from VIS. However, in order to mobilize funds successfully, local banks are required to prove that their operational capacity and development potential meet the high expectations of international investors. “The main purpose of the government in the future is to build two or three large banks that are among the top in Asia, so local banks in the years to come will certainly need more foreign capital to boost their capital raising roadmap,” he said.