Small banks have to become big to exist

VietNamNet Bridge – The steps taken today in the bank restructuring process would decide the face of the Vietnamese banking system in the next three years.

Vietnam, investment, banking system, CAR

Under the bank restructuring plan, the number of commercial banks in Vietnam would decrease from 50 currently to 13-15 by 2015. This means that 2/3 of the existing banks would have to quit the market.

To date, the State Bank of Vietnam has named the nine commercial banks which have to go through the compulsory restructuring. All the nine banks are the small ones with the total assets of less than VND50 trillion, or just equal to 1/10 of Agribank – the bank which has the highest total assets now in the market.

Therefore, in minds of people, “small banks” means “weak banks.”

However, according to Nhip cau Dau tu, a business journal, the group of smallest banks has the highest CAR (capital adequacy ratio) which is much higher than the minimum ratio of nine percent stipulated by the State Bank.

The banks which have higher CARs would have thicker covers to protect themselves from the disadvantageous factors in the market. It seems that the more banks try to increase their assets, the lower safety level they would suffer.

Agribank is an example. At the end of 2011, the CAR of the bank was 6.82 percent, or lower than the minimum required level. In 2012, the ratio, according to the State Bank increased to 9.49 percent, while the average ratio of the whole banking system was 14 percent at the same time.

However, economists say, in the context of the economic downturn, the CAR does not truly reflect the safety of commercial banks. Since the collaterals for the loans at banks now are mostly real estate products, which have been decreasing dramatically in prices, the CAR has been decreasing rapidly.

Another important index that measures the health of banks is the bad debt ratio. The ratio of the group of the banks with smallest total assets (group 3) is 2.25 percent. The figure is lower than the bad debt ratio of the banks in group 2, or the banks with medium total assets, 3.1 percent.

However, the banks of the group 3 still have been facing high risks: since their total assets are small, a small negative factor would be enough to make them lose the stockholder equity.

As such, in order to exist, the small banks have no other choice than increasing their capital to become stronger to struggle in difficulties, and more importantly, to improve their competitiveness.

According to StoxPlus, a financial analysis firm, 80 percent of the source of income of banks come from credit activities. The profit from credit activities is understood as the margin between the lending and deposit interest rates. I other words, the banks’ credit activities do not create added value, while the profit margin is nearly fixed.

Therefore, the banks which can reduce the input costs would have higher profits. In this case, the advantages would belong to the bigger banks which have lower input costs thanks to their big operation scale.

The small banks, therefore, are always inferior to bigger banks in the competition to mobilize capital from the public. In order to attract capital, they have to offer higher deposit interest rates than big banks, which then lead to the higher capital mobilization costs and smaller profit margin.

The principle “one needs to be big if he wants to be strong” has been ruling the market. This explains why commercial banks all have been trying to expand their networks. Agribank, for example, had had 2,400 branches by October 2012, which means that it has 37 branches in every province or city.

ACB has reportedly had 350 branches nationwide.


Vietnam, investment, banking system, CAR