Recently, many banks met the Basel II standard on capital, which has been extended by the State Bank of Vietnam (SBV) to credit growth, such as Asia Commercial Joint Stock Bank (ACB) was allowed to expand credit limit from 13 percent at the beginning of the year to 17 percent, Vietnam Prosperity Joint-Stock Commercial Bank (VPBank) was expanded from 12 percent to 16 percent, Vietnam Technological and Commercial Joint Stock Bank (Techcombank) was extended from 13 percent to 17 percent, etc.
The expansion of credit limit can be considered normal for SBV in the past few years. In fact, for banks, management agencies often approve credit limit lower than expected, then adjust the increase flexibly but the overall result remains the same orientation set at the beginning of the year.
For this year, the credit growth target of the whole economy is set at 14 percent. The mechanism to loosen credit limit this year has been well informed by SBV in the banking industry conference in Q1/2019. This agency will prioritise high credit targets for credit institutions that have implemented before the regulations on capital safety norms. Therefore, it is not strange for commercial banks to meet Basel II standards on capital, which has been extended by SBV.
Loosening credit limit is good for banks because the prospect of profit will be bigger, but also comes with worry.
At the six-month preliminary meeting, a Chief Executive Officer (CEO) of one large private bank in HCM City shared that, after loosening credit limit, this year had many advantages, however the revenue and profit structure must be appropriate.
As credit increases, business operations and loan portfolio control must be reasonable. Otherwise, the profit was only short-term, and could bring many risks
CEO underlined the finitude of debt growth, because it was limited not only by credit but also by capital adequacy ratio. Lending would increase risky assets and reduce capital safety.
In many cases, the dilemma happens. When credit limit is extended, if the bank does not take advantage, it will be very wasteful. However, allocation of additional credit must always ensure the bank’s development orientation and ensure safety. This is not simple.
For example, this year, the overall growth of the real estate sector slowed, making loan growth of this segment much lower than in previous years, especially the segment of housing loan. For many commercial banks, especially private commercial banks, the segment of housing plays a very important role, even accounting for a large proportion in the structure of outstanding loans. If growth is not as expected, credit redirection is not easy, and also the allocation of additional credit resources.
Techcombank had a solution to this problem at a long-term strategic level.
Techcombank began a strategic transition from the end of 2015, divided into three phases and this bank is about to step into the third phase (from 2020) as “Strengthening performance management” with one of four focus areas is “Profit management on risk-weighted assets”.
Why is managing profits on risk-weighted assets?
The bank makes a profit with a loan or any other way, always ensuring the capital adequacy ratio (CAR). According to Basel standards in the world in general and Circular 41/2016/TT-NHNN in Vietnam in particular, CAR is proportional to Equity and inversely proportional to Risk-Weighted Assets (RWAs).
Profit management on risk-weighted assets means managing RWAs (through asset portfolio management) so as to achieve the target profit with the highest possible CAR. The higher the CAR, the greater the future growth potential, the longer the growth prospect, meaning the higher the sustainability.
The difference from other banks was that Techcombank attached the profit management on risk-weighted assets to the value chain (such as real estate value chain from investors to real estate distribution agents to home buyers). This helped manage risk more focused, more proactive and optimal RWAs more easily.
Concerning credit growth in connection with capital adequacy criteria, Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) case is also noteworthy.
Although VietinBank raised a huge amount of capital from selling shares to foreign investors, VietinBank quickly used all its capital adequacy. Currently, when the capital increase is no longer available, the bank has had to reduce its loan balance to keep its capital adequacy ratio above the minimum level as prescribed. And this greatly affects profitability.
The higher credit growth, the lower the capital adequacy ratio. Although VietinBank is a bit special because the State must keep a minimum of 65 percent of shares, other joint-stock banks are also quite similar.
Specifically, banks are limited by foreign ownership limits (currently 30 percent). Many banks have used this limit to sell capital to foreign investors. If continue raising capital, banks must sell it to domestic investors. This is what bankers don’t expect, because it can pose a power risk.
In summary, the expansion of credit limit and high credit growth both have benefits and risks. If there are careful calculations, the benefits are undeniable. However, it may also affect the bank’s ability to sustainably grow.
