Banks face off with Gov’t on cash dividends

June 13, 2016 - 10:31

On May 30 the media carried the Ministry of Finance’s request to the central bank governor, Lê Minh Hưng, to instruct major State-owned lenders BIDV and Vietinbank to pay the 2015 dividends in cash.

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On May 30 the media carried the Ministry of Finance’s request to the central bank governor, Lê Minh Hưng, to instruct major State-owned lenders BIDV and Vietinbank to pay the 2015 dividends in cash.

The banks announced combined profits of more than VNĐ7 trillion (US$313 million) for last year but said they would not pay dividends in cash. A year ago both had committed to pay a cash dividend of around 10 per cent.

While BIDV said it would issue bonus shares worth 8.5 per cent in lieu of dividends, Vietinbank, which reported profits of VNĐ3.66 trillion, decided not to pay any dividends at all.

The ministry said the decisions would influence the budget since the Government is the largest shareholder in the two banks, owning 64.5 per cent of Vietinbank and more than 95 per cent of BIDV.

It pointed out that Article 23 of Decree 57/2012 stipulates that lenders in whom the Government owns more than a 50 per cent stake have to consult the central bank and ministry on dividend decisions.

While the ministry is upset with the two banks’ decisions to retain profits to increase their capital, the central bank said it is necessary for them to retain their profits to increase their capital.

The question of who has the final say on dividend payments does not have a clear-cut answer. Việt Nam does not have an entity that is entrusted with managing the Government’s investments, and so this generally works on co-operation between the parties involved.

BIDV and Vietinbank seem to hold most of the aces because the Enterprise Law vests the decision-making authority in case of equitised firms like BIDV and Vietinbank in their shareholders.

Both sets of shareholders have endorsed the banks’decision to issue bonus shares and not cash dividends, with the Government, the majority shareholder, agreeing during the vote.

Now if it digs its heels in on the cash dividends issue, the banks will have to organise extraordinary shareholders meetings.

Analysts warn that while paying dividends in cash would benefit the State Budget in the short term, if the banks do not increase their capital, they would face risks in the long term.

Vietinbank is reportedly insistent on retaining its profits to increase capital. Analysts said the Government would possibly have no other option but to sell off some of its shares in the bank.

But the Government is not exactly keen to pare its investments in major banks.

The imbroglio involving the central bank, finance ministry and two banks reveals one thing: that management of the State’s investments in companies is in disarray and the Government and relevant agencies need to improve the system and have consistent policies to safeguard the benefits of both the companies and the Government.

The Government is the biggest shareholder in the banking sector as it completely owns four lenders and has dominant stakes in three others commercial banks namely Vietinbank (64.5 per cent), Vietcombank (77 per cent) and BIDV (95 per cent).

Property sector’s heavy reliance on banks continues

On May 27 the State Bank of Việt Nam’s image in the eyes of property developers got a boost after it announced long-awaited amendments to Circular 36/TT-NHNN regulating prudential ratios for banks.

In a new circular, the central bank has raised the risk weightage for real estate and securities loans from the 150 per cent (the lowest level) in Circular No 36 to only 200 per cent. It is lower than the 250 per cent it proposed earlier, which had made property investors jittery since it would have meant banks would cut back on lending to them.

The increase will take effect next year.

The new circular also specifies a roadmap for cutting from 60 per cent to 40 per cent the maximum ratio of short-term funds that can be used for medium- and long-term loans.

The rate will remain at 60 per cent until December 31 this year, fall to 50 per cent next year and then to 40 per cent in 2018.

Since the draft Circular 36 was issued four months ago, the central bank has received complaints from many firms in the property sector, many of them saying that tightening bank lending would impede the recovery of the real estate market from its extended slump.

Many analysts approved of the central bank’s decision, saying it would ease pressure on developers’ finances, reducing the impact on the real estate market recovery.

Both decisions are indeed good for the real estate market, particularly for projects that are now under development.

This is because the market still relies heavily on bank loans and, since property projects are often developed over a long period, developers need long- and medium-term funds.

Banks will also be obvious beneficiaries.

They are now allowed to continue using 60 per cent of short-term deposits for medium- and long-term loans, meaning they will have enough liquidity to pursue their credit activities in the property sector.

Some analysts said the new circular gives banks breathing time until early 2017 to improve their liquidity position.

But they warned that banks should be cautious while lending for property projects to avoid all risks, and said the central bank should inspect all property projects financed by banks to ensure transparency and that everything is above board. 

What the new circular also brings home is that the real estate market still relies heavily on bank funding and will need a long time to be able to stand on its own feet.

Analysts said developers should take the initiative to raise funds from real estate investment funds, especially those traded abroad.

REITs would not only provide them with funds for their projects but also advanced management experience besides helping them improve transparency and diversifying their products.VNS