Shareholders ignore banks' capital increase roadmap

Tuesday, April 22, 2008
The race of increasing chartered capital among joint stock commercial banks has raised a lot of wonders for the public when these lenders have poured billions of bank shares into the market in the context that the finance market is facing many difficulties.
Up to the end of March, the country has total 33 urban joint stock banks with a total chartered capital of 45.144 trillion dong. If each bank increases by about 80% in the current chartered capital, this year urban joint stock commercial banks will issue extra 36 trillion dong meaning 3.6 billion shares at 10,000 dong par to the market. The real figure could be higher because banks are racing to hike capital as high as possible. Particularly, Asia Commercial Bank plans to hike its chartered capital from the current 2.63 trillion dong to 6.355 trillion dong, meaning that the increase is 164%. Meanwhile, Eximbank's chartered capital will be raised by 164% from 2.8 trillion dong up to 7.4 trillion dong, EAB by 112% from 1.6 trillion dong to 3.4 trillion dong. The question is now raised that who will own billions of these additionally issued bank shares?
Hoang Xuan Quyen, analysis director of Tan Viet Securities Co said that first off, banks should keen on foreign investors that have a higher financial strength while domestic investors are suffering pressure caused by the stock market slump and their capital supply is being narrowed. In return, foreign investors also pay attention to shares of local banks with an attractive price through big efforts to hold over 10% stake in domestic banks.
After that, state commercial banks surely will not miss opportunities to buy into joint stock lenders that are demanding to hike capital. Finally, existing shareholders also have more opportunities to own extra shares of their banks thanks to the policy of paying dividend in shares or buying new shares at preferential prices.
In medium term, the demand for banking services especially banking retail services will soar considerably because more and more enterprises want to mobilise capital via the stock market and rely on the help from banks. Thus, from now to the end of the year, banks could more difficulties and their shares could be less attractive on the domestic capital market, Quyen forecasted.
Moreover, the rumours have been raised recently that shareholders now shun banks' capital increase roadmap due to the forecast that banks' profit targets cannot be reached in 2008 and general difficulties of the economy. Factually, in the first quarter, joint stock banks performed good business results, namely Sacombank with the profit of 435 billion dong, a rise of 44% yoy, ACB with 501 billion dong, a 1.2 time increase against 2007 and others. It is expected that domestic and foreign investors will re-consider the attractiveness of bank shares to save the kind of shares from the free fall like previous.
But, if banks' chartered capital is hiked too quickly with non-corresponding profit growth, the value of each bank share will surely decline sharply. One investor at Habubank Securities Co's trading floor said, this year ACB targets to reach a pre-tax profit of 2.5 trillion dong, EPS of 3,400 dong while Sacombank's STB share code targets EPS of 2,900 dong. The targets seem to be too low in comparison with the remaining medium and small shares on the stock market. For example, Viet Han Co with a chartered capital of 250 billion dong last year posted 86 billion dong in after-tax profit that is expected to gain 110 billion dong in 2008. If reaching the target, EPS of the company will be 4,400 dong, much higher than ACB and STB's.
If hiking chartered capital too quickly, banks themselves will make their shares to be penny commodities, according to the investor.