Vietinbank To Issue New Shares To Existing Shareholders: An Analysis of Shareholders’ Benefits

Vietinbank has got approval from the State Bank of Vietnam, the country’s central bank, and the State Securities Commission, the stock market watchdog, to issue new shares to existing shareholders to raise its charter capital to VND20.23 trillion ($1 billion) from current VND18.86 trillion. This article will provide an analysis into the issue and the importance of the event to Vietinbank.

Key information:

·         Number of shares to be issued: 337,162,027

·         Issuance method:  issuing to existing shareholders

·         Issuance ratio: 20% or 1-for-5 at par value of VND10,000

·         Ex-date: 29 November, 2011.

The issuance is a part of Vietinbank’s plan to raise its charter capital to $1 billion in 2011 which was approved by the AGM on May 31, 2011. The plan included two new share issuance tranches, the first one to raise VND3.372 trillion issued to existing shareholders and the second one to raise VND3.57 trillion (15%stake) issued to foreign strategic partner.

Ownership Structure Change:

If this issuance is successful, Vietinbank will surpass Vietcombank to be Vietnam’s second biggest bank after Agribank (VND21.3 trillion) by charter capital. If Vietinbank succeeds in issuing 15% stake to Nova Scotia, it will become Vietnam’s biggest bank by charter capital, even if Vietcombank can sell 15% stake to Mizuho Bank.

Table 1: Vietinbank’s ownerships structure before and after issuance

Source: Vietinbank’s prospectus, StoxPlus

Vietinbank is expected to get VND3.372 trillion ($164 million) from the first issuance of which the state, IFC and insiders will contribute VND3.139 trillion ($153 million) and the public will contribute VND232 billion ($10.5 million).

Vietinbank is negotiating to sell 15% stake to Canadian bank, Nova Scotia. If the deal is successful, Vietinbank’s shareholder structure will be change as shown in Table 2. Vietinbank is expected to earn VND7.14 trillion ($340 million) from issuing 15% stake to Nova Scotia at estimated price of VND20,000 each, equal to the current market price adjusted by new share issuance.

Table 2: Vietinbank’s ownerships structure after selling 15% stake to strategic partner

Source: Vietinbank’s prospectus, StoxPlus

Estimated adjusted price:

Based on CTG’s close price on November 25, we estimated CTG adjusted price at VND20,500/share. CTG’s real adjusted share price will depend on its close price on Monday, November 28, 2011, one day before ex-date.

Table 3: Calculating CTG’s adjusted share price on ex-date

Source: StoxPlus. Calculating CTG’s adjusted share price on ex-date will depend on share price at the close of Nov 28

Analysis on Share Issuance:

·           Very high success rate: Some concern that Vietinbank may face high risk issuing new shares amid current market’s confidence crisis. However, data from table showed that state, IFC and insiders will contribute VND3.372 trillion out of the new fund raised. The State Bank of Vietnam and related agencies approving the plan means that state will contribute its part in the new share issuance.

Under the official document No 563/TTg-KTTH of April 07, 2010 by the Prime Minister on state’s capital representative at joint stock banks, the State Bank of Vietnam,the representative of state’s stake, sends its representative to Vietinbank and  buys new share issuance under Prime Minister’ instruction stated in document No 3813/VPCP-KTTH of June 09, 2011 by the Government Office.

Money raised from the public accounts for a small part of VND232 billion. We believe that there will be high possibility of new share purchase right execution because most of shareholders of 116 million free floated shares face small risk as CTG is one of the stocks with low price volatility since its debut.

·           Importance of the Issuance: Vietinbak is estimated to earn VND3.372 trillion from the share issuance. This is an important amount for Vietinbank to raise its prudent ratios, invest in IT, expanding its business overseas, and other investments. More importantly, the new raised fund will help Vietinbank raise its capital capacity to handle system risks if Vietnam’s banking sector gets worse (loan losses due to bad debts)

If Vietinbank successfully sell15% stake for its strategic partner for an estimated value of VND7.14trillion, the lender will raise a combined number of VND10.512 trillion ($513 million). This is a very important amount of money amid current credit crunch and draining liquidity in almost all capital markets in Vietnam.

Vietinbank’s CAR as of September 30, 2011 was 9.86%, higher than the requirement of 9%. New fund raised will increase the lender’s car close to 12% international standard.

·           Share Dilute Analysis: Vietinbank made a net consolidated profit of VND4.501 trillion in 9M/2011, up 57% on year and 32% versus whole 2010 and surpassing  011 target of VND 3.825 trillion. Therefore the new issuance at 1-for-5 ratio will not dilute existing shareholders and minor shareholders’ interest much. In other words, Vietinbank can maintain EPS growth rate planned for 2011-2013 and therefore the new share issuance will not affect shareholders’ interest.

Besides, Vietinbank’s leaders remain high dividend payment rate of VND1,500-1,600/share in 2011-2013 and current shareholders get a the dividend yield or the dividend-price ratio of 7.5%-8% per year.

Issuance Risks:

The biggest risk that investors and market fear is increasing bad debts due to enterprises’ difficulties amid current economic conditions and it is likely that these enterprises include Vietinbank’s customers. Like financial markets overseas, this is a big unknown that no booking, accounting or report systems can precisely show. And this is the system risk that CTG’s shareholders, like shareholders of other banks, are putting close eyes on. As of September 30, 2011, Vietinbank’s bad debts stood at VND3.931 trillion, or 1.44% of the total outstanding debts, much lower than Vietnam’s banking system of 3.4% and lowest amid partly privatized banks.

Other common risks like any share issuance in Vietnam are that it normally takes take 3 months, or even 6 months in some cases for new share issuance procedures to complete and additional listing is done. Vietinbank’s shareholders hoped and waited for Vietinbank to complete these procedures at the fastest pace and fully paid for the new shares.

Conclusion:

The success of this new share issuance and the deal to sell 15% stake to foreign strategic partner Nova Scotia Bank played very important part in raising Vietinbank’s financial capability,  helping it to develop IT projects, expand business overseas, and cope with possible risks amid current economic conditions. Based on the latest data, Vietinbank still remains high profitability growth and asset quality. However, potential risk is that many enterprises , including CTG’s clients, are facing difficulties amid current macro conditions, the market expects Vietinbank’s leaders to proactively manage and limit risks.