Vietnam consolidates banks to form regional lenders

The State Bank of VIetnam, visual from the bank's website

Vu Viet Ngoan, president of the Vietnam National Financial Supervisory Commission (NFSC), describes 2015 as a year of “blooming” mergers and acquisitions (M&A) in the banking system.

It is expected that in 2015 there will be six M&As implemented in the country’s banking sector. Most of the restructuring is expected to be carried out on a voluntary basis.

The M&A between Vietcombank and SaigonBank will be the first deal of the year. Vietcombank is currently a major shareholder of SaigonBank with a 8.2 per cent stake. Vietnam’s central bank has already approved the merger in principle.

Next, there may be potential M&As of Vietinbank and Oceanbank or PGBank; Sounthern Bank and Sacombank, Maritime bank; and Mekong Development Bank (MDB), the Bank for Investment and Development of Vietnam and Mekong Housing Bank; and LienVietPost Bank and GPBank.

Forming regional banks

Truong Thanh Duc, chairman of the Vietnam Banking Association’s Legal Club, once said that banking reform in 2012 and 2013 has yet to provide the expected outcomes. In two years, the local banking system has just reduced five credit institutions, dissolved and suspended three branches of foreign banks, and equitised four state commercial banks. In 2014, there were no M&A activities among commercial banks.

Meanwhile, after the planned restructuring in 2015, the State Bank of Vietnam (SBV)  is hoping to to have bigger and highly competitive banks. It is targetting to reduce the number of banks. from 30 to 20, by 2017.

If the central bank hastens the consolidation in the coming years, the goal of establishing the region’s banks might be completed by 2020, which is the integration deadline of the banking sector in the ASEAN Economic Community (AEC).

According to SBV deputy governor Nguyen Phuoc Thanh, so far the central bank has controlled the situation of the weakest banks. The earliest case of this year is Vietnam Construction Bank, which was acquired for no cost by the SBV.

Also read: Vietnam central bank to take over troubled VNCB

Thanh also added that the main goal of restructuring was to help banks pay more attention to innovation, improving efficiency of management as well as enhance there financial capability, after the M&A.

However, to accomplished the outlined target within the next five years, Vietnam has to overcome the persistent problem of bad debts, the biggest risk to the economy according to former NFSC vice president Le Xuan Nghia.

The target to reduce the non-performing loan ratio to 3 per cent in commercial banks is uncomplicated. The difficult part is the debts that have been sold to the Vietnam Asset Management Company (VAMC). In a recent report, bad debt ratio in the system has reduced from 17 per cent in 2012 to around 4 per cent currently. By the end of last year, the VAMC has bought VND123 trillion ($5.75 billion) worth of NPL but has recovered only VND4.5 trillion.

To purify the system, Nghia said, banks must make their policies for operation, public and apply international accounting standards. Currently, the risk management divisions of many banks is not very active.

“The process of handling bad debts will only be successful if we form a strong base to prevent future NPL,” he added. It is also a reason for the need of merging loss-making banks into bigger entities.

Also read: VAMC issues up to $3.75b bonds for buying bad debts

Nghia said that the bigger banks may not want to merge, considering the operation of weak banks. In fact, not all of the aforementioned lenders are weak. OceanBank, Vietnam Construction Bank, GPbank and Southern Bank are the loss making ones, but SaigonBank, MHB and MDB simply have a smaller scale of operations.

The SBV has also repeatedly assured that the acquirers will see benefits in terms of network distribution, as their smaller partners often have 30-50 branches and transaction offices.

However, the problem is how the management mechanism will be structured post merger. Are the smaller banks ready to be merged? This question is raised as the 2012 deal between Saigon – Hanoi Bank and Habubank bring up the total failure of Habubank executives. Its CEO, Bui Thi Mai, was demoted as a debt collector, while a large part of Habubank staff lost their jobs.

To answer this, banks should think through beyond their own interests. “Basically, financial institutions must act for mutual benefits of the nation. While other countries would carry out bankrupt procedures for weak banks, we merge to help them overcome it,” explains  NFSC president Ngoan.

If the period of 2013-2014 is seen as a stepping stone to overcome weaknesses, preventing the risk of collapse, this year is to create new breakthroughs in restructuring the banking system.

The pain of cross-holding

One of the pressures to stimulate the M&A process is the technical intervention to the system of the central bank by circular 36. Taking effect from February, the circular regulates that a commercial bank can have holding in only two other credit institutions and the holding must be no more than 5 per cent. This is the drastic measure of the Vietnamese government aiming to eliminate cross-holding in the system, which causes capital adequacy risks.

Cross-holding does not always cause a negative impact. It can create financial and technical support between the banks but has a potential to be  pain of the economy especially when one entity is a large shareholder with the discretion at many organisations.

In Southern Bank, which is expected to merge with Sacombank, for example, Sacombank’s vice chairman Tram Be is the largest individual shareholder of Southern Bank with 8.4 per cent. His son, Tram Trong Ngan, is vice chairman of the target bank. Ngan’s sister is Southern Bank’s deputy general director. The total amount of shares this family represent in the bank account for some 20 per cent of its capital.

A typical case of cross-holding is the manipulation by Nguyen Duc Kien, vice chairman of Asia Commercial Bank’s founding council, who was jailed last year.

He established six private companies to sell bonds to the bank and several lenders. These companies executed financial business without licenses. The consequences Kien had caused mounted to more than VND2 trillion ($93.5 million).

All in all, the M&A is expected to benefit the economy.

There has not been a Vietnamese bank large enough to compete with the international banks; this might change in the near future as mergers happen.

Along with equitising state-owned companies, consolidating the banking system is a critical counterbalance to help transform the country.

Related Stories: AEC Effect: ASEAN banks follow retail & realty investors, into Vietnam

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.