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Official Gazette

Wednesday, April 1, 2020

Mergers and acquisitions: the future of banking in Vietnam

Updated: 14:25’ - 30/11/2009

Trinh Quoc Trung, PhD
Ho Chi Minh City Banking University

 

In the context of Vietnam’s deeper international economic integration, numerous merger and acquisition (M&A) deals will be seen in the country’s banking sector in order to optimize profits, diversify banking operations, mitigate risks and achieve Government-set objectives of restructuring the financial-banking system to help weather pervasive impacts of the global financial crisis.

In Vietnam, M&A activities in the banking sector date back to the early 1990s following the collapse of the system of credit cooperatives.

As more foreign investors show their interest in banking M&A deals in Vietnam, the present legal framework should be improved and reformed. One of the most important measures would be that the Government would encourage or even force joint-stock commercial banks to merge, consolidate or acquire one another in order to form larger banks with greater competitiveness in the global market following Vietnam’s accession to AFTA and WTO, and to avoid a collapse of the credit system.

Some banking M&A deals in Vietnam

Deal

Year

Four credit cooperatives consolidated into Sai Gon Thuong Tin Joint-Stock Commercial Bank

1991

Phuong Nam Joint-Stock Commercial Bank merged with Dong Thap Rural Joint-Stock Commercial Bank

1997

Phuong Nam Joint-Stock Commercial Bank merged with Dai Nam Joint-Stock Commercial Bank

1999

Dong A Joint-Stock Commercial Bank merged with Long Xuyen Quadrangle Rural Joint-Stock Commercial Bank

2001

Phuong Nam Joint-Stock Commercial Bank merged with Dinh Cong  People’s Credit Fund

Sai Gon Thuong Tin Joint-Stock Commercial Bank merged with Thanh Thang Rural Joint-Stock Commercial Bank

Quoc Te Joint-Stock Commercial Bank merged with Mekong Joint-Stock Commercial Bank

2001

Phuong Nam Joint-Stock Commercial Bank merged with Cai San Rural Joint-Stock Commercial Bank

Phuong Dong Joint-Stock Commercial Bank merged with Tay Do Rural Joint-Stock Commercial Bank

Da Nang Joint-Stock Commercial Bank merged with Sai Gon Financial Company into Viet A Joint-Stock Commercial Bank

The Bank for Investment and Development of Vietnam merged with Nam Do Joint-Stock Commercial Bank

2003

Dong A Joint-Stock Commercial Bank merged with Tan Hiep Rural Joint-Stock Commercial Bank

2004

 Source: the State Bank of Vietnam

Legal foundations

·       General regulations:

In Vietnam, M&A are governed by the Civil Code, the 2004 Law on Competition, the 2005 Law on Enterprises, the 2005 Law on Investment and the 2006 Law on Securities.

The 2004 Law on Competition only regulates M&A activities based on market controlling ability of businesses after they have merged.

·       Specific regulations on banking M&A:

Under Decree No. 69/2007/ND-CP of April 20, 2007, foreign investors may buy shares of Vietnamese banks under the following conditions:

1) Holding rate of foreign investors:

ü       Total holding rate of foreign investors (including also existing foreign shareholders) and their affiliated persons must not exceed 30% of the charter capital of a Vietnamese bank.

ü       Holding rate of a foreign investor that is not a foreign credit institution and his/her/its affiliated persons must not exceed 5% of the charter capital of a Vietnamese bank.

ü       Holding rate of a foreign credit institution and its affiliated persons must not exceed 10% of the charter capital of a Vietnamese bank.

ü       Holding rate of a strategic foreign investor and his/her/its affiliated persons must not exceed 15% of the charter capital of a Vietnamese bank.

2) Conditions for a foreign credit institution to buy shares of Vietnamese banks:

ü       Possessing total assets of at least USD 20 billion in the year prior to the year of registration for share purchase.

ü       Being experienced in international banking operations.

ü       Being rated by international credit rating agencies to be capable of fulfilling financial commitments and normally operating even in case economic situations and conditions become unfavorable.

3) Conditions for a foreign investor to buy shares of Vietnamese banks on the securities market:

After a Vietnamese bank lists its securities, foreign investors may buy shares under legal provisions on securities and the securities market within the above-said holding limits.

4) Conditions for participation in administration of a Vietnamese bank:

ü       A foreign credit institution may become a strategic investor of only one Vietnamese bank.

ü       A foreign credit institution may join the board of directors of not more than two Vietnamese banks.

Issues and recommendations

1) Applicable criteria for measuring market shares of Vietnamese banks

Current regulations on the method for measuring the market share of a credit institution based on its revenues, including interest, earnings from service provision and foreign exchange trading, capital gains and income from other business operations (under Decree No. 116/2005/ND-CP) are unreasonable for the reason that:

ü       Incomes of a bank from its operations do not have a direct effect on its market competitiveness but show only the efficiency of its provision of banking products and services as well as its capacity to effectively manage business operations and control risks.

ü       The financial nature of products and services provided by banks would prevent the measurement of market shares based on these banks’ incomes from showing the degree of their market control, which constitutes one of important reasons for controlling M&A in general and banking M&A in particular.

In any event, Vietnamese banks can hardly determine whether or not their M&A plans violate anti-trust regulations since relevant information on the banking market is not sufficiently transparent.

The combined application of the following indicators would best show the future competitiveness of businesses, to the determination of market shares conducive to market concentrations before entering into or refusing an M&A deal:

·         Ratio of deposits (of the bank in question) to the total deposits of the entire sector;

·         Ratio of credit to the total credit in the entire sector;

·         Ratio of revenue from interest to the total interest of the entire sector.

We also suggest the application of HHI coefficient, which can bring about more practical results, to measuring the extent of concentration instead of merely summing up market shares of involved entities without considering important material factors.

When examining M&A among credit institutions, the State Bank of Vietnam and the Competition Management Department may refer to any criterion relevant to any operation of these credit institutions in order to maintain competitiveness in the marketing of financial products and services.

2) M&A between a Vietnamese bank and a non-bank credit institution:

At present, there is no regulation dwelling on this type of case. For example between a Vietnamese bank (bank A) and a financial leasing company (company B) in a given locality (province X) in which already exists a branch or a financial leasing company of this bank as the only banking institution.

Since non-bank credit institutions also provide some limited financial-banking services, an M&A between the above two entities, when viewed from national level, would not violate current anti-trust regulations.

A case study

After the M&A deal is completed, customs using services of company B cannot receive products and services and enjoy conditions as previously provided because in province X there is now only one provider of these products and services, namely bank A. This means the M&A deal between bank A and company B has depressed banking competition in province X.

As the banking administration authority, the State Bank of Vietnam should settle the case as follows:

ü       Requesting the involved parties to assure that the M&A deal between bank A and company B in province X would not worsen the actual provision of financial products in the locality in terms of category, price and access conditions, unless they pledge to provide new products and services which are unavailable in the locality;

ü       In case users of products and services of company B or bank A in province X lodge complaints and can furnish proof that the M&A deal between bank A and company B has caused damage to them, bank A and company B will be handled for their violation of the competition law.

3) Banking concentration limit:

At present, there is an inconsistency between provisions of the Competition Law and Decree No. 69/2007/ND-CP on the bases for measuring the degree of banking concentration.

The Competition Law sets a limit of banking concentration based on market share, while Decree No. 69/2007/ND-CP stipulates such a limit based on charter capital.

To facilitate M&A involving domestic and foreign entities, the said provision of Decree No. 69/2007/ND-CP should be revised to be consistent with the Competition Law.

4) Some other issues

In order to further improve the legal framework for banking M&A, we suggest the following issues be regulated by legal documents in a consistent manner:

ü       M&A between foreign non-bank credit institutions and Vietnamese banks;

ü       M&A among Vietnamese non-bank credit institutions;

ü       Overseas listing of Vietnamese banks;

Foreign credit institutions or foreign investors buying equities of two or more Vietnamese banks.-
VNL_KH1 

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