Banking restructuring: more room for foreign investors
Foreign investors will have a chance to increase their involvement in the Vietnamese banking sector under a scheme approved by the Prime Minister this month.

Foreign investors will have a chance to increase their involvement in the Vietnamese banking sector under a scheme approved by the Prime Minister this month.

The scheme for restructuring the system of credit institutions through 2015 says competent authorities will create favorable conditions for foreign banks to do business in Vietnam on an equal footing with local banks. The scheme also calls foreign banks to closely cooperate with domestic partners to develop new products, renew governance practices and modernize technology.

Under the scheme, the banking sector will be basically, thoroughly and comprehensively restructured to have multifunctional credit institutions by 2020. These credit institutions will have diversified forms of ownership, sizes and scopes of operation, including one or two regionally competitive banks, and provide better financial and banking services for the economy.

Boosting M&A in the banking sector

The scheme introduces many restructuring orientations and solutions, of which consolidation, merger and acquisition are regarded as the most effective.

Based on their financial status, operation and governance capacity, asset and debt quality, equity capital and safety level, finance companies, commercial banks and financial leasing companies will be divided into three groups: financially sound group; group temporarily lacking liquidity; and poorly performing group.

Financially sound institutions will be encouraged to voluntarily conduct consolidation, merger and acquisition to increase competitiveness, expand operational scope and enter regional and global financial markets. When necessary, the State Bank may request these institutions to provide liquidity support loans to, or acquire or merge with, poorly performing institutions.

For credit institutions facing a temporary shortage of liquidity, the State Bank will provide refinancing loans for them to restore their liquidity and resume normal operations. Consolidation and merger among institutions temporarily lacking liquidity and between them and healthy ones will be facilitated and promoted.

For poorly performing credit institutions, the State Bank will first refinance these institutions and ask state-owned commercial banks and other healthy banks to acquire their high-quality assets and debts for payment of due debts. These institutions will be subject to strict and comprehensive supervision by the central bank and may be placed under special control when necessary. They will have to reduce credit liabilities, refrain from distributing dividends and profits, expanding operational scope and transferring shares or contributed capital or assets. Additionally, their managerial and executive officers may be dismissed.

The green light for voluntary consolidation, merger or acquisition of poorly performing institutions can only be switched on after the above measures have been taken. If these weak institutions fail to voluntarily conduct consolidation, merger or acquisition, the State Bank may force them to do so. In this case, the central bank will take one of the following three options: asking these institutions to transfer their charter capital or equity capital or requiring their dominant shareholders to transfer their shares; directly acquiring charter capital or shares of poorly performing institutions and then consolidating or merging them with other institutions or selling them to qualified investors; or permitting foreign banks to acquire or merge with these institutions and concurrently increasing the foreign ownership ratio therein.

Increasing foreign involvement

With this scheme, it is clear that the State Bank expects that consolidation, merger and acquisition measures will help form larger and stronger financial institutions capable of operating in a fiercer competitive environment. It also wants to improve the financial strength, risk management and business governance capacity of domestic banks.

According to banking specialist Le Xuan Nghia, although some top-ranking banks of Vietnam have got experiences in acquiring ailing banks, at the present time, not many domestic banks have sufficient financial strength and redundant liquidity to act as the backbone of the banking restructuring program. Meanwhile, foreign banks possess abundant funds and good banking practices.

“It would be a huge waste if we could not make the best of foreign banks’ financial potential and banking governance and risk management experience for our banking restructuring process,” Nghia said.

To increase foreign involvement in the Vietnamese banking sector, the State Bank will create conditions for and encourage foreign banks to contribute capital to, purchase shares of, acquire, merge or consolidate with poorly performing credit institutions undergoing restructuring. In these cases, the State Bank may possibly consider increasing the foreign ownership cap in such institutions.

The foreign ownership ratio in Vietnamese joint-stock commercial banks is presently set at 30% but often kept at 15-20% in reality for fear that local banks may be swallowed by foreign partners. However, foreign banks are not in the least interested in acquiring ailing banks. The reason behind this fact is that even in case a foreign bank holds the maximum rate of 30% of capital in a local bank, it can hardly join in the latter’s decision making or administration work.

Vietinbank president Pham Huy Hung considered transparency as the most benefit that foreign banks can bring to their domestic partners. Along with the participation of foreign partners, banking operations must comply with international standards and, therefore, will be improved both quantitatively and qualitatively, he said.

According to banking experts, it is the right time not only for restructuring poorly performing banks but also for larger banks to renovate themselves. BIDV, one of the biggest local banks, is keenly seeking for foreign strategic partners to assist it in improving banking governance.

Foreign investors have become strategic partners of several local banks, ranging from leading banks such as Vietcombank, Vietinbank and ACB, to emerging banks, including VIB and Southern Bank.

While offering more business opportunities for foreign players in the domestic financial market, the scheme also requires overseas parent banks to assure operational safety and payment capacity for their Vietnam-based affiliates. Besides, foreign banks’ operations, especially their international transactions and provision of new products, will be strictly managed and supervised so as to prevent their market manipulation and protect customer interests.

Restructuring roadmap

If the restructuring is carried out as scheduled, in 2011-2012, the liquidity of the banking system will be basically assured, while poorly performing members will be identified and controlled for application of restructuring measures.

In 2013, the danger of systematic banking collapse will be averted. Weak credit institutions will be basically handled and the order and discipline in the banking sector will be reset and fortified.

In 2014, the financial restructuring of the banking system will be completed with all banks reaching the required charter capital level and satisfying banking safety standards and prudential ratios. The restructuring of banking operation and governance will be stepped up along with consolidation, merger and acquisition activities.

By 2015, significant improvements will be seen in the financial condition and operation of the entire banking system. The number of small-sized and weak institutions will reduce, while a number of institutions of a larger size and stronger competitiveness will be formed. The market-leading role and position of state-owned commercial banks will be enhanced.

At a recent meeting with the consultative group of donors, State Bank Governor Nguyen Van Binh committed that the central bank would do its utmost to assure that neither financial crunch nor banking collapse or insecurity would occur during the restructuring process beyond the control of the Government and the State Bank; and that it would also try to minimize losses and costs for addressing issues concerning the system of credit institutions.

In a statement released on March 7, the global rating agency Fitch Ratings highly appreciated Vietnam’s banking restructuring plan, considering it a positive step which would have an impact on the country’s balance sheet.

“Nevertheless, there are little details available on when the Government might initiate mergers, how big the bad-debt acquisitions will be or what price the Government might pay. Without these details, it is impossible to gauge how significant a benefit the measures will be for the sector,” the statement read.-

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