Vietnam Seeks to Shake up its Banking Industry through M&A and Increased Foreign Ownership

By Edward Barbour-Lacey

HCMC – Vietnam is continuing its struggle to reform its banking system and create a more attractive business environment for foreign investors. This will be achieved in part by changing the current limits on foreign ownership and encouraging mergers and acquisitions in its financial industry. Building a stable and competitive banking system is a key part to Vietnam becoming a global investment destination.

Previous efforts to improve the liquidity of the country’s weak banks have helped to reduce risks to the financial system. The government is now attempting to create larger and stronger banks that will be able to compete with regional competitors.

One of the chief problems facing the country’s banking system is the high level of nonperforming loans. The central bank has set a goal of lowering the ratio of bad debt to outstanding loans to three percent by the end of 2015, the ratio currently stands at slightly over four percent – among the highest in Asia.

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The country’s central bank, the State Bank of Vietnam, is seeking to consolidate the banking sector by encouraging mergers and acquisitions, increasing credit growth, and increasing capital for its asset management firm so that it can buy up bad debt. The central bank has also announced plans to restructure around six to eight of the country’s weakest banks through either deals or bankruptcy.

Foreign ownership

While there have been rumors circulating for some time now, it seems as if the government is finally ready to increase the allowable size of foreign investor ownership stakes in local banks. It is hoped that foreign investors will be able to lend their expertise, as well as their money, to the reformation of the country’s banking system.

Prime Minister Dung has stated that the government will soon allow foreigners to invest above the current 30 percent limit. The current investment limit covers total foreign shareholdings and also limits a single foreign strategic investor to a one-fifth stake.

The current ownership limits have proven unpalatable to most foreign investors, who see little benefit in holding a minority share and having limited input into the restructuring and recapitalization processes of the banks.

More mergers on the horizon

Encouraging mergers is a key strategy of the Vietnamese government to strengthen the country’s banking system. This year looks to be particularly active on the M&A front. One of the key upcoming mergers is between the Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank) and the Petrolimex Group Commercial Joint Stock Bank (PG Bank).

VietinBank, which is 60 percent owned by the government, is one of the largest lenders in Vietnam and the seventh-largest company listed on the Ho Chi Minh Stock Exchange by market capitalization,. With assets of US$1.2 billion, PG Bank has 16 branches and 63 transaction outlets scattered throughout the country.

Other ongoing, or possible future mergers include the following banks:

• Maritime Bank and Mekong Development Bank
• DongA Bank and An Binh Bank
• Sacombank and Southern Bank
• Eximbank and Nam A Bank
• SaigonBank and Vietcombank
• Mekong Housing Bank and BIDV

In a further move to strengthen the banking system, the central bank also “bought” the debt-ridden Vietnam Construction Bank for the price of zero dong per share.

Analysts expect further M&A activity in the financial sector as well as in a range of other industries. Many companies are looking to obtain a strategic position in the country before it becomes a party to major trade agreements such as the Trans-Pacific Partnership, a massive United States led deal.

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In addition to reforming its banking sector, Vietnam is attempting wider efforts to create an attractive business environment through such liberal reforms as the privatization of the state-sector and allowing for greater foreign investment in a range of sectors. As its economy has begun to pick up, Vietnam has become an increasingly attractive investment destination for investors engaged in a variety of businesses such as the manufacturing of garments or high-tech products. The country also has a burgeoning consumer market, which retail businesses around the world are eager to take advantage of.

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