The SBV was forced to step in and protect VNCB's depositors from the disaster inflicted by its major shareholders.
The Governor of the State Bank of Vietnam (SBV), Mr. Nguyen Van Binh, signed a Decision on March 5 on taking over all shares of the Vietnam Construction bank (VNCB) and transforming it into a single member limited company owned by the State. The decision nominated a price of VND0 per share and the termination of all rights, benefits, and shareholder roles.
This was the first time the government decided to take over a private bank, with the event offering a number of lessons in how Vietnam’s banking sector needs to be managed.
New shareholders arrive
VNCB was originally known as TrustBank, one of nine banks that had to restructure under the master plan from the government on economic restructuring following the bursting of the real estate bubble. At a TrustBank extra-ordinary general meeting on February 7, 2013, almost all of the Board of Directors were replaced and the General Director of the Thien Thanh Group, Mr. Pham Cong Danh, was appointed Chairman.
In its restructuring plan, TrustBank sold a stake of almost 85 per cent to a new group of shareholders, including the Thien Thanh Group, with 9.67 per cent, with 20 other investors taking on the remainder.
After completing the ownership transfer, Trustbank was rebadged as VNCB. Its charter capital grew quickly, from VND3 trillion ($139.29 million) to VND7.5 trillion ($348.22 million).
At the time, the appearance of Thien Thanh and the other new investors gave TrustBank’s existing shareholders a sense of joy and hope for the future. But it also led to questions being asked about their ability, because the Thien Thanh Group’s expertise was in the trading of construction materials and cars, and in real estate and financial investments. Banking management didn’t appear to be one of its fortes. Apart from raising capital from the Thien Thanh Group, the restructuring plan lacked specifics on how the new investor group would support the bank’s activities.
After almost a year under the questionable management of Mr. Danh and his group, on July 27, 2014 he was dismissed by the Board of Directors. A day later, police from the Ministry of Public Security moved in, arresting him on charges of violating State regulations on economic management causing serious consequences.
According to the police investigation, Mr. Danh and the group of new investors used the deposits of the Tan Hiep Phat Group as collateral on 39 loans without the Group’s permission, including three loans it left off its books, to invest in core banking system upgrades and rent office space. When the loans became overdue the loans went unpaid, seeing VNCB VND6 trillion ($278.58 million) the poorer. They also used VND6.6 trillion ($306.43 million) of customer deposits in the interbank market to secure loans from Sacombank, BIDV and Tien Phong Bank, to bail out 29 companies founded by Mr. Danh. When these loans expired, Sacombank, BIDV, Tien Phong Bank recalled the funds on the interbank market, causing VNCB to lose VND6.146 trillion ($285.35 million).
Given the apparent improper behavior of Mr. Danh, the SBV moved quickly to protect depositors at VNCB. On August 1, 2014 a strategic cooperation agreement was signed, containing terms for Vietcombank to provide liquidity support to VNCB, cooperation in capital and currency trading and credit, trading support, management, and the exchange and provision of information to pay interest to depositors. The two sides agreed to support each other in carrying out capital transactions and currency trading, as required.
Even though VNCB received support from the central bank via Vietcombank, it wasn’t enough to get it out of the red.
SBV steps in
On January 1, 2015, at an extra-ordinary general meeting of VNCB, the results of an independent audit were tabled, showing that VNCB had negative equity. Shareholders not only no longer had assets in the bank but had become liable for all debts incurred.
There were three more extra-ordinary shareholder meetings seeking approval of plans to contribute additional charter capital of VND7.5 trillion ($348.22 million), as prescribed by law. Unsurprisingly, the shareholders baulked at the idea.
Only two solutions had become available to VNCB: bankruptcy or being taken over by the SBV. Under law, in case of bankruptcy its depositors would be covered by deposit insurance, but this was limited to a maximum of VND50 million ($2,320). And VNCB going bankrupt would hardly bolster confidence in the country’s banking sector. The central bank was forced to step in.
Taking over VNCB at VND0 per share aims to show its responsibility towards the bank’s depositors. “It seeks to provide stability and curtail any loss of belief in the banking sector,” SBV Deputy Governor Nguyen Phuoc Thanh told local media. “We may act in a similar nature in the future if the circumstances require.”
Mr. Can Van Luc, Senior Advisor to the Chairman of BIDV, said the decision by the central bank will avoid a “run” on financial institutions and the subsequent chaos that would ensue. The central bank also wants to fully secure customer rights, because when a bank declares bankruptcy depositors are only minimally covered, and this would have a negative affect on confidence in the banking sector as a whole.
Future for VNCB
Deputy Governor Thanh was quick to point out that the move does not represent “nationalization”. After the acquisition, the SBV will raise capital and provide VND40 trillion ($1.9 billion) in support for the emerging new bank to operate as normal.
At the time of the acquisition VNCB had 551 shareholders, of which six were institutional shareholders and 545 were individual shareholders. Though depositors were protected, these shareholders all lost out. After restructuring the bank, Deputy Governor Thanh said, the SBV will seek new investors, both domestic and foreign.