State-owned economic groups have a long way to go to divest all their holdings in banks before the end of next year.
The pressure is mounting. Vietnam’s largest State-owned economic groups and corporations are battling against time to divest their investments in the financial sector in general and from commercial banks in particular before December 31, 2015. Directed to do so by the government, the withdrawal of capital from non-core businesses was widely seen to be among the key resolutions taken to accelerate the restructuring of State-owned enterprises (SOEs). But many State-owned economic groups still hold major stakes in commercial banks, despite being told to divest two years ago.
Official figures from the Ministry of Finance (MoF) show that at the end of 2013, State-owned economic groups and corporations still had investments totalling VND15,200 billion ($724 million) in the banking sector. They have indeed begun to divest but it seems that the process is running out of steam. In the first half of this year only VND73 billion ($3.4 million) was pulled out of banks; much lower than the VND734.7 billion ($35 million) in 2013. “The modest results indicate more challenges ahead, wrapping up a year that so far has been more defined by failure than success,” said a partner at a Singapore-based market research firm.
During 2006-2008, to stimulate business expansion and diversification, many economic groups pumped too much cash into non-core businesses. At that time, investments in commercial banks accounted for 60 per cent of all investments State-owned economic groups made in the financial sector, which includes insurance, securities and investment funds, according to a report from the National Assembly Economic Committee. Despite the government’s call for State-owned economic groups and corporations to speed up their divestments from non-core businesses, their investments in banks actually increased in 2011 and 2012. “At the end of 2013, dozens of State-owned economic groups and general corporations still held stakes in commercial banks,” the Committee’s report stated.
As demanded by the government, State-owned economic groups have begun valuing their assets to divest when suitable buyers are found. The Vietnam National Coal, Mineral Industries Holding Corporation Limited (Vinacomin) was the most recent group to cut its capital from banks, as it announced the completion of its divestments ahead of schedule. Vinacomin was reported to have offloaded its entire stake in the SHB Insurance Company (SVIC), Saigon Hanoi Bank (SHB), VNA Insurance Company, SHS Securities Company, and Vinacomin Finance Company, for VND1,503 billion ($71 million).
Likewise Vietnam Airlines, which sold its remaining 2.7 per cent stake in Techcombank, Vietnam’s fourth-largest partly private bank by assets, late last year. The national flag carrier was one of Techcombank’s founders, with an initial, and largest, holding of nearly 20 per cent. However, since the end of 2011 Vietnam Airlines only held 2.7 per cent, or more than 24 million shares.
Meanwhile, Electricity of Vietnam (EVN) has also conducted several capital market transactions to exit from its stake in the banking sector. It sold more than 25.2 million shares in An Binh Bank (ABBank) to the Hanoi Import-Export Company (Geleximco), lowering its stake from 21.27 per cent to 16.02 per cent. EVN confirmed that its stake will continue to decline, based on government requirements.
Despite the activity, investments by State-economic groups in banks and financial companies remains significant. Of the groups withdrawing capital from banks, PetroVietnam is a special case, considering the size of its capital in the finance and banking sector. The national oil and gas group now holds a 20 per cent stake in Ocean Bank and 52 per cent in PVcomBank. After cutting its stake in ABBank, its still holds 16.02 per cent.
VNPT still holds 8.95 per cent of Maritime Bank’s charter capital while Petrolimex has a 40 per cent stake in PG Bank. Bao Viet Holding possesses the dominant stake, of 52 per cent, in BaoVietBank, and the Vietnam National Textile and Garment Group (Vinatex) has a 3.69 per cent interest in the National Commercial Bank (NCB). Although more divestments are in the pipeline, the process has noticeably slowed.
Less buyers, less divestment
State-owned economic groups typically seek willing buyers for their banking assets as they can often obtain a higher sales price. But the lack of potential suitors and an inability to agree on pricing in recent years have all but closed this route for many sellers. “The challenge for State-owned economic groups remains to make their non-core assets attractive for sale,” said Mr Nguyen Tri Hieu, an independent banking analyst.
Without buyers, of course, there can be no divestments. The banking sector is facing a challenge as commercial banks are about to undergo a bank restructuring process initiated by the State Bank of Vietnam. Moreover, banking stocks, as reported by VPBank Security, have underperformed the VN-Index, with a one year return of only 5.9 per cent compared to 33.7 per cent.
With fewer willing buyers around, State-owned economic groups may have to consider selling at a lower price. Vietnam Airlines, for example, had cut the price on its Techcombank shares from VND12,100 ($0.57) per share at the first auction to VND10,800 ($0.51) at the second attempt. As a result, three investors registered to buy all 24 million shares.
Authorities have two options. If they target quick divestments, then the selling and buying price will be decided by the market. The other option is that they wait for a certain period of time so that the market will be less problematic and divestments may be more easily done. Impatient with the divestment process, the government has recently signed a decision officially agreeing with a proposal to allow capital divestments at under par value. SOEs, though, must work to a principle of minimising investment losses when conducting divestments.
Agreeing with the government’s decision, Mr Hieu believes that divestment will mean loss of capital. Previously, he explained, SOEs invested major amounts in the banking sector, so the purchase price they paid would have been several times higher than the real value of the shares. Banking shares have now lost their appeal, with prices continuing downwards. “So, if authorities want quick divestments, they must accept losses,” he said. He suggested that authorities allow State-run groups to transfer their investments in banks to the State Capital Investment Corporation (SCIC), who will hold onto the shares and wait for the market to pick up before selling.
The decision to sell bank shares at lower prices might attract foreign investors but price is not their primary motivation, according to the partner at the Singapore-based market research firm. What foreign investors want is more than 30 per cent of local banks or more than 50 per cent of certain weaker banks. Only when such ownership ratios are dangled in front of them will foreign investors make a move.