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Banking & Finance

For the benefit of whom?

Released at: 07:57, 16/06/2014

For the benefit of whom?

A rare bank merger is more or less complete, seeing Sacombank and Southern Bank become one, embodying the apparent will of a group of major shareholders.

by Thong Dat

For all the constant rumours of bids and mergers flying around Sacombank there had been little actual progress towards a deal. In early March, however, the bank announced that it was going ahead with a proposal to the State Bank of Vietnam (SBV) to merge with Southern Bank. Both sides have agreed on the feasibility of the project and the merger plan has been made on a voluntary basis and is in line with the regulators’ principles.

In theory, a merger of equals between two banks can be common in Vietnam, especially when the SBV encourages mergers and acquisitions (M&A) to reduce the number of poor quality banks in the marketplace. But the merger between Sacombank and Southern Bank may have a different outcome to most others. While it’s stronger banks who often come out in front from taking over a smaller bank, the winner this time around may not be Sacombank but Southern Bank, the far more inferior of the two.

Takeover or merger?

Despite the difficult economic climate, Sacombank is one of the very few commercial banks in Vietnam that have recorded stable and impressive growth. The bank is ambitious and expects to become Vietnam’s fifth-largest lender by assets behind the four State-owned giants of Agribank, BIDV, Vietcombank, and Vietinbank. As at the end of 2013 its charter capital totalled $590.4 million while total assets stood at $7.6 billion. The bank reported pre-tax profits of nearly $134.5 million last year, surpassing its yearly target by 1.3 per cent and rising 115.9 per cent against 2012.

The sense of loss must be sharp at Sacombank when merging with Southern Bank. The latter is not a big player in the banking sector, not to mention that it has had problems with liquidity in the past. Southern Bank’s total assets are just a half of Sacombank’s, its profit one-tenth and its network coverage estimated at just one-third or even a quarter. Notably, the scale of outstanding loans at Southern Bank is only equal to 40 per cent of Sacombank’s. Ironically, Southern Bank’s bad debt ratio could be many times higher than that of Sacombank, according to calculations from credit rating agency Moody’s. Southern Bank’s return on equity (ROE) was just 0.5 per cent in 2013, down from 12.9 per cent in 2010, while Sacombank has boasted an ROE of 15 per cent for several years.

Sacombank management, however, told local media that they saw Southern Bank, which is 20 per cent owned by Singapore’s United Overseas Bank, as a good takeover prospect. “Merging with Southern Bank will see us enjoy advantages due to similarities in capital and ownership,” said Mr Pham Huu Phu, who has just stepped down as Chairman for personal reason. “Merging must make the bank stronger and shareholders will see how much stronger the bank is after two years.” In fact, Sacombank estimated that its charter capital will rise to $783.75 million and total assets to almost $11.4 billion after merging with Southern Bank. The new bank will also have 108 branches and 432 transaction offices nationwide.

Southern Bank, whose bad debts had increased to $62.8 million as at the end of the third quarter last year, with nearly 60 per cent classified in the lowest category, found it impossible to restructure on its own and sought a merger with Sacombank. In many respects the merger does not positively change Sacombank’s position compared to other banks. Still, some believe the merger will make Sacobank grow slowly. The problem, analysts at Viet Capital Securities Company believe, is that the merger, in the short term, will place a greater bad debt burden on Sacombank and it may be negatively affected by Southern Bank’s deteriorating performance.

Sacombank’s shareholders, understandably, would not readily agree to merge with a bank that will drag their bank backwards. At the shareholder’s meeting held late last month, a number questioned the Board of Directors (BOD) as to why the bank must merge with Southern Bank. In reply, the newly-appointed Chairman Kieu Huu Dung said that the merger will help it to increase its competitive advantage, expand operations, and have more resources to carry out future business plans, but didn’t elaborate any further.

The majority of shareholders were clearly unhappy with such an answer. Some believe that the merger has been in the wings for some time and is being controlled by the BOD and major shareholders, who are close to Southern Bank. And the vote raised a few eyebrows. As announced by the BOD, 97.31 per cent of shareholders agreed to the bank’s plan to merge with Southern Bank, which will be implemented this year if the feasibility study is approved by regulators.  

The winner in this particular case is definitely Southern Bank. Despite the fact that the name of the bank will disappear after the merger, Southern Bank will be able to overcome a number of difficulties it’s being facing in its operations. The takeover rumours also pushed up its share price, which was trading at VND9,800 ($0.46) from VND8,000 ($0.38) previously.

With small scale and a bad debt burden, it wasn’t easy for Southern Bank to persuade any of the healthy banks such as Sacombank to go ahead with a merger. One big question is why the latter insisted on merging with Southern Bank, considering the gap between the two banks’ development levels. Industry analysts and insiders are left with the notion that they are merging for legal reasons: the banks’ owners want to legalise the share-ownership in both banks by removing the cross-ownership issue.

Current laws stipulate that one individual shareholder must not hold more than 5 per cent of the charter capital of a credit institution and that the total shares held by one shareholder and relatives must not be higher than 20 per cent of the capital. Mr Tram Be, former Deputy Chairman of Southern Bank’s BOD, now holds 8.36 per cent of the bank’s charter capital. His son, his daughter and his son-in law own 4.42 per cent, 7.36 per cent and 0.67 per cent, respectively. Together the family holds a total of 20.81 per cent stake, which breaks the 20 per cent cap on share ownership stated in the law.

Mr Be is now the Standing Deputy Chairman of Sacombank and his family also owns 6.78 per cent of the bank’s shares. Some sources have suggested that his influence may be much stronger than it appears, as four out of ten members of Sacombank’s BOD were high ranking leaders of Southern Bank, who are close to Mr Be and his family.

This is why there is talk that what drove the merger was the opportunity to alter Mr Be’s family’s shareholdings in both banks, so that they no longer violate the law. If the takeover proceeds, Mr Be’s family’s ownership ratios would decline but the new ratios are still unknown, as the share swap ratio is yet to be finalised.

B&F in brief

Vietcombank last month was chosen to become the first local bank in Vietnam to be compliant with FATCA (Foreign Account Tax Compliance Act), which are a set of new US tax laws becoming effective on July 1. Vietcombank has selected consulting firm KPMG Vietnam to advise the bank on the implementation and compliance requirements of FATCA.

Vietinbank opened a transaction office in Champasak province, Laos, on March 29. The office, the first of its kind in Laos, provides all the customary services of a full-service bank including capital mobilisation, lending, trade finance, foreign currency exchange, Western Union money transfer, and card services.

Petrolimex Insurance Corporation (PJICO) has insured three ongoing real estate projects of Vingroup that have a total investment of nearly $285.7 million. They include Vincom Nguyen Chi Thanh, Vinpearl Phu Quoc and Vincom Ha Long.

The State Bank of Vietnam (SBV) last month issued Decision No 461 on extending the operational duration of the representative office in Ho Chi Minh City of Malaysia’s RHB Bank Berhad by five years, from October 9, 2013.

The SBV last month revoked the operational licenses of the two branches in Hanoi and Ho Chi Minh City of France’s Credit Agricole Corporate and Investment Bank.

Dai-ichi Life Vietnam has received an establishment licence for its fund management company, the Dai-ichi Life Vietnam Fund Management Company Limited (DFVN). The fund management company will manage the investment of pension products, universal products, and unit link products, and seek to maximise profits from the management of securities investment funds, securities investment portfolios, and securities investment consultancy.

 

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