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Banking & Finance

Much to offer

Released at: 07:22, 16/06/2014

Much to offer

Given the complexity of the bank restructuring process it is important that Vietnam create more conditions for foreign investors to jump onboard

by Thong Dat

Foreign banks play a relatively minor role in Vietnam’s economy, as reflected in their command of about 10 per cent of total assets and capital in the banking system, which is quite small compared to other countries. But they can become a more important force thanks to their international practice and experience. With Vietnam’s banking sector undergoing fundamental restructuring, bank regulators are now urging foreign banks to participate more deeply in the process.

The advantages of greater foreign participation are clear. They tend to increase the efficiency of the local banking system, bring in more sophisticated financial services and, especially, have the ability to nurse weak banks back to health. For a number of years already some foreign banks have been actively involved in buying stakes in local banks. Bank of Tokyo-Mitsubishi UFJ now holds 15 per cent of VietinBank, while Mizuho Corporate Bank is strategic partner of Vietcombank, holding a 15 per cent stake. HSBC and Standard Chartered are also long time strategic partners of local banks, with the former holding 20 per cent of Techcombank and the latter 15 per cent of the Ho Chi Minh city-based ACB.

While foreign bankers are broadly optimistic that the current restructuring will create opportunities for them, they remain cautious about how policies and regulations will be applied and whether they will face constraints similar to those that have challenged them in the past, such as restrictions on foreign ownership in local banks. Many noted that the relaxation in the foreign capital cap holds significant promise for pushing foreign participation and accelerated and more balanced bank restructuring.

Vietnam is at least doing more to attract foreign investors to its troubled banking sector. In February a policy to allow foreign investors to acquire larger stakes in the country’s banks took effect, with the aim of bolstering the ailing banking system. The overall limit on foreign stakes in Vietnamese banks is 30 per cent under the new policy. Of this, foreign individuals are allowed no more than 5 per cent, foreign organisations 15 per cent, and foreign strategic investors 20 per cent. In special cases, total foreign ownership in a local bank can exceed 30 per cent if the Prime Minister favours the investment.

News has circulated since late last year that GP Bank, one of nine weak banks under the State Bank of Vietnam (SBV)’s clarification method, may sell 100 per cent to the Singapore-based United Overseas Bank (UOB). If a deal is struck it would be a major triumph for foreign investors, who are patiently waiting to invest in local banks.

Vietnam’s financial and banking market is considered attractive to foreign investors and has huge potential for development, as only around 21 per cent of citizens have bank accounts. The price of a stake in a Vietnamese bank is also attractive, as their P/E (price/earnings) ratio is low compared to banks in other regional countries. However, foreign investors seeking a stake will have to face the fact good banks aren’t looking to sell large stakes. Only weak banks are interested in doing so, meaning investors must study such opportunities carefully.

More incentives

It is hard to overstate the significance of the relaxing of foreign ownership restrictions, which throws the door open to more foreign investors. Many foreign banks expect to hang on to their Vietnam strategies while waiting for the benefits of the country’s bank restructuring and regulatory changes to become clearer. But the total foreign ownership in a bank is still limited to 30 per cent compared to 49 per cent in other sectors. Foreign investors say they could help ease the load of bad debts at Vietnamese banks, but their stakes are not high enough to justify pumping in more resources. “I see no significant change as the total maximum remained unchanged,” said Mr Nicolas Audier, Managing Partner at Audier & Partners and an executive board member at Eurocham Vietnam. “This has upset most foreign investors, who have their eyes on local banks.”

Mr Audier is of the opinion that investors cannot run effective banking businesses in Vietnam due to their subordinate role in management. He gave the example of Standard Chartered and the World Bank’s International Finance Corp (IFC) being surprised by news a few years ago that local bank ACB, in which they held stakes, had been found to have been manipulated by a group of Vietnamese shareholders, including Mr Nguyen Duc Kien, for illegal business purposes. He suggested regulators consider further increasing the cap, especially given the current problems in bad debts, cross-ownership, and mismanagement. “Ongoing mergers of weak banks without the help of foreign strategic partners will not do much to clean up bad debts in the system at all,” he said.

For his part, Mr Remco Gaanderse, Chief Representative of Dutch bank ING, believes that Vietnam should have raised ownership by strategic investors to 50 per cent. “The economy is not really opening its doors to foreigners with a ceiling of 20 per cent,” he said, adding that local banks stand no chance of catching up with the modern administration adopted by foreign banks. The overall opinion is that Vietnam should not be hesitant to lift ownership limits in order to lure international investors into the local banking sector and get them to help rectify the high bad debt ratio.

Mr Nguyen Manh Hung from the Banking Institute Strategy under the SBV believes that there is still a lot of room for foreign investors, since only a few banks, like ABBank and VietinBank, have used up their entire ownership limit for strategic investors. By increasing the cap by 5 per cent to 20 per cent, the SBV sent a message that the system genuinely needs foreign investors, but it is only opening the door to them gradually.

While open to an eventual increase in the foreign cap, local regulators have cautioned against the risk posed by short-term investors. They may invest in Vietnam but then pull out at the first sign of trouble or in response to issues in their home markets, such as the current drawdown of QE in the US. “They may be in for quick profits, and then withdraw their capital anytime they see problems,” said Mr Hung. “We need to seek long-term commitments from investors.”

As for local banks, they may support foreign participation but are in no hurry to team up with them because the stake price always occupies the minds of shareholders at local banks, who only want part of their bank to be sold to foreign investors at a favourable time so that they can earn the best returns. This means they may try to increase the attractiveness of their bank in advance, to maximum profits from such sales.

Still, most analysts contacted by VET agree that it is difficult for Vietnam to restructure its banking sector without the participation of foreign investors. The country’s resources are limited while it must deal with a range of issues like resolving bad debts and complex cross-ownership matters. “So we need to attract more foreign investment to resolve these issues,” said Mr Hung. “Other countries are also doing likewise.”

One thing foreign banks, whether strategic partners or not, would be happy to do is to contribute to the country’s bank restructuring process by passing on their international experiences to local authorities. Most foreign banks in Vietnam have already been part of bank restructuring in other countries and so do have something to offer. Greater participation by foreign investors would help Vietnamese banks get access to more funds, improve their corporate management and technology, and increase transparency as information will be strictly supervised. All of these things would help to accelerate the restructuring of the local banking system.

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