A few global banks have recently downsized some of their business in Vietnam but this does not hint at a widespread exit.
Foreign banks once saw Vietnam as a huge undeveloped market. Now there subtle signs that they are adjusting their development plans for the country. Earlier, in April, there was a rumour that HSBC was looking to divest from its 20 per cent stake in Techcombank when the cooperative agreement between the two banks expires in June. While the UK-based bank is yet to make any official comment regarding the matter, industry insiders say it is unlikely the agreement will be extended.
A year before Vietnam joined the WTO foreign banks were active in partnering with local banks as they hoped to leverage their positions to drive expansion in the country. ANZ was the pioneer, outlaying $27 million to buy a 9.93 per cent stake in Sacombank in March 2005. Three months later Standard Chartered bought 8.56 per cent of ACB while HSBC closed 2005 by acquiring 10 per cent of Techcombank.
Strategic investment is a reliable method for foreign banks to establish a presence in Vietnam as it may pave the way for future acquisitions should regulations change. However, it is worth noting that while Vietnam’s commitments following WTO accession permitted foreign banks to own up to 20 per cent of the charter capital of local banks, ANZ, Standard Chartered and HSBC, in their fist attempts, did not buy more than 10 per cent. This showed that what the long-term thinkers wanted was not only a return on their initial investment but also to conduct a test of their ability to penetrate into the new market. For local banking regulators, the thinking was that foreign banks would help to improve management standards and transfer technology and know-how. One of the most urgent aims was to fix a weak link in the local banking system: risk governance.
Nearly ten years on, the momentum for cooperation has been slowing. Under the new Basel III banking rules, introduced from January 2013, which raise capital requirements in holding financial institutions, foreign banks have been divesting assets in foreign countries in an attempt to raise capital. In Vietnam, some foreign banks, desperate to replenish balance sheets weakened by the global financial crisis, have been starting to cash out.
Foreign bankers have drawn one lesson from Vietnam. Some have bristled at their limited influence over bank operations and inability to gain ownership control. For years, foreign strategic investors have been anticipating a lifting of the 20 per cent cap on foreign stakes in local banks, but it hasn’t happened. Part of the reason is that banking regulators and local banks are concerned about how foreign strategic investors would influence a business and that is something that has to be considered up front, according to Mr Tay Han Chong, CEO of Mekong Development Bank (MDB), who believes that 20 per cent is not enough for a foreign investor to take control of a bank. “The right of control is what the majority of foreign investors strive for,” he said. “They may ask themselves why they need to make every effort to develop a bank in which they only hold 20 per cent.”
Unable to reap meaningful strategic value from these deals, many foreign banks increasingly looked at their stakes in local banks solely as financial investments, according to Mr Le Xuan Nghia, Director General of the Business Development Institute. MDB recently revealed that its strategic partner, Fullerton Financial Holdings, a 100 per cent owned subsidiary of Singapore’s Temasek Holdings, which holds 20 per cent of the bank, would sell its entire stake to the local Maritime Bank after it merges with MDB. The story is similar in the case of the Singapore-based Oversea-Chinese Banking Corporation (OCBC), who sold its stake of more than 85.83 million shares, accounting for 14.88 per cent of VPBank’s charter capital, late last year. The withdrawal ended seven years of OCBC as a major foreign shareholder of VPBank, after it bought a 10 per cent stake back in 2006.
Although some foreign banks are unloading stakes, banking analysts say that such sales don’t necessarily represent any sort of retreat. Foreign banks are not about to shut down their foreign networks altogether, not least because the business they do overseas is often their best prospect for growth. Mr Nghia said that some of these banks, however, may hold their shares to help secure their future growth in the Vietnamese market. “Unless they feel an urgent need for capital, they will hold on to their shares,” he said. “The market still holds potential for foreign banks.”
Indeed, the major potential of the Vietnamese market was the motivation of foreign banks to enter in the first place. Only around 40 per cent of Vietnam’s population has a bank account and less than 50 per cent of these actively use banking services. In addition, the government’s banking reform push may finally result in giving foreign banks a lift in foreign ownership.
It’s true that several foreign financial institutions have made some reductions in their stakes at local banks and some of the more cautious are beginning to question the wisdom of increased market share in a business whose economics are fundamentally unsatisfactory. But this is unlikely to represent the whole picture, as these seem to be case-by-case investment decisions rather than foreign investors becoming bearish about Vietnam’s entire banking sector.
It is nearly impossible for foreign banks to match the size of local banks in terms of retail networks. The State-owned Agribank, for instance, has 2,300 branches and sub-branches nationwide. In sharp contrast, HSBC, the largest foreign bank in terms of network, has less than 20 branches even though they are moving to expand quickly. Unless they can expand much faster, foreign banks will be unable to match the retail networks of Vietnamese banks for a very long time. Recent development by the likes of ANZ, after the bank divested from Sacombank in 2011, shows that foreign banks, while cutting investment banking arms, have been beefing up their private banking and wealth management operations in the hope of attracting high-income customers. Their strategy is shifting back to advisory, wealth management and intermediary services.
As big banks ponder their future in a country once considered the industry’s hope for growth, some of them still have the appetite to continue in the hope of profiting at some point in the future. At this point, HSBC remains the largest shareholder of Techcombank, with 19.4 per cent of capital, but it didn’t nominate board candidates to the bank’s Board of Directors in the new tenure from 2014-2019. While talk regarding a split between the two remains just that, it is expected to happen sooner or later. Taken together, the end of the long-term cooperation between HSBC and Techcombank has two meanings. Firstly, the latter is now fully able to compete in the market, and secondly, the former is working on a new strategy.
Strategies may be diverging but some things always stay the same, as all bankers now stress the importance of balance sheet discipline and targeting only profitable activities. The thinking is that foreign banks are mulling over other options such as setting up independent operations rather than teaming up with local banks. That’s why many tip that the sale of the Techcombank stake, whether it happens quickly or not, will not represent an exit from the Vietnamese market by HSBC.
Of course, foreign banks are being increasingly cautious in their investment decisions and HSBC will have noted how Vietnam fits into its global operation, where it is focusing on business stemming from their commercial banking strongholds. Notably, in March this year HSBC won approval from the State Bank of Vietnam to increase its charter capital to VND7,528 billion ($357 million) from VND3,000 billion ($142 million). The move suggests that HSBC is planning to expand the scale of its operations, as the capital increase allows it to open more branches and transaction offices while ensuring safety requirements are met. This implies that the bank plans to expand throughout the country as it hopes for future profitable business.