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Banking & Finance

Unknown quantity

Released at: 08:00, 18/02/2017

Unknown quantity

Photo: Viet Tuan

A look at the more troubling aspects of Vietnam’s banking sector makes for uncomfortable reading.

by Duy Anh

Though appearing, on the surface, to be on the mend, the actual state of Vietnam’s banking sector remains difficult to gauge. Minister of Labor, Invalids and Social Affairs (MoLISA) Dao Ngoc Dung asked the National Assembly (NA) meeting last October whether anyone present could provide an accurate description of where the sector stands. No hands were raised. 

Bankruptcy not an option

The banking sector is one of three critical areas in need of restructuring over the 2016-2020 period, in addition to State-owned enterprises (SOEs) and public investment. While the pace of SOE equitization slowly picks up and public investment is tightened, the banking system is yet to recover from its 2011 crisis, when the State-owned shipping company Vinashin went belly up. A proper solution to combat bad debts is yet to be found, while banks’ financial figures are still unsteady at best, making the sector the hardest to restructure, Minister Dung acknowledged. 

While reform is never easy, it is much more difficult to restructure Vietnam’s banking system because of three key reasons, according to Mr. Joseph Stiglitz, World Bank Chief Economist. A lack of legal, scientific, and institutional grounds for restructuring, including mechanisms on asset handling, remains the case. Secondly, illiquid banks with bad assets account for a large percentage in the banking sector, while efficient banks, who could acquire and control the weaker banks, are few in number. Finally, the banking sector is overly complex, with State banks operating under an implicit depositor guarantee mechanism and the government’s declaration to not provide guarantees for private banks perhaps resulting in a “run”, where people descend on banks and make mass withdrawals.

Instead of allowing weak banks to declare bankruptcy, the State Bank of Vietnam (SBV) found itself shoring up ailing institutions three times in 2015, transforming OceanBank, VNCB, and GPBank into wholly State-owned entities in a move to negate any concern over the health of other banks. Senior executives from State-owned banks have become leaders of these distressed banks, with Vietinbank executives appointed to manage OceanBank and GPBank while Vietcombank Deputy CEO Mr. Nguyen Van Tuan joined VNCB in March 2015. 

While the SBV’s may have prevented a “run”, it has failed to help these unsalvageable banks become better. The loss-making lenders remain paper tigers, with mountains of unresolved debt and an absence of any proper transformation schemes being put forward, while those responsible remain in the shadows.

Even though Deputy Prime Minister Vuong Dinh Hue touched on it in October last year, saying the government may force weak institutions into bankruptcy as it intensified an overhaul of the country’s banking sector to boost growth, Vietnam is yet to deal with the domino effect one bankruptcy may trigger, especially after SBV Governor Le Minh Hung requested Vietcombank become more active in the restructuring of weak banks, starting this year.

Still, bright prospects may await Vietnam in 2017. The core mission of the banking sector this year is not only restructuring of the three banks but also two other troublesome lenders: Dong A Bank and Sacombank. While the naming of Dong A Bank as troublesome came as no surprise, especially after it was put under special supervision in August 2015 and several of its executives were dismissed and replaced by BIDV personnel, the naming of Sacombank did catch many off guard.

“Sacombank is not a weak bank”

Sacombank became the fifth-largest lender in the local banking sector in 2015 after the voluntary merger with Southern Bank, where Sacombank’s Deputy Chairman Tram Be and his family held some 20 per cent of capital. Interestingly, post-merger, Mr. Be authorized the central bank or any individuals or organizations that it designates to take over his entire holdings and those of related shareholders in Sacombank if the lender was to be consolidated. The trigger for the move was reported to be the central bank wanting direct involvement in Sacombank to monitor its bad debt situation and oversee the restructuring process.

In the latest response, Sacombank Chairman Mr. Kieu Huu Dung declared that Sacombank is not a weak bank, pointing out that it still leads the commercial group. He also revealed that many potential investors are keen to lend a hand to address the consequences of the Southern Bank merger, and in the meantime the bank’s restructuring plan is to be submitted to the central bank. “We are determined to start the process as soon as the plan is approved,” he added. 

But while the SBV has praised the joint entity, saying it had synergy that brought greater benefits to shareholders and customers, Moody’s confirmed the merger resulted in high solvency and liquidity risks for Sacombank. In its October 2016 report, it changed the bank’s outlook to negative, with its problem assets increasing substantially since the pre-merger period while its credit provisions were slim at end-June.

And that’s not the only thing working against Sacombank, as related risks include its corporate behavior and opacity and complexity. The corporate behavior risks originate from the situation where the majority of Sacombank’s shares are managed by the SBV, which creates uncertainty around the financial health and future development of the bank. Opacity risks stem from the fact that the bank has not yet published its audited financial report for 2015, which raises the possibility they may be restated. “The negative outlook for Sacombank reflects the uncertainty around the strategic direction of the bank, its unclear ownership structure, and the true scope of asset quality challenges,” wrote Moody’s.

Regardless, SBV’s restructuring plans have already been submitted and are awaiting Politburo approval, with the likely option of allowing unsalvageable banks to be merged with larger banks, since “the thought of letting unsalvageable banks declare bankruptcy has never crossed the minds of government officials,” said Mr. Nguyen Hoang Minh, Deputy Director of the SBV’s Ho Chi Minh City branch. 

M&A a way out

The Asian Development Bank previously noted that it will stick to its country partnership strategy by supporting investments and policy reforms that promote more inclusive and environmentally-sustainable economic growth, and it has no plans to buy-out a troubled bank in Vietnam. Officials in Hanoi may well have breathed a sigh of relief, as any bailout by the regional development bank might have, at least briefly, left the government “high and dry”. According to a knowledgeable source, Sacombank is discussing a potential merger and acquisition (M&A) with a smaller Ho Chi Minh City-located bank. Bank executives were unavailable for comment at the time of writing.

For the four weakest banks in the country, M&As with the three partly State-owned banking entities are the most likely option that would benefit the country’s banking system in the long run, unless there is a buy-out by a foreign investor. The central bank’s target to cut the number of banks from 35 to 20 by the end of this year has long been improbable, but the slow merging of loss-making banks into bigger entities would not only create a strong base to prevent future non-performing loans (NPLs) but also allow the process of handling existing bad debts to find success. “Banks will pay more attention to innovation, improving efficiency in the management and enhance their financial capacity after an M&A,” according to SBV Deputy Governor Mr. Nguyen Phuoc Thanh. 

The banking sector’s bad debt ratio was as low as 2.46 per cent by the end of last November, from 2.72 per cent a year previous, according to the central bank. But a regulatory change is necessary for the long term, as the existing incomplete and unsuitable legal framework has seen a larger number of bad debts being parked at the SBV-run Vietnam Asset Management Company (VAMC). It has, so far, recouped just 15 per cent of NPLs purchased from credit institutions and still has some VND224 trillion ($9.86 billion) on standby for sale, according to the National Financial Supervisory Commission (NFSC).

Secondly, M&As would help tackle the issue of cross ownership, which remains a thorn in the side of authorities. According to banking expert Mr. Nguyen Tri Hieu, cross ownership was the major cause of the failure of the three “zero dong” banks - OceanBank, VNCB, and GPBank. Many of their directors owned companies that borrowed from the banks and then defaulted on the loans, eroding shareholder capital and wiping out liquidity. And even though the central bank issued Decree No. 6 in 2015, requiring banks that still have shareholders with shares exceeding the regulatory limits to reduce such excessive shareholdings, cross ownership continues to exist. 

Thirdly, the central bank is rumored to be extending the timeline for the ten banks that have been designated to move to Basel II standards, with full adoption expected by end-2018. This, if it happens, would ease the pressure on capital buffers for the three semi-private banks to conduct M&As with the weaker ones, and then apply Basel II standards. With the banking sector having substantial recapitalization needs, the latest move by the government has removed the biggest obstacle to achieving both targets.

Vietnam may increase the limits on foreign ownership in banks as early as this year to quicken the overhaul of the country’s banking sector and further attract overseas investments to boost economic growth, Prime Minister Nguyen Xuan Phuc told foreign media on January 13. “Right now, if there are any foreign investors interested in buying any of our under-performing banks, we will sell them entirely,” he said. While the Prime Minister didn’t specify the new ceiling to be introduced, with the cap currently standing at 30 per cent, he indicated that the government may completely sell the more troubled banks. That also means that if there is no buy-out by foreign investors, then M&As will almost certainly be the only option.

On the economic front, “healthy economic growth plus a recovery in the real estate market are likely to lead to a slower NPL formation, at least in the short term,” according to Fitch Ratings. Liquidity and funding conditions should continue to be supported by local currency stability and benign inflation. But there is not much time left for the government to decide, since the goal of establishing highly-competitive banks is targeted for 2020, which is the integration deadline for the banking sector in the ASEAN Economic Community (AEC). 

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