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Banking & Finance

Questionable approach

Released at: 04:04, 02/07/2014

Questionable approach

Regulators are keen to push the idea of mergers between small and large banks but many analysts see it as the wrong strategy to pursue.

by Thong Dat

A number of factors are converging upon and within the local banking sector and spurring an interest in merger activities, which is exactly what regulators are hoping for. The State Bank of Vietnam (SBV) has already announced that the number of commercial banks must be cut by half from now to 2015, to address many of the problems at smaller banks. Larger banks, meanwhile, are growing even larger after swallowing up smaller banks. Industry insiders say that M&A activities will become more commonplace this year, with a growing number of small and medium-sized banks merging as capital shortages, high levels of bad debt and shrinking profits put pressure on their operations.

Pursuing mergers

Several banks have recently presented plans or expressed an intention to complete a merger as the country speeds up the restructuring of credit institutions. The latest name linked with a potential merger is Petrolimex Bank (PG Bank), in which the country’s top petroleum importer and distributor, Petrolimex, owns 40 per cent. It has been reported that the bank is actively pursuing a merger with the giant VietinBank, the country’s second largest by total assets. If approved by shareholders, the move would see PG Bank become an affiliate of VietinBank, with the latter holding up to 99 per cent. But at PG Bank’s shareholder’s meeting last month the bank, whose registered capital stood at $142 million and total assets at $1.18 billion as at the end of last year, merely indicated that it was considering a merger with another bank as part of its restructuring plans and made no specific reference to Vietinbank or any other bank.

Meanwhile, shareholders in the Hanoi-based Maritime Bank last month approved a merger with the Mekong Development Bank (MDB). Leaders from both said the deal made sense for a variety of reasons, first and foremost being the boost to financial strength and increased competitiveness. Analysts believe that the merger will put Maritime Bank, whose registered capital stands at $379 million, or double that of MDB, among the country’s five largest banks. With shareholders on both sides giving the go-ahead, the merger will proceed as soon as final approval comes from the central bank.

Much of what these banks are doing makes perfect sense. They have noted that the central bank is supporting mergers, acquisitions, and consolidations, especially small banks merging into large banks, to create stronger institutions and also weed out problematic banks. “It is very difficult for small banks to operate at the moment as their competitive capacity is very low,” said SBV Governor Nguyen Van Binh. “I have firmly suggested banks should sit down together to discuss mergers for the sake of their and the community’s interest. Vietnam’s economic scale is fine with 14 to 17 local commercial banks.”

As a result, a dozen small banks, with the minimum capital asset requirement of VND3,000 billion ($142.8 million), are eager to pursue mergers as they seek to avoid being classified as systemically risky. VietCapital Bank, one of the dozen, announced in documents prepared for its shareholder’s meeting that it would actively seek a suitable partner in a merger. “The bank’s policy is nothing new and has been mentioned in previous shareholder meetings.” General Director Do Huy Hung said. “If there is potential for a merger that is beneficial to the development of the bank, then we will consider it.”

Over the last couple of years smaller banks haven’t fallen off the cliff in great numbers but their profitability has declined dramatically, according to independent banking analyst Mr Nguyen Tri Hieu. “Without access to larger pools of capital the pressure to restructuring or die puts their future at risk,” he said. “This is why more bank mergers will unfold, as small banks continue to struggle amid the difficult economic conditions.” But the upcoming wave of mergers with a focus on small and medium-sized banks isn’t only explained by the struggle of smaller banks. A major contributing factor is stricter regulations by the SBV. As VET reported last month, the merger between Sacombank and its smaller competitor, Southern Bank, has been more or less completed. The merger was “strategic” more than anything else, with the banks’ owners wanting to legalise the share-ownership in both banks by removing the cross-ownership issue.

For their part, healthy banks, which have emerged from the economic difficulties relatively unscathed, are expected to support smaller banks that don’t have the means to survive. Among the healthy is Vietcombank, one of the country’s largest. CEO Nghiem Xuan Thanh told the shareholder’s meeting last month that the bank would consider taking part in the restructuring process, adding that a merger would happen sooner or later as this is necessary for the development of the banking sector. He also said that the bank has plans in place to raise capital for a merger as and when conditions permit. “The process of finding a suitable partner hasn’t been up to our expectations, and the time for a merger is yet to be fixed,” he told the gathering.

Substandard solution

One thing for certain is that the banking sector will see assisted mergers, orchestrated by regulators, with large banks lend a helping hand to smaller banks. While this is the strongly held view of regulators, who believe it will help speed up the restructuring process, analysts believe otherwise. Many are sceptical about the real effects of assisted mergers, saying that such deals look more like rescue missions than sound business deals, with the large banks receiving little in the way of benefit.

This solution, according to Ms Alicia Garcia Herrero, Chief Economist for Emerging Markets at Banco Bilbao Vizcaya Argentaria (BBVA), a global financial services group, can only work if the acquiring bank were strong enough to absorb the losses of the weak bank without endangering its own soundness. “Weak banks should be recapitalised by the government before being merged, at least to avoid them having negative capital when being merged,” she was quoted as saying. “Foreign banks should also be permitted to manage banks in Vietnam.”

Meanwhile, Mr Yun Hang Jin, Director of the Department of Emerging Markets at Korea Investment & Securities (KIS), is of the opinion that cutting the number of banks is insufficient. He argued that, after a merger, the bad debts of the new entity would be worse, as it would then equal the total bad debts of the two banks. “One cannot say that a merger will help to improve the health of the banks or help them escape from liquidity problems,” he said.

For his part, Mr Nguyen Duc Thanh, Director of the Vietnam Centre for Economics and Policy Research, believes that this solution may not work in the long term. Forcing bank mergers can only help strengthen the banking system in the short term, while in the longer term it will have to be supplemented with structural changes in the banking system. The negative aspect of merging small banks into larger ones is that it may affect the competitiveness of the entire banking system. “If large banks have more power they will exert greater influence on the policy making process, which would allow them to control the market,” he believes.

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