Banks are encouraged to do M&A for restructuring

The State Bank of Vietnam (SBV) will continue to encourage the mergers and acquisitions (M&A) between banks as a solution to dealing with weak credit institutions.

This solutions is a part of the restructuring the credit institution system in the 2016-2020 period project which urgently developed by the central bank. According to Mr. Nguyen Van Hung, Deputy Chief Inspector of the SBV’s Inspection Agency, M&A is a popular and effective solution to handle weak credit institutions and has many advantages compared with other measures.

The new restructuring project is aimed to continuously enhance the country’s banking system, which has been improved significantly thanks to a strong restructuring scheme from 2011 to 2015.

One of the new project’s goals is that Vietnam’s banking system must have at least 1-2 commercial banks with scale and capacity equivalent to large banks in the region to gradually meet the requirements of international economic integration by 2020.

The SBV affirms that they will support banks to prevent the disruption of credit institutions’ operations during the process of M&A. In addition, the SBV will protect the rights and interests of shareholders and customers, and save costs, time and human resources when the process of M&A occurs.

The data of the SBV shows that the number of banks decreased by 19 through the implementation of M&A, dissolution and by revoking licences in the 2011-2015 period. Of these, there were nine banks, two non-bank credit institutions and eight branches of foreign banks. Besides restructuring 10 banks through mergers, the SBV dealt with three ailing banks - Ocean Bank, Vi?t Nam Construction Bank (VNCB) and Global Petroleum Bank (GPBank) - by acquiring them at zero VND.

However, there are still 12 banks with charter capital of less than 4 trillion VND (179.4 million USD). These banks are considered as weak banks because in the context of fierce competition, banks need a strong source of capital to boost lending activities and trade support as well as to invest in infrastructure such as information technology system and business-related services.

Hence, Vietnam’s banking system will have to continue restructuring so as to be able to develop sustainably. In case raising capital from existing shareholders is not feasible, banks will have to find potential M&A partner.

Ms. Nguyen Thuy Duong, Deputy Director of Ernst & Young Vietnam’s Financial-Banking Services said that foreign financial institutions with abundant capital resources will seek to penetrate the Vietnam’s banking sector in the context of increasing openness of the financial market.

The current policy of the central bank is not to increase the number of banks. Therefore, it is quite possible that domestic small- and medium-sized banks will be acquired by foreign partners, according Ms.Nguyen Thuy Duong.

Ms.Nguyen Thuy Duong also pointed out another issues of the banking system. At present, there are still a number of banks holding over 5 percent of the shares of other banks or financial companies while the SBV’s Circular 36 only permits commercial banks to purchase and hold less than 5 percent of voting shares of other banks.

Therefore, banks which are holding more than 5 percent will be required to divest to ensure compliance with the circular’s regulation.For this reason, it is expected that in the near future, the market will witness more cases of M&A among banks, Ms.Nguyen Thuy Duong said.

Mr. Nguyen Van Hung said that this issue needs a thorough study and an appropriate roadmap.The limit of foreign investors’ ownership and shares owned by foreign strategic investors in Vietnamese credit institutions under the current regulations is suitable, according to Mr.Nguyen Van Hung.

At present, a foreign strategic investor can own up to 20 percent of the charter capital of a credit institution, while the total percentage of shares held by foreign investors is not allowed to exceed 30 percent.

According to economic experts, the restructuring of banking system project face with some barriers from the banks’ internal resources. Strong banks are generally not interested in merging with smaller and less effective banks. Even shareholders in these banks, especially strategic ones, are often opposed to the merger with ailing banks, unless they’re forced to do so.

Mr. Nguyen Van Hung said that the central bank was studying overall measures to report to the Prime Minister for consideration.