Analysts wary of foreign investment in banking

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  A pedestrian stands in front of automated teller machines operated by Techcombank (from left), DongA Bank, Asia Commercial  Bank, and SeABank in Hanoi. Photo: Bloomberg

Foreign partnerships in banks could help bolster the banking system, especially in terms of dealing with bad debts and improving management, but increasing the foreign ownership cap in banks should be considered carefully to prevent a wholesale takeover, experts warn.

The governor of the State Bank of Vietnam, Nguyen Van Binh, said increasing the rate up to which foreign investors can buy into Vietnamese banks would help restructure the banking system, and the central bank has recommended this.

But he admitted that the issue should be carefully considered to ensure it does not harm the nation's interests.

Vietnam allows foreign investors to hold a maximum of 30 percent in its banks, pursuant to its World Trade Organization commitments.

Former central bank governor Cao Sy Kiem said: "For weak credit institutions, increasing capital is quite necessary to help them deal with bad debts and increase their liquidity. Because of the gloomy domestic capital market, seeking more foreign funds is a reasonable step."

But banks face the risk of being taken over if foreign investors hold large stakes, he said.

"With their deep pockets, good management, advanced technology, and qualified staff, foreign investors could take control of banks. This is very dangerous."

Foreign investors, amid the economic slowdown and bear market, could purchase massive stakes in local banks at low prices and then resell to local investors at higher prices when the economy and market rebound, he said.

"Vietnam should keep the foreign ownership cap unchanged now. The cap should be raised only when the bad debt issue is resolved, and liquidity in the banking system improves."

Bad debts were estimated at 8.6 percent of total loans at the end of March.

The ownership cap would not be important when banks get their act together, Kiem said.

"At that time we wouldn't have to worry even if we allow 100 percent foreign ownership.

"In fact, Vietnam could restructure its banking system without depending on foreign funds. But it may have to spend more time on this, maybe several years, because of the lower capacity of its banks compared to foreign ones."

Le Tham Duong of the Ho Chi Minh City Banking University said the participation of foreign investors in the restructuring of local banks is very important amid the current trend of globalization. However, it does not mean that Vietnam cannot do it without foreign money, he said.

"A local bank with a good CEO and stable funds mobilized domestically could successfully restructure without the participation of foreign partners," he pointed out.

The Asian Development Bank's Vietnam chief, Tomoyuki Kimura, said: "The current adverse business climate means banks' assets may be sold at cheap prices."

However, restructuring of the banking system would require substantial capital injections and be potentially very costly, he said.

This capital could come from overseas or domestic sources, he said.

Currently, both international and domestic market conditions are not conducive to risky measures such as equity investments in developing country banks, he said. "Given the size and complexity of restructuring the banking industry, the government should explore all options, not just domestic options.

"Not just for the capital but also to benefit from transfer of knowledge and international know-how."

Foreign investors' hope

Kimura said increasing the foreign ownership cap in banks could benefit the banking industry through transfer of capital and international expertise as well as through business collaboration.

The process could contribute to improved corporate governance, facilitate a transition towards adoption of international banking standards like provisioning and accounting, and lead to improved accountability and transparency, he said.

The decision of how much foreign ownership to allow is therefore not just a technical decision but also a political one, he said.

In determining the appropriate share, the government needs to balance these strategic objectives against the need to create the right conditions to attract foreign investments into the sector, he said.

"Foreign banks may be reluctant to invest in equity of local banks if they view the share as too small to influence strategic decisions within the bank."

Sumit Dutta, CEO of HSBC Vietnam, said the government should consider an increase in foreign ownership limit in banks.

With rich management experience, advanced technology, and strong capital, foreign investors would help improve the efficiency of local banks, he said.

Foreign banks, instead of establishing their own banks in Vietnam, could invest in local ones to make use of their branches and customers, he said.

Thus more foreign investors would consider cooperating with small local banks if the government raises the ownership limit, even to 100 percent of chartered capital, he said.

With larger stakes, foreign investors would have more say in management, which would help improve weak banks, Dutta said.

If the central bank decides to restructure the banking system, small weak banks would ask to sell stakes to bigger ones or foreign investors to improve their financial situation and competitiveness, he pointed out.

Vietnam should also improve transparency in the banking system so that foreign investors feel assured when collaborating with local banks, he said.

An economist said foreign investors are interested in the Vietnamese banking industry since they perceive an opportunity to take over a leading lender. But they may be reluctant if the restructure of the banking system is too tardy and implemented ineffectively.­­­­­

Last September Japan's Mizuho Bank purchased a 15 percent stake in Vietnam's third biggest partly-private lender, Vietcombank. It cost US$567.3 million, the biggest ever merger and acquisition deal in Vietnam.

Earlier the International Finance Corp paid $182 million to buy a 10 percent stake in the country's second biggest partly-private bank, VietinBank.

Vietnam is in the process of restructuring its banking system, with two mergers having taken place since the end of last year.

Credit rating agency Fitch said last month that Vietnamese banks are still vulnerable due to the high credit-to-GDP ratio relative to many emerging markets.

"This, together with broader macroeconomic vulnerabilities often found in developing markets, makes the financial system particularly sensitive to shocks," it said.

Standard & Poor's said Wednesday that Vietnam's process of restoring confidence in the banking system and monetary policy is in an early phase and calls for careful management, especially when non-performing loans are rising.

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