Clients at a branch of VietinBank, Vietnam's second-biggest publicly traded lender. Last month Japan's Mitsubishi UFJ Financial Group Inc. agreed to buy a 20 percent stake in VietinBank for VND15.5 trillion ($743 million).
Vietnam's financial and banking sector remains of interest to foreign investors, but not many mergers and acquisitions are expected this year due to the state of the global economy and the country's foreign ownership cap, analysts say.
"There will be some foreign investors wishing to become strategic partners in Vietnamese banks, as it is like getting a business license," economist Bui Kien Thanh said.
"So some foreign investors have bought stakes even in loss-making banks whose bad debts are higher than their chartered capital.
"This year I think there will be more interest in the sector from Asian investors and those from the UK and France."
Last month Japan's Mitsubishi UFJ Financial Group Inc. agreed to buy a 20 percent stake in VietinBank, the country's second-biggest publicly traded lender, for VND15.5 trillion (US$743 million), the biggest Japanese investment in a Vietnamese bank.
Its Bank of Tokyo-Mitsubishi UFJ Ltd. will buy the stake from the Vietnamese government by the end of this year.
"Given the continuing turmoil in the European and US economies and banking sectors, we expect Asian banks and financial institutions to continue leading investment in the Vietnamese banking and finance sector," Stephen Gaskill, deputy general director of auditing firm PricewaterhouseCoopers Vietnam, said.
Besides Japan, Korea, Malaysia, and Thailand are also interested, he said.
Given the stagnation in the Japanese economy and difficult market conditions limiting profit growth over the past several years, Japanese companies, especially those in financial services, have increasingly sought to invest in overseas markets that offer greater growth opportunities, he said.
Many Japanese firms see Vietnam as an attractive market in the long term with significant potential in banking, insurance, and various other sectors, and have been expanding operations or acquiring new assets in Vietnam.
Japanese investment has also been driven in the last few years by the strength of the yen and the saturation in that country's banking market.
Last year Mizuho, Japan's third-largest bank by market value, agreed to buy 15 percent of the state-owned Joint-Stock Commercial Bank for Foreign Trade of Vietnam, or Vietcombank, for $560 million. Larger rival Sumitomo Mitsui bought a 15 stake percent in Eximbank, or Vietnam Export-Import Commercial Joint Stock Bank, for $225 million in 2007.
Stephen Gaskill said: "There are still a number of state-owned and private joint stock banks, including some relatively large ones, that would benefit from, and are actively looking for, a strategic investor. So it is possible that we will see one or two more large investments in 2013.
"However, investments may be subdued by the reduced number of sizable targets, the fragility of the global economy and any actions taken by the State Bank of Vietnam regarding the banking sector restructuring plan, changes in the regulatory environment, and continuance of enforced credit growth caps."
Foreign investors are also reluctant due to difficulties in assessing banks' actual level of non-performing loans, which have increased following rapid credit growth in recent years and high interest rates, and mobilizing cash due to the limited number of individual accounts in use, besides the relatively high cost of funding and inconsistency in regulations and their interpretation.
Thanh said despite interest in the Vietnamese banking and financial sector, foreign investors are balked by the foreign ownership cap in banks.
The government allows foreigners to hold no more than 30 percent in a bank, and no more than 20 percent by a single investor.
He said some M&A transactions would take place as banks speed up restructuring since the government is encouraging it to revamp the banking system.
"But foreign investors can only take part in M&A activities when the government raises the cap.
"Foreign investors will be more interested if the cap is increased so that they can influence strategic decisions in a bank."
But local banks are not too attractive to investors since they are mostly small with a capital of $1-2 billion.
"The poor development of the banking system and the bearish stock market are not very attractive to big international investors," Thanh added.
Edward Johns, associate director of PwC's Advisory - Transaction Services, said: "We also expect more mergers as part of the SBV's restructuring plan though these are likely to involve mergers or acquisitions of some of the small and medium-sized banks that require recapitalization to strengthen their balance sheets.
"The SBV's plans may spark more interest in M&A as some banks look to avoid forced mergers and/or look to swallow up other small private banks in order to achieve scale."
It seems likely that the merger between Petro Vietnam Finance Company and Western Bank will go ahead in 2013, which should help the former alleviate some of the difficulties it has been facing as a non-bank credit institution.
Sumit Dutta, CEO of HSBC Vietnam, said the government should consider increasing the foreign ownership limit in banks.
With their management experience, technology, and deep pockets, 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 pointed out.
More foreign investors would consider cooperating with small local banks if the government raises the ownership limit, even to 100 percent, he said.
With larger stakes, foreign investors would have more say in management, which would help improve weak banks, he added.
But former central bank governor Cao Sy Kiem said banks face the risk of being taken over if foreign investors hold large stakes.
"With their deep pockets, good management, advanced technology, and capable staff, foreign investors could take control of banks. That is very dangerous.
"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."
The State Bank of Vietnam would resolve half of the bad debt problem this year, the government said.
Bad debts account for more than 8 percent of total loans.
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