New ownership cap in local banks too restrictive to attract foreign investors

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A bank branch in Ho Chi Minh City's District 1

Vietnam's new plan to raise the ownership limit for foreign investors in local banks in order to boost restructuring of the troubled banking system might not work because the planned expansion is not attractive enough, experts say.

However, some experts are in fact against the idea of allowing large stakes in local banks because it opens the door for a complete takeover, which would be "very dangerous" and ill-advised.

According to the new draft decree prepared by the State Bank of Vietnam, the prime minister can let foreign investors own more than a 30 percent stake in a local "weak" bank on a case by case basis. The draft neither defines "weak" nor mentions an upper limit, and the central bank has not said when the decree would take effect.

Economist Le Tham Duong said regulation was "reasonable," despite the absence of an upper limit, because it means the PM could allow, at his discretion, up to 100 percent ownership of a bank. The absence of an upper limit would help attract foreign investors, he said.

Currently, Vietnam limits ownership for an individual foreign investor in a local bank at 5 percent, while a foreign institution can own up to 15 percent. In special cases, where the foreign institution becomes a strategic investor, the stake can go up to 20 percent. For holding stakes of more than 20 percent up to 30 percent, the prime minister's endorsement is required.

Le Xuan Nghia, former vice chairman of the National Financial Supervisory Commission, said the latest ownership expansion is a good move that would help accelerate restructuring of the banking sector hit hard by the ongoing economic slowdown and high level of bad debts.

With their extensive management experience, advanced technology and strong capital, foreign investors would help improve the efficiency of local banks, he said. Greater participation of foreign investors would also help increase local banks' transparency as information would be more closely supervised, he said.

"There are just a few local commercial banks that can spend millions of US dollars on their restructuring, so, for the others, foreign banks with strong financial capacities can make the restructuring process much easier," Nghia said.

Former central bank governor Cao Sy Kiem said seeking more foreign funds was a reasonable step for the banking sector given the gloomy domestic capital market. "The greater participation of foreign investors in weak credit institutions can help banks raise capital flows and improve their corporate governance and risk management."

Also agreeing with the move, the Vietnam Association of Finance Investors (VAFI) said it would help weak banks raise funds for restructuring their finances, reduce bad loans, increase liquidity and facilitate a further reduction in deposit interest rates.

The banking sector's bad debts totaled 8.8 percent at the end of 2012, up from around 6 percent at end of 2011, the central bank said.

Japanese banks have been among the most active foreign investors in local banks. Early this year, Mitsubishi UFJ Financial Group Inc. announced it would buy a 20 percent stake in VietinBank, the nation's second-biggest publicly traded lender, for VND15.5 trillion ($743 million), the biggest Japanese investment in a Vietnamese bank.

Last year, Mizuho, Japan's third-largest bank by market value, agreed to buy 15 percent of state-owned Joint-Stock Commercial Bank for Foreign Trade of Vietnam, known as Vietcombank, for $560 million. Larger rival Sumitomo Mitsui bought 15 percent of Eximbank, or Vietnam Export-Import Commercial Joint Stock Bank, for $225 million in 2007.

Not easy

Economist Nguyen Tri Hieu said: "The cap expansion is not large enough to encourage foreign banks to invest in Vietnam. They can raise their ownership by more than 30 percent only in poorly operating banks. They will not be too keen to do this.

"We should allow them to own up to 40 percent stake in local banks, and then gradually raise this cap before removing it by 2020 under WTO commitments," he said.

Economist Bui Kien Thanh felt differently. "There will be some foreign investors who wish to become strategic partners in Vietnamese banks, as they want to make use of legal incentives that local banks enjoy in terms of opening branches and expanding credit.

"Thus, they can accept buying stakes in loss-making banks whose bad debts are even higher than their chartered capital," he said. "I think there will be more interest from Asian investors and those from the United Kingdom and France in the sector," he said.

"However, foreign investors would be more interested in the field if the cap is increased so that they could influence strategic decisions within a bank," he added.

As of now, investment in local banks, which are mainly small ones with a capitalization $1-2 billion, is not really attractive to investors as they can only expect profit when the price of the banks' shares go up. Most of the stock market investors in local banks are individuals or small foreign funds with investments of less than $1 billion.

An official with a foreign bank in Hanoi said worries about the ineffective operations of local banks that will not investors earn much profit will be a dampener for foreign investors.

The banks often do not have well-placed branch offices, lack competitive products and their customer base is still moderate, making them less attractive to foreign investors, he said.

However, former governor Kiem said allowing foreign investors to hold larger stakes was a move fraught with the risk of local banks being taken over.

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

Foreign investors could purchase massive stakes in local banks at low prices and then resell to local investors at higher prices when the economy rebounds, he said.

"In fact, Vietnam can 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," he said.

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