Overlapping, complex ownership puts banking system at risk

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  A Sacombank branch in Ho Chi Minh City. Cross ownership among credit institutions has become a "serious" problem in Vietnam, a new report says.

Experts warn that a complex web of cross ownership among local banks could endanger the financial system as it allows banks to borrow easily from each other and secretly plan hostile takeovers.

According to a report published by the National Assembly's Economic Committee last week, cross ownership linking credit institutions has become a "serious" problem in Vietnam.

"It is one of the reasons that have led to lending based on relationships instead of efficiency," the report said.

Cross ownership is not always a problem. The parliamentary panel's report said that in some cases, the involvement of foreign partners and fund managers in local banks could help them improve their management. The State Bank of Vietnam also encourages local banks to look for experienced foreign strategic partners, it noted.

The report, however, warned that when it comes to banks holding stakes in each other, it is more complicated. At least 10 banks are known to be holding stakes in other lenders.

Vietcombank, Vietnam's third largest partly-private lender by assets, has acquired an 11 percent stake in Military Bank, 8.2 percent in Eximbank, 5.3 percent in Saigon Bank and 4.7 percent in Orient Commercial Joint Stock Bank.

Then Eximbank itself owns 10.6 percent of Sacombank and 8.5 percent at VietABank, the report pointed out as an example.

It also said that nearly 40 state and private companies own more than a 5 percent stake in local banks, with the relationships only complicating matters. "Many banks are owned by family companies or by members of the same family who are managers at different companies."

"When state-owned banks are major shareholders in joint stock banks, they can sway the latter into offering loans to state-owned enterprises.

"When banks have companies as major shareholders, they will likely become the backyard for these companies and will help the firms raise funds for their projects. Even though banks are not allowed to directly lend to shareholders, they can dodge the regulation by offering loans to subsidiaries of those companies," the report said. "Similarly, cross ownership between two banks can allow shareholders of one bank to easily borrow from the other."


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Such cases could lead to banks offering loans based on cronyism without screening the borrowers carefully. "If that happens, it will be one of the main reasons why bad debts have risen fast in Vietnam's system of credit institutions."

Economist Le Dang Doanh, one of the authors of the report, said complex ties between banks could threaten the system's safety and reduce lending quality.

When banks borrow from each other, they give a false impression that they have ample funds, he said in Monday's Lao Dong (Labor) newspaper. "This means there is an "˜unreal' amount of capital in the banking system whose real value remains unknown."

"There are many other consequences as banks can collude to manipulate the monetary market, interest rates and forex rates," Doanh said, adding that it is also difficult to come up with the right bad debt figures of the banking system if lenders work together to hide them.

Vietnam's bad debts had risen to 8.6 percent of total loans in the banking system by the end of March, according to the central bank.

Analysts have said the real bad debt ratio could be higher than the official figure while Fitch Ratings has put it at 13 percent, Reuters reported in July. The Economic Committee's report said non-performing loans need to be promptly dealt with to avoid prolonged stagnation.

Ownership complexity, combined with what Fitch called "a general lack of transparency," has also raised concerns over hostile takeovers in the banking system.

Vietnam caps individual ownership of domestic banks at 5 percent of the bank's registered capital. That shareholder, together with all relations, can own up to 20 percent of the bank. An institution, on the other hand, can own up to 15 percent of a bank.

"By many different ploys, some individuals end up owning a higher stake than allowed, affecting the operation of credit institutions," Vu Duc Dam, chairman of the government office said on September 5. "The prime minister has ordered related agencies to focus on criminals related to the banking system, particularly those involved in takeovers."

The State Securities Commission of Vietnam in June imposed a fine on a group of investors, including two financial investment firms linked to Eximbank, for buying Sacombank shares secretly in a takeover attempt.

The punishment was criticized for coming too late five months after the first purchase was made and several weeks after Sacombank already went through a management shakeup, with seven outsiders joining the new 10-member management board.

Nguyen Hoang Hai, general secretary of the Vietnam Association of Financial Investors, said existing laws do not ban takeovers or mergers but they have to be transparent. Otherwise the authorities need to step in, he said.

Financial expert Nguyen Tri Hieu said other countries have very strict banking regulations.

That is why they often carefully investigate investors who seek to increase stakes in a bank to understand the real motives. By doing so, they can prevent an investor or a group of investors from taking control of a bank in order to manipulate the market, he said. "They will stop such an attempt immediately when it starts because the stability of banks is very important for an economy."

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