Vietnamese bank consolidation will accelerate this year as a new rule encourages lenders with stakes in each other to merge or unwind their holdings amid a government pledge to push unions and even force bankruptcies.
Renewed calls for restructuring come with teeth this time after a new rule restricting banks’ cross-ownership took effect in February. The central bank has said there will be at least six mergers this year and recently took the unprecedented step of nationalizing two unlisted banks. JSC Bank for Foreign Trade of Vietnam, the largest bank by market value, said last month it’s looking for a partner to merge with this year.
The State Bank of Vietnam, the monetary authority, plans to reduce the total number of banks to as few as 15 by 2017 from 40 now. Investor confidence is rebounding as the country’s weakest lenders have been absorbed by larger banks and bad debt that was the highest in Southeast Asia just a few years ago has been partly taken over by a state-backed asset company.
“The consensus is that Vietnam is overbanked,” Long Ngo, a Ho Chi Minh City-based research manager at Viet Capital Securities, the nation’s third-largest brokerage, said in an e-mail. “Even if we don’t have the current banking problems, there are good reasons to shrink the number of players.”
Under the new law, banks’ cross-ownership is limited to 5 percent or less in a maximum of two other financial institutions. Moody’s Investors Service Inc. has said the move will quicken consolidation.
The mergers of Saigon Thuong Tin Commercial JSB, or Sacombank, with Southern Commercial JSB, and Vietnam Maritime Commercial JSB with Mekong Development JSB, have received initial central bank approvals and are likely to be completed this year.
Tram Be, deputy chairman at Sacombank and senior adviser at SouthernBank, and his family held stakes totaling more than 20 percent in SouthernBank and 6 percent in Sacombank, the Dau Tu Chung Khoan magazine reported April 2014. Maritime Bank held about a 10 percent stake in Mekong Bank, it reported. The mergers address those cross-ownership issues at the banks, according to the report.
“The central bank considers 2015 to be a decisive year to complete banking reform,” Alan Pham, Ho Chi Minh City-based chief economist at VinaCapital Group, the country’s biggest fund manager, said in an e-mail. “M&A is very important because it is an effective policy instrument to reform the banking system.”
The country’s largest listed banks, which are state-controlled, have also picked up some of the weakest in the sector. The nation’s third-largest lender, Bank for Investment and Development of Vietnam, or BIDV, expects to complete a merger with unlisted Mekong Housing Bank this month. Shareholders at VietinBank, or Vietnam JS Commercial Bank for Industry and Trade, the second-biggest, gave approval April 14 to merge with unlisted Petrolimex Group Commercial JSB.
Shares of VietinBank have rallied 28 percent this year, while BIDV’s stock has jumped 42 percent. The gains compare with a 1.3 percent increase in the benchmark VN Index of Vietnamese stocks.
The number of merger announcements so far this year has outpaced consolidation activity in each of the past several years, Eugene Tarzimanov, Singapore-based vice president and senior credit officer at Moody’s, said by phone. Getting larger banks to absorb smaller and weaker lenders limits contagion risk and supports the financial system’s stability, he said.
“Vietnam’s well-positioned now to gradually improve its financial health,” he said. “There’s a desire from the regulator and government to have a cleaner financial system. Still, we are unlikely to see a rapid transformation of the system.”
The central bank and the government have said this year the monetary authority can take over weak banks and force lenders into bankruptcy. No bank has gone bankrupt yet.
Vietnam’s banking overhaul has long been in the making, with the government announcing reforms as far back as 2012. That year, central bank Governor Nguyen Van Binh said he would crack down on cross-ownership of banks because “interest groups” of shareholders manipulated bank operations and were obstacles in the restructuring process.
The pace of bank restructuring in Vietnam remains slow, Sanjay Kalra, the International Monetary Fund’s resident representative in Vietnam, said at a conference in Nghe An province April 21. Vietnam banks can’t get fresh capital because of bad debt, which is still “not going away,” Kalra said.
The nation’s state-backed asset management company has bought 123 trillion dong ($5.7 billion) of troubled loans, improving the outlook for Vietnamese lenders. Non-performing loans reported by the nation’s banks dropped to about 3.25 percent at the end of 2014 from 17 percent two years earlier, government data show. Moody’s estimates actual bad debt was higher, about 10 percent at the end of 2014.
The union of VietinBank and Petrolimex Group Bank, or PG Bank, will form Vietnam’s largest lender by registered capital at 40.2 trillion dong and the second-largest in terms of assets, according to the Economist Intelligence Unit.
Hanoi-based lender BIDV expects the merger with MHB to help expand operations with about 1,000 branches nationwide.
Larger banks with greater economies of scale will also benefit from improved efficiency, though it poses implementation risks, according to a Moody’s March report. Fewer banks will make it easier for authorities to supervise, it said.
To get foreign investor betting on Vietnamese lenders, authorities need to strengthen bad-debt transparency and lift the current foreign ownership stake at banks above the current cap of 20 percent, Moody’s Tarzimanov said.
“Unless transparency is improved, we won’t see a lot of foreign capital flowing in,” he said. “They need the foreign capital because domestic capital is limited.”