Vietnam is accelerating merger and acquisition activities in the banking sector, in an effort to reduce bad debt, which monetary regulators said has been a heavy burden on the country's economy.
The central bank said it will take measures to drastically deal with weak banks that have no chance of recovery.
It is putting its utmost efforts to quicken the overhaul of banks, the bank said in a statement.
Six bank mergers are expected to occur this year. Some state-owned banks could merge with smaller and more fragile lenders, according to the central bank.
However, it has not yet revealed any details of possible mergers.
Among the mergers likely in 2015, Sacombank, Vietnam's ninth-biggest bank by assets, will be combined with Southern Bank, thereby becoming Vietnam’s fifth-largest lender by assets.
That would bump it to the top tier, right behind the four state-owned giants Agribank, BIDV, Vietcombank, and Vietinbank.
There could be some shake-up within this elite group as well.
Vietnam's biggest bank by market value, Vietcombank, may merge with the unlisted Saigonbank. The merger has been approved by the central bank in principle. Vietcombank reportedly has an 8.2 percent stake in Saigonbank.
Meanwhile, VietinBank may strike a deal with OceanBank or with Petrolimex Bank. BIDV could join forces with Mekong Housing Bank, according to the central bank.
This is part of a roadmap to cut the number of commercial banks from 30 to between 14 and 17 in the next two years.
Analysts say Vietnam now has too many lenders, and most are small, with poor management and financial capacity.
Thus, M&A could offer a feasible solution for them to increase their competitiveness, they say.
A new rule, which restricts banks’ cross-ownership is also expected to help M&A activities gain traction.
Under the rule, effective February 1, banks can now only invest in two other financial institutions, with a stake of less than 5 percent at each of those banks.
One more condition: only banks with bad-debt ratios of less than 3 percent can do so.
This is part of a roadmap to cut the number of commercial banks from 30 to between 14 and 17 in the next two years."
With this strict rule, banks which hold stakes of more than 5 percent in other lenders, or have invested in more than two lenders, will be required to divest their capital.
The problem, analysts say, is that selling shares at high prices is difficult now, which means M&A is a good, if not the only way for banks to deal with their cross-ownership hurdle.
They also say the central bank is trying to deal with the issue of bad debt, which was one of the main factors that dragged economic growth to a 13-year low in 2012.
Non-performing loans were valued at around 3.87 percent of total loans in October 2014, according to central bank. The government seeks to cut this ratio to 3 percent by the end of this year.
Economist Le Xuan Nghia said banks do not want to merge, as all sides want to win the right to manage post-merged banks.
Thus, negotiations for M&A deals are expected to be "very stressful" and should be facilitated by the authorities.
Former governor of the central bank Cao Sy Kiem said M&A deals on voluntary basis should be encouraged so that banks could find the perfect partners themselves.
But, if they fail to do so, the central bank may push them to merge with others, he said.
The participation of big banks in the restructuring of ailing ones is very good, but it could take banks two to three years to stabilize their business after an M&A, he added.
Economist Can Van Luc said merging a strong bank with a weak one will not always create a stronger institution.
Some banks could improve after an M&A, but others may actually get weaker.
A few lenders are in fact concerned that mergers with weak institutions will increase risks linked to bad debt, which they have already struggled with.
They also express their worries about the quality of the staff coming from small banks.
“M&A is not the most effective measure for strengthening the banking system," said economist Bui Kien Thanh.
"It is difficult for two weak banks to become a strong lender just by merging. And a merger between a strong bank and a weak one often weakens the former.”
M&A is not the most effective measure for strengthening the banking system." -- Economist Bui Kien Thanh
Poorly-operated banks should be let to go bankrupt, he said, noting that bankruptcy in the banking sector is common in many countries.
Over the past two years, seven banks have been merged into or acquired by larger lenders in Vietnam.
Assessing these banks in the post-M&A phase, Vu Viet Ngoan, chairman of the National Financial Supervisory Commission, said there has been "positive change" in liquidity.
These banks have also repaid their refinanced loans to the central bank, Ngoan said.
However, a couple have not yet overcome all difficulties, and they need more time, he said.