A customer makes a transaction at a Petrolimex Bank (PG Bank) office. PHOTO: WWW.PGBANK.COM.VN
A series of banks have announced plans to merge as the central bank continues to accelerate the process of restructuring and refinancing bad debt.
However several experts warn that mergers and acquisitions don't offer a workable solution for banks that, by all rights, should be bankrupt.
During a shareholders meeting on April 18, the management board of Petrolimex Bank (PG Bank) submitted a plan to merge with an unnamed bank -- details of the plan remain sketchy.
The bank had previously informed shareholders that it was 40 percent owned by fuel importer and distributor Petrolimex and planned to merge with VietinBank, the country's second-largest bank by assets.
Sacombank, the country's ninth-largest bank by assets has announced a plan to acquire Southernbank to become Vietnam’s fifth-largest lender by assets behind the four state-owned giants Agribank, BIDV, Vietcombank, and Vietinbank.
Meanwhile, Maritime Bank is set to acquire Mekong Development Bank. These two acquisitions have already been approved, in principle, by the State Bank of Vietnam.
Commercial bank Vietcombank plans to gather shareholders’ opinion about the proposed M&A activities in the near future.
Economist Nguyen Tri Hieu said: “M&A is not the best measure for strengthening the banking system. It is difficult for two weak banks to become a strong one by merging. Even the merger between a strong bank and a weak one often reduces the former's health.”
“We should have let weak banks declare bankruptcy,” he said. The central bank has said that it will not allow the “uncontrolled collapse” of financial institutions while the system undergoes a restructuring effort that began in 2011. The collapse of a single bank might lead to a domino effect and threaten the entire system, according to the state lender. So it has asked them to merge.
“We're running against the principle of the market economy by trying to keep weak banks alive," Hieu said. "If the situation persists, the banking system's difficulties will not be resolved.”
The bankruptcy of a weak bank could erode public faith, which could lead to a collapse in the banking system. Authorities should prepare measures to minimize the side effects, Hieu said. “We should not avoid the measure due to apprehensions about their side effects.”
Victoria KwaKwa, Country Director of the World Bank (WB) in Vietnam, said M&A won't suffice to restructure Vietnam's banking system.
It is one of many measures to reform the banking system in many countries. Some banks could become stronger after the M&A, but others may actually get weaker, she said.
Vietnam should consider forcing its weakest banks to declare bankruptcy to ensure the overall safety of the system, she added.
Economist Bui Kien Thanh agreed with KwaKwa, saying: “Weak banks should be eliminated. It is the most effective way to restructure a system.”
Because there are too many weak banks, M&A can't solve the system’s problem. Merging a strong bank with a weak one cannot create a strong institution, he argued.
Thanh said: “It's easy for an institution to invest some VND3 trillion ($142.9 million) in buying a bank. However, the issue is whether it can bear the bank’s some VND30 trillion worth of bad debts or not.”
Bad debts at many banks now exceed their charter capital.
“Like businesses, poorly-operated banks should be permitted to go bankrupt. In other countries, bankruptcy in the banking sector is not unheard of,” Thanh said.
The central bank has planned to cut the number of local commercial banks from the current 30 to between 14 and 17 in the next three years.
Economist Hieu said the government should have encouraged mergers between strong banks instead of pushing them to merge with institutions on the verge of the bankruptcy. The issue should be reviewed to ensure that future mergers create stronger banks.
Nguyen Duc Thanh, director of the Vietnam Center for Economic and Policy Research at the Vietnam National University in Hanoi, said: “M&A should be temporary measure to deal with the issues of cross ownership or bad debts in the banking system.”
In the future, bank operations should be decided by the market, he said adding that non-performing loans, cross-ownership, and mismanagement have stymied the banking system.
The central bank has called for takeovers and restructuring at weak banks to reform the system since 2011.
Six or seven banks will be forced into mergers and takeovers this year, according to the central bank. The plan entered its second phase and the number of banks taken over by other banks is expected to climb to 7-10 by year's end.
The central bank has fully dealt with eight out of nine weak banks it identified in late 2011.