Vietnam's banking reform gains momentum with first merger

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  A branch of Vietnam Tin Nghia Bank in Hanoi

Vietnam's central bank has approved the merger of three small banks mired in liquidity problems, the first move in a broader plan to restructure the banking system as a whole.

Analysts have been somewhat surprised that clients have responded calmly to the news of the merger and there has been no rush on deposits.

The three lenders Ficombank, Saigon Commercial Bank and Vietnam Tin Nghia Bank have a combined registered capital of nearly VND10.6 trillion (US$503.7 million) and a total asset base of VND154 trillion ($7.3 billion). The unlisted banks, all based in Ho Chi Minh City, have attracted deposits of more than VND120 trillion.

State Bank of Vietnam Governor Nguyen Van Binh said Tuesday that most of the deposits are short-term, while the banks have mainly offered medium or long-term loans, leading to temporary liquidity problems.

With the central bank's support, the banks have overcome their difficulties and they voluntarily decided to merge towards cutting costs and becoming a stronger lender, Binh said.

The central bank has assigned the state-run Bank for Investment and Development of Vietnam, known as BIDV, to represent and manage the government's stake in the newly formed bank. The size of the stake has not been disclosed.

Binh noted that the interests of depositors in the banks will be assured as "the new bank, after the merger, will have state participation."

BIDV Chairman Tran Bac Ha said his bank has lent a total of VND2.4 trillion to help the three lenders improve their liquidity. BIDV signed a cooperation agreement with the banks Tuesday, promising to protect all depositors.

The new bank is expected to start operations on January 1. Its name will be announced by December 25.

Market response

Unlike previous predictions, the news of the upcoming merger is yet to cause any major shakeup in the market. For the three banks, it was business as usual at most branches.

A source told Thanh Nien that before the central bank made the announcement on the merger, it had set aside tens of trillions of dong as a precautionary measure in case of a mass withdrawal of money by depositors.

Local media reported that some clients even responded positively to the news, believing the merger would make the banks stronger.

Nguyen Thanh Huong, editor-in-chief of Ngan Hang (Banking) magazine, said the central bank's transparency and its commitment to protect the interests of depositors helped calm the public and successfully prevented stronger, panic-driven actions.

The merger of the troubled lenders comes after the central bank announced its plan to restructure the banking system in October. Governor Binh said the State Bank of Vietnam will complete reviewing, classifying and reorganizing all banks by the end of March 2012.

Le Xuan Nghia, vice chairman of the National Financial Supervisory Committee, said the banking restructuring plan, to some extent, has had a negative impact on depositors who are concerned that they could lose their savings. But Nghia said the public should not be too worried as the central bank is capable of dealing with the situation.

Cao Si Kiem, a member of the National Assembly's Economic Committee and a former central bank governor, said the government has affirmed that it will not let any bank fall.

The chance of bank collapse is small and should it happen, the State Bank of Vietnam still has enough capital resources to step in and recapitalize weak banks, he said.

The merger announced this week resulted from liquidity problems and the move was "a positive step" toward strengthening the banking system, Bloomberg reported Wednesday, citing Fitch Ratings.

Liquidity stress

Vietnam's central bank aims to create two big lenders that are competitive within the region and between 10 and 15 major banks that can become "pillars" to support the country's financial system. It has encouraged local lenders to seek merger and acquisition opportunities among themselves during the process.

The issue of restructuring the financial sector was high on the agenda of the Consultative Group meeting this week. The group, comprising major development partners like the World Bank

and the Asian Development Bank, said the country's banking sector is showing signs of stress after prolonged macroeconomic instability.

According to the World Bank, banks in Vietnam are reporting liquidity shortages, and capital adequacy continues to be an issue.

Meanwhile, the International Monetary Fund said the weaknesses in the financial system, which resulted from rapid credit growth in the recent years, have come to the fore, and the State Bank of Vietnam and state-owned banks have stepped in with liquidity support to protect small and weak banks.

"Vulnerabilities in the financial sector need to be addressed without delay," it said. "As non-performing loans rise and liquidity stress has intensified at some small banks, due in part to a tightened monetary policy, a transparent framework for financial sector consolidation and recapitalization"¦ is urgently needed."

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The fund said it welcomed efforts underway to prepare bank-by-bank plans to deal with the weaknesses and consolidate the sector, but stressed "it is important that they be implemented rapidly." It also called for tightening of regulations and supervision.

Allastar Cox, Australian Ambassador, said that a "forensic audit" of all the banks, with results being made public, should be the first step in Vietnam's financial restructuring.

Vietnam's credit growth is forecast at 13 percent this year and between 15 percent to 17 percent in 2012, following a rise of 27.65 percent in 2010.

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