No easy answers, but banking M&As here to stay

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  A file photo shows a crowded branch of Habubank in Hanoi in 2010. The lender has been taken over by local commercial bank SHB after suffering massive bad debts and losses.

The recent takeover of troubled lender Habubank by commercial bank SHB is a sign that the banking merger and acquisition trend will continue over the next four or five years, given the government's determination to restructure the sector, experts say.

Vietnam's central bank gave approval for SHB to take over Habubank on August 7, the second M&A deal in the banking sector in less than a year. The voluntary takeover is expected to be completed next month.

Former governor of the central bank Cao Sy Kiem said: "The acquisition could bring benefits to both sides. It could help Habubank avoid the risk of collapse caused by its big losses, at more than VND4 trillion (US$190.5 million). Meanwhile, the takeover could help SHB expand its market share, increase its revenues and improve its position.

"The issue now is how to deal with the shortcomings, gain shareholders' support and not suffer more losses," he said. "It cannot be done overnight, but over a longer period."

SHB's bad debts will stand at 8.69 percent of loans after the deal. The bad debts of Habubank amounted to VND3.73 trillion, or 23.7 percent of its loans, said Chief Executive Nguyen Van Le of Hanoi-based SHB, formally known as Saigon-Hanoi Commercial Joint Stock Bank.

SHB Chairman Do Quang Hien said the takeover is mapped out in SHB's development strategy, which seeks to cut costs and time.

The deal with Habubank will help it complete its expansion plan within seven months at a reasonable cost, he said, adding that it would take SHB at least five years and huge investments without the deal.

Habubank's high bad debt ratio will be reduced to 10 percent by the end of the year, he said.

Despite regretting the loss of its brand name, which has existed for some 20 years in the banking market, Habubank Chairman Nguyen Van Bang said the deal was "successful," helping the lender avoid more "errors and losses."


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Nguyen Huu Nghia, interim chief inspector of the central bank, said Habubank had exposed itself to major risks by lending to vulnerable companies between 2008 to 2010. It had also invested in risky sectors and its risk management practices were flawed.

The bank had given shipbuilder Vinashin, which almost collapsed in 2010, loans of some VND3 trillion, which it could not recoup, according to Habubank officials.

Still cautious

The central bank had earlier said it will restructure nine weak lenders in the country by the end of June, calling for the participation of all investors in the process.

"For these nine banks, the priority is to let them restructure on their own. If they can't come up with a plan, the State Bank of Vietnam will step in," said Governor Nguyen Van Binh. "So far banks have solved their own problems by calling for new investors and looking for partners for mergers."

Binh did not reveal the names of the banks. He said the central bank will allow all investors, including foreign ones, to engage in the restructuring process of the nine weak banks, but local investors would be given preference. He also noted that central bank could purchase stakes in these banks and resell them later.

However, the central bank, to date, has not yet announced the restructuring of any other bank apart from the voluntary takeover deal between SHB and Habubank, and the merger of three small banks late last year.

Although Prime Minister Nguyen Tan Dung has ordered a public list of weak banks and details of lenders' non-performing loans, it has not happened.

Former governor Kiem said: "The central bank may be cautious in declaring lists of weak banks. It would be very dangerous if the list is announced before banks' business results are checked, and measures to cope with risks are mapped out."

Depositors could withdraw their money en masse, causing banking collapses if prevention measures are not in place, he said.

While mergers and acquisitions are now being touted as a good way to restructure and improve banks' business, the measure's effectiveness has not yet been demonstrated, said an expert who did not want to be named.

He cited as an example the first merger of three unlisted and privately owned banks last December.

The new bank, the Saigon Joint Stock Commercial Bank, which was formed by the merger of the First Commercial Joint-Stock Bank, Vietnam Tin Nghia Commercial Joint-Stock Bank and Saigon Commercial Bank, has total assets of VND153.6 trillion, becoming one of the five largest lenders in Vietnam.

It was said that the merger would create a stronger bank in terms of both capital and management, safeguarding the interests of depositors.

However, the newly-formed bank, after operating for more than half of a year, is yet to release figures that show it is doing well.

Kiem said the newly merged bank cannot have better business results now as it is at the stage of improving its operations. Normally, banks only declare results when they are good, he said.

Trend to continue

"In 2012, we would expect to see a lot more activity in the banking sector as smaller players either voluntarily merge, are subject to forced mergers, or are acquired by the stronger banks," said Stephen Gaskill, deputy general director of advisory and auditing firm PricewaterhouseCoopers Vietnam.

"We also expect to see further proposed acquisitions of minority stakes in local banks by foreign banks. In all cases, these deals take time to develop and to close and we may not therefore see significant numbers of closed deals by December 31, since many will spill over into 2013."

Echoing Stephen Gaskill, Le Tham Duong of the Banking University of Ho Chi Minh City, said mergers and acquisitions will continue to happen since Vietnam still has several weak banks. "The restructure of banks will continue for the next three to five years. We have to implement the restructure of both small and large banks in a drastic manner."

Kiem noted that the weakness of banks is mainly due to low liquidity. "If their risk management is not well implemented, the merged bank could still be a weak one," he cautioned.

He said dealing with bad debts is of key importance. "Mergers and acquisitions can make a weak bank stronger only when the bad debt problem is solved."

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