When referring to potential areas for mergers and acquisitions (M&A) activities in Vietnam, banking and finance is always in the top in the context of the banking system is accelerating the process of restructuring and need more capital resources to meet Basel II standards. However, in recent years, M&A activities in this area have not been really exciting.
High demand
In 2018, many experts predicted that M&A in the banking sector would be very exciting, when a series of banks were planning to find strategic partners. And the government also encouraged M&A of small banks into larger banks.
In 2018, there were also many deals revealed such as HCM City Development Joint Stock Commercial Bank (HDBank) merged with Petrolimex Group Commercial Joint Stock Bank (PGBank), Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) was approved by the government to sell 17.65 percent of capital to KEB Hana Bank of Korea, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) was allowed to sell 10 percent of shares to increase charter capital.
However, by the beginning of 2019, Vietcombank had successfully issued more than 111 million shares privately, equivalent to three percent of charter capital for Singapore’s national investment fund GIC Private Limited and Mizuho Bank Ltd
In July 2019, BIDV’s Board of directors just issued a resolution through documents dealing with foreign strategic investors, and continued to carry out the necessary procedures in accordance with the laws of countries to complete the above transaction. The merger of PGBank and HDBank is expected to be completed by the end of 2019.
Although slowing down, it can be said that the demand for M&A in the banking sector has not decreased yet, because restructuring the banking system and increasing capital to meet Basel II standards has always been a great pressure. Reportedly, Vietcombank continues to promote the plan of selling 6.5 percent of shares from now to 2020 and is waiting for approval.
Saigon Hanoi Commercial Joint Stock Bank (SHB)’s Board of directors also informed shareholders that it had been working with many foreign financial and economic organisations to find suitable strategic shareholders. SHB’s selection criteria are financial corporations committed to long-term investment for joint management and development.
Military Commercial Joint Stock Bank (MB) also submitted to shareholders through the search and deployment of M&A opportunities (if any) in accordance with the bank’s strategy and the State’s policy on restructuring credit institutions.
On the other hand, investors are also very interested in acquiring and restructuring weak credit institutions of Vietnam. For example, J.Trust Group (Japan) said that it researched and carefully calculated the financial indicators of One Member Limited Liability Vietnam Construction Bank (CBBank) and sent a buyout offer to restructure this bank to the State Bank of Vietnam (SBV).
In particular, the Project of restructuring the banking system in phase 2 (2016-2020) clearly stated the policy of the government to promote the handling and restructuring of credit institutions by encouraging M&A of small credit institutions into big ones. These are the reasons that M&A in the banking sector will still be more developed.
But it is difficult to reach the destination
Looking back at the evolution of M&A cases, many banks are aiming for this goal, but to realise M&A deals, there are many problems. For the group of commercial banks with state capital that want to sell capital to foreign partners, Bui Quang Tin, HCM City University of Banking pointed out a barrier affecting the progress of M&A, which was a problem that must not cause loss of state capital.
In M&A deals of banks with state capital, foreign partners often offer lower price than stock price in the market, so the bank must submit the approval of government and SBV. And the time between a memorandum and a formal contract is far apart due to waiting for approval, leading to a difference between the value on the contract and the market value, creating new difficulties, so it takes a long time to complete a transaction.
For joint stock commercial banks, Nguyen Tri Hieu, bank financial expert said that the goal of the banking system was to reduce to 15 to 20 banks. The system would have large banks of equity, ensuring safety ratios, which would have conditions to increase the scale of operations, infrastructure investments, technologies, etc.
In terms of the current banking industry, to achieve that, M&A is the best solution. But Vietnamese banks do not like to be merged, because the establishment of new bank is difficult when SBV does not issue any licenses to establish bank, and even withdraws. Therefore, banks that have been granted business licenses always seek to maintain that advantage, except for special circumstances.
Not wanting to merge, small banks seek to sell capital to foreign strategic shareholders. However, this plan still failed many times, including banks bought at zero dong. Although many foreign investors were favoured in terms of ownership, any transactions had been identified due to difficulties in negotiating issues.
In the past, many small and medium commercial banks repeatedly announced negotiations with foreign partners, but still remained quiet. Most of foreign partners who buy shares want to own a share of ownership with dominant rights, so the limit of 30 percent ownership in Vietnamese banks is a big barrier.
In addition, when the bank wants to sell its capital to strategic foreign investors, the bank must show itself a good management and financial strategy. When buying, investors carefully study the internal structure, potential of that bank and small banks are difficult to meet the requirements set out.
Should promote domestic M&A
According to an economic expert, M&A activities in the banking sector in Vietnam are forecast to maintain the current situation, if there is no change in the foreign ownership ratio at Vietnamese commercial banks. That is the general problem of the system.
For small banks, M&A trend with foreign partners is forecast to be more difficult to achieve. The nature of M&A is a commercial and financial transaction, requiring specific regulations such as auditing, valuation, consulting, brokerage, providing information, security, transfer of ownership, transfer of legal status, shares, financial obligations, trademarks, dispute settlement mechanisms, etc.
In fact, many banks cannot meet these partner’s requirements in the negotiation process.
Continuing to find foreign capital in the current situation will affect the restructuring process of the banking system. Therefore, many experts propose, SBV should apply measures to make voluntary M&A banks, both achieve strong targets, and reduce the number of banks.
In particular, pressing banks to apply Basel II is also a solution. Applying Basel II will reduce the Capital Adequacy Ratio (CAR) of existing banks. Based on Basel II’s CAR criteria of eight percent, banks that cannot improve this ratio are forced to M&A to achieve the safety target for the banking system.
