According to summary of Saigon Securities Incorporation (SSI), the capital contributions and share purchases of foreign investors increased sharply in the first 10 months of 2019. Specifically, there were 7,509 capital contributions and share purchases of foreign investors nationwide, with a total value of 10.81 billion US dollars, up by 70.5 percent over the same period of 2018. Of the above capital contribution, according to experts, the amount of capital poured into finance and banking sector was insignificant. However, it is forecasted that in the near future, this amount of capital will flow strongly when mergers and acquisitions (M&A) in finance and banking sector continues to be exciting because there are many catalysts for this market.
The above statement is completely reasonable, because after Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV)’s sale of 15 percent stake to its strategic partner KEB Hana Bank for 900 million US dollars, there is market rumour that Military Commercial Joint Stock Bank (MB) plans to transfer 7.5 percent of stake to foreign investors through a private placement in the end of November 2019. MB is currently working with about 40 investors from Japan, Hong Kong, Singapore, and South Korea. The bank’s ambition is to collect 240 million US dollars from this offering.
The market is also waiting for another high-value deal, which is the private placement of 6.5 percent stake by Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank) to foreign investors. The deal is expected to take place in the end of this year or early next year.
In addition to the above catalyst, it is easy to see that the demand for capital increase of credit institutions (CIs) is very large, in order to meet the capital safety requirements under Basel II standards. According to statistics of the State Bank of Vietnam (SBV), the average credit growth of the entire CI system in the period of 2016 2018 was 16.75 percent per annum, while the average growth of equity was only 11.73 percent per annum.
In the context when the domestic investment capital is still limited, to improve Capital Adequacy Ratio (CAR), CIs must increase their equity by calling for foreign capital or selling shares to domestic and foreign investors. The restructuring process associated with bad debt settlement in the 2016 -2020 period is in the sprint stage, especially for weak banks which need to improve financial capacity, it they do not want to be excluded from the game.
In addition to encouraging foreign investors in general and foreign financial institutions in particular to acquire or merge with Vietnam’s weak commercial banks, the government has embarked on this issue, strengthened connectivity, and promoted working with international financial institutions. Investors whereby can see the government’s determination to support them and when the government takes part in, investors’ confidence in banks will be higher. The evidence is that investors from regional countries have recently come to Vietnam to seek investment opportunities and offer to participate in restructuring Vietnamese banks.
In addition to state-owned banks, private joint stock banks have also been actively negotiating to sell shares to foreign investors. Specifically, National Citizen Commercial Joint Stock Bank (NCB) said that investors from Japan and Singapore will buy shares in the bank’s coming issuance for increasing charter capital and become its foreign shareholders.
The new catalyst promoting M&A in the banking sector, according to banking experts, is the development trend of the 4.0 technology with the rapid growth of Fintechs which has become a threat to the existence of the organisations that provide retail financial services around the world.
In fact, banks themselves are aware that there needs to be a comprehensive change in operation, product and service provision if they do not want to become an empty link in the financial system. In order to do so, banks should have abundant financial resources. This will prompt banks to conduct M&A or buy fintech companies to retain market share.
The pressure on banks also comes from the competition for payment and retail market share. In the draft Decree on non-cash payments, the SBV proposed to set the maximum percentage of foreign ownership rate (both indirect and direct ownership) in intermediary payment service providers at 49%. This will also facilitate the attraction of foreign investment in this potential area.
Moreover, the SBV is drafting and submitting the prime minister regulations on agent banking and customer identification via electronic means (e-KYC). These two regulations, if approved, will open a new playing field for fintech companies to participate directly in providing financial services to the majority of Vietnamese. This can be a motivation for banks to be more proactive in seeking foreign partners in order to improve their competitiveness with support in terms of technology, management and strategy.
Not only from the needs of banks themselves, Dr Vo Tri Thanh said that it is also a request from the government and the SBV. Decision No.986/QD-TTg on the Development Strategy of the Banking sector to 2025, with vision to 2030 also sets out the tasks of researching, amending and completing the regulations on foreign investors’ purchase of Vietnamese CIs’ shares in the direction of increasing the ownership ratio of foreign investors for each type of CIs, in accordance with the signed international commitments in order to increase mobilisation of resources in terms of capital, technology and governance from foreign investors; at the same time encourage foreign investors to take part in dealing with weak CIs, etc.
It can be seen that, in order to survive, compete and development, carrying out M&A is still a suitable solution for banks. However, for banking M&A deals to take place more smoothly and successfully, a member of the National Financial and Monetary Policy Advisory Council said that the government should soon amend and complete the laws related to investment and business such as the Law on Investment, Law on Enterprises, Securities Law, Law on Construction, etc. to remove obstacles, eliminate overlaps, cut market entry costs and procedures, and business costs of enterprises. Particularly, the legal provisions involved M&A activities need to be clearer, more specific and in line with international practices.
Dr Can Van Luc emphasized the need to fix the pricing mechanism for state-owned commercial banks. According to current regulations, the selling prices must not be lower than the price provided by the valuation consultancy unit, not lower than the market price, and must be audited if necessary. From the beginning of the negotiation to the time the price is closed, the market price may increase by one and a half or double, breaking the financial plan of foreign investors, making it difficult to negotiate. Therefore, the above regulation needs to be revised to be in line with international practices to attract foreign investors.
Sharing similar point of view, an expert thinks that it is necessary to create more catalysts for M&A activities by giving more flexibility in ownership room for foreign investors. In addition, banking operations need to be more and more transparent, following international standard practices which is in the short term Basel II standards, etc.
Along with the potential and health from the economy in general, Vietnamese banks in particular have been increasingly strengthened. With a more open mechanism, more in line with international standards, more big M&A deals are expected to be seen in the future. If so, the restructuring of Vietnam’s banking system in the immediate and long term will successfully reach the goal in both quantity and quality.
