Expanding foreign ownership room in banks is not only the expectation of foreign investors, the need to raise capital to meet the Basel II standards and improve competitiveness is also very urgent for Vietnamese banks.
Foreign ownership room to be increased to 49%
For foreign investors, Vietnam’s financial and banking is still a field in interest with strong capital investment. However, listed banks with large scale and potential (Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), HCM City Development Commercial Joint Stock Bank (HDBank), Asia Commercial Joint Stock Bank (ACB), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), etc.) have run out of their room for foreign investors which was set at 30 percent according to Vietnamese law.
Thus, in order to own capital in Vietnamese banks, not only domestic banks have petitioned to loosen room to attract foreign capital but foreign investors have also proposed to increase the ownership limit for them in Vietnamese banks.
Notably, in the context when many banks are striving to mobilise capital to complete the task of applying the Basel II standards of which the deadline is set in early 2020, the government is likely to loosen the foreign ownership limit in banks from 30 percent to 49 percent in order to attract foreign capital.
At this time, banks are making efforts to increase investment both at home and abroad to prepare for the application of Capital Adequacy Ratio (CAR) in accordance with Circular 41/2016/TT-NHNN, because ensuring minimum CAR of eight percent under the Basel II standards is a real challenge.
In addition, in the context of increasingly deep integration, banks are required to have a strong financial health to enhance their competitiveness with banks from other countries that may participate in the Vietnam’s market. If banks want to invest in technology and infrastructure to catch up with the competition of foreign banks, in addition to increasing charter capital, raising equity is extremely important.
However, the fact shows that the capital raising roadmap of banks in the recent time has still faced many challenges. Although the bank stock developments have become relatively bright and positive than before, bank stocks are not yet attractive enough for investors. Meanwhile, the banking system still has many issues that must be actively overcome such as bad debts, capital increase, etc.
The limited capital in the domestic will inevitably lead to the high demand for foreign capital. As some banks have recently sold a relative amount of stake to foreign investors, the regulations around foreign ownership rate need to be reconsidered.
In fact, many foreign investors have invested in Vietnamese banks within the allowed limit. However, the current state of investment of foreign investors is just purely financial investment and foreign investors have not participated strongly in the management and administration of banks. Such limited foreign ownership rate is less attractive to foreign partners, as they do not have enough power to support or improve banks’ financial situation.
In this context, the expectation of foreign investors as well as domestic banks is to have more room. The proposed rate is 35-40%, and some banks even expect to have a foreign ownership room of 49-51%. In addition, the SBV has allowed foreign investors to buy 100 percent stake of Vietnamese banks which are in the process of restructuring and settling bad debts, but so far no deals have been successful.
There is a concern that easing foreign ownership room will result in uncontrollable consequences, while banking sector is one of the sensitive areas of the national monetary security. Nevertheless, the attraction of foreign capital will help domestic banks increase their medium and long-term capital and also meet the safety ratios. Such concern is said to be unfounded.
In fact, banks also want to attract more foreign capital to improve their capital capacity, especially when the deadline of meeting the Basel II standards is approaching, even for large banks. However, according to current regulations, the maximum ownership rate of a strategic foreign investor should not exceed 20 percent of the charter capital of a credit institution (CI), and total shareholding of all foreign investors in a CI should not exceed 30%. In the case if the room is loosened to 49 percent in a CI, the control still belongs to a large shareholder who is a domestic investor, not a foreign investor. In this context, the expectation of foreign investors for foreign ownership expansion is also understandable.
At the same time, according to Article 9, Decree No.01/2014/ND-CP on foreign investors buying shares of Vietnamese CI, a foreign investor expecting to own from 10 percent of Vietnamese CIs must have credit rating by reputable international organisations and a minimum total assets of 10 billion US dollars.
Article 10 stipulates that a foreign organisation expecting to be strategic investor must have a minimum total assets of 20 billion US dollars in the year preceding the year of applying for share purchase and international experiences in banking and finance sector for five years or more, etc.
Under such conditions, it is clear that the government and the SBV can control foreign investors in Vietnam.
As the government and the SBV have tools to control banks’ operations, the increase of foreign ownership room can be taken into account, after careful consideration. We have to acknowledge that, Vietnamese banks are in desperate need of financial and technological support and banking management under international practices in the upcoming context of Basel II application.
Management authorities should consider the foreign ownership limit loosening cautiously to have appropriate mechanisms, avoiding losing opportunities for the development of the banking and finance system. For the group of state-owned commercial banks, the ownership rate of foreign investors may be increased to 30-49%, while this rate at private commercial banks may be flexible according to the scale and situation of each bank.
