Big Push For Stronger Banks

Banking regulators want stronger local banks to be able to stand the fiercer competition now that Vietnam has to open its economy as a WTO member


Vietnam is in the process of opening its finance-banking sector in line with its commitments to the World Trade Organization. At present, there are five State-owned commercial banks, one policy bank, one development bank and 37 commercial joint stock banks holding nearly 90% of the banking market share. However, except for a few strong banks, most of the commercial joint stock banks are not large by international standards, with their charter capital averaging VND500-1,000 billion (US$31.2-62.5 million).

HSBC, Standard Chartered, ANZ and Citigroup already have a presence but with the opening of the local banking market, more and more foreign banks, most of them established institutions with strong financial capacity and extensive experience, are keen to gain a good share of the local market.

Shrinking number

In an effort to help the local banking sector strengthen competitiveness, the State Bank of Vietnam, the central bank, is mulling regulations in step with the Government’s policy to restrict the establishment of new banks and encourage the merger of joint stock banks. “In the long term, the aim is to bring the number of domestic banks and financial groups down to 15 to 20 before 2010,” said a source from the central bank.

Kieu Huu Dung, director of the central bank’s bank department, expresses the idea this way: “When competition reaches a certain level, it will create pressure for mergers. At present, there is room for local commercial banks to grow in Vietnam, but merging may take place after five years more.”

To reach this target, the State Bank will implement policies regulated by the Basel Commission, which include high requirements for financial security, financial capacity, and experience in new banks’ big shareholders. The bank has just issued a decision on setting up new banks, which is seen as a new step to translate its plan into reality.

Under Decision 24/2007/QD-NHNN issued on June 7, the minimum charter capital required for a new bank will be periodically regulated by the Government. All commercial joint stock banks established between now and December 31, 2008, must have charter capital of at least VND1 trillion (US$62.5 million). Those coming into existence between December 31, 2008, and 2010 must have capital of at least VND3 trillion (US$187.5 million). A new commercial joint stock bank must have at least 100 shareholders, including at least three institutional founding shareholders.

The requirements for a founding shareholder do not make the role easy. If this shareholder is a non-bank enterprise, it must have equity capital of at least VND500 billion (US$31.2 million) and profitable operations in three consecutive years. If it is a bank, it must have total assets of at least VND10 trillion (nearly US$625 million), a bad debt ratio of less than 2% of total outstanding loans and profitable operations in three consecutive years.

The shareholders also face some restrictions in share ownership. An individual investor can hold at most 10% of the charter capital and an institutional investor at most 20%. In the first five years after the bank is established, founding shareholders can transfer their shares only among themselves. Meanwhile, non-founding shareholders cannot transfer their shares in the first three years. The shareholders must contribute capital with their own money, not with loans in any form.

The central bank’s intention to restrict the establishment of new banks is also a move to terminate the operation of ailing commercial banks. The collapse of any one of these may have a negative effect on the whole banking system. In the period of consolidating the operations of commercial joint stock banks from 1998-2001, the State Bank had to close 10 ailing banks, leaving 30 that have regained their vitality only over the past three years.

Stronger players

Despite the strict requirements of the new decision, more new commercial joint stock banks will likely come into existence this year. Dung says this is a strong trend at the moment. “Banks are doing well. So, the move to set up a bank is unavoidable,” he said. About 25 applications for setting up commercial joint stock banks have been received by the central bank.

Meanwhile, several strong corporations have plans to set up their own banks. Among their number are FPT, Bao Viet (Vietnam Insurance) Group, Postal Savings Company and PetroVietnam Finance. The central bank is cautious about this move. Central bank governor Le Duc Thuy early this year reminded the local media of the bitter outcome of events in the 1990s when many big businesses rushed to establish banks to raise funds for their operations and faced heavy losses.

At present, big State corporations are keen to establish banks or to hold a dominant role in a certain bank. According to Dung, this move is understandable, but it may lead to the corporations “manipulating” the banks when the corporations face some challenges. Therefore, the central bank has ruled that a corporation that is a member of the board of directors or a big shareholder of a bank cannot take out loans from that bank.

For these reasons, the Government is encouraging the merger of banks to establish bigger domestic institutions. To encourage bank mergers, the central bank will cooperate with the Finance Ministry to issue preferential tax policies for parties to a bank merger. The policies will appear next year. Along with this, the authorities will issue regulations to restrict the network expansion by banks which have capital below VND1 trillion this year. They will also adjust regulations on financial safety to meet international rules and create chances for the successful merger of banks.

According to a source from the central bank, strong backing will go to financial groups that combine insurance, banking and securities services. In 2006-2008, the Government will build one or two pilot financial groups by supporting a merger between a State-owned bank and Vietnam’s insurance giant Bao Viet. A law on financial groups will be adopted to replace the current law on credit institutions. The central bank will encourage financial groups to set up finance leasing companies to give a boost to the diversification of products and services on this market.

To help local banks boost their strength, Vietnam will give priority to foreign investors wishing to become strategic investors of local commercial joint stock banks. In a decree issued in April, the Government allows a strategic foreign investor to own a maximum stake equivalent to 15% of the charter capital of the local bank. Decree 69/2007 states that in particular cases, the Prime Minister may permit the strategic foreign investor to hold a stake equivalent to 20% of the capital. However, strategic foreign investors can transfer their shares only five years after their purchase.

On their part, a local bank that sell shares to foreign investors must also be a strong institution with charter capital of at least VND1 trillion (US$62.5 million), in addition to meeting other requirements on financial status, management and operations. Meanwhile, the foreign credit institutions buying shares of local commercial banks must have total assets of at least US$20 billion.

Aware of the need to become stronger players, many existing commercial joint stock banks are rushing to raise their charter capital to the level required, either by issuing shares or inviting the participation of local investors with strong financial capacity or foreign financial institutions. Some banks, like Vietnam Eximbank, have sold shares to strategic local partners such as Kinh Do Corp., Saigon Jewelry Co., PetroVietnam, Asia Commercial Bank and others. Others are selling part of their stakes to strong foreign banks. Among such deals are those between Orient Commercial Bank and BNP Paribas, Techcombank and HSBC, Habubank and Deutsche Bank, Southern Bank and United Overseas Bank, VP Bank and Overseas Chinese Banking Corp., Sacombank and ANZ Bank, and Asia Commercial Bank and three foreign partners–Standard Chartered, International Finance Corp. and Dragon Capital.

Vietnam will give priority to foreign financial institutions that become strategic investors of local banks. Therefore, foreign investors’ ownership in local banks may be allowed to increase from the present 30% to 49%. After 2010, the country will open up the financial sector in accordance with World Trade Organization commitments.
By SGT