Private equity finds its way into local banking

March 31, 2018 | 11:09
The local banking sector is regaining its place in the sun this year, as more banks are due to get listed on the stock exchanges, while others are undertaking capital raising rounds where more shares are on offer to potential investors. Foreign investment funds, rather than foreign banks, are the ones with the most appetite for a slice of the local banks.
private equity finds its way into local banking
Foreign investment funds, not banks, are the most active buyers of stakes in local banks, Photo: Le Toan

Big fish

Last week, Hanoi-based VPBank announced its plan for a private placement that will offer a total number of shares equivalent to 15 per cent of the bank’s ordinary shares at the time of the event to both local and foreign investors. As of December 31, 2017, VPBank reported 1.57 billion total outstanding shares, of which 1.497 billion are ordinary shares.

The sale of VPBank stake to shore up its chartered capital is expected for the second quarter or early in the third quarter of the year, as the bank announced during its annual general meeting. Chairman Ngo Chi Dung shared his confidence that investors will pay a premium price for the shares, well above the current market price, thanks to the bank’s strong performance in 2017 and bright prospects for 2018.

Dung noted that the bank seeks to increase its capital this year as both the local and the global macro-economic conditions are supportive enough to proceed with its capital raising plan. “Opportunities may pass us by any time, so it is just the right time for us to go ahead with it; should the sale go through, our capital adequacy ratio (CAR) will go up to 18 per cent,” he said.

It is yet unknown whether investors will now wait for the upcoming event or if they are already in negotiations with the bank for a fair price. What has become evident, however, is that foreign investment funds are very interested in local banks, evident in the recent investments worth $370 million that two separate legal entities under private equity investor Warburg Pincus poured into Techcombank. Thanks to this, the lender will have the funding it needs for expansion and to further strengthen its brand in the country.

VinaCapital’s Vietnam Opportunity Fund (VOF) gained prominence with another example, when it acquired almost 5 per cent of Orient Commercial Bank (OCB) for $11 million last October. The deal, according to VOF managing director Andy Ho, was “a rather rare opportunity to own a meaningful stake in a bank that has high lending and earnings growth”.

“In addition to negotiating an attractive price, we were able to obtain certain minority protections and performance commitments, which made this transaction all the more attractive,” Ho said at the time.

In addition to those who have already received investment or are en route to finalise investment deals, there are a multitude of banks that are anticipated to go to the main bourses in 2018 and 2019, allowing investors more options of increasingly transparent bank stocks to choose from.

These banks, which currently listed on the over-the-counter (OTC) trading platform, include Techcombank, Maritime Bank, Saigon Bank for Industry and Trade (Saigonbank), OCB, ABBank, SeABank, Nam A Bank, and VietABank.

TPBank has been approved by the Ho Chi Minh City Stock Exchange (HSX) last Thursday to list 555 million shares on the exchange.

A piece for all

The above-said lenders are commercial ones. For those with an appetite for state-owned banks, there are a couple that are planning to offload some of their stakes to sound investors.

Vietcombank (HSX: VCB), the third-largest lender in terms of assets, has gotten the thump-up from the government to offer 10 per cent of its stakes, equivalent to over 350 million shares, to foreign investors, either through private placement or a public auction. The offering is likely to take place in the second quarter of the year, according to the bank. The state currently owns 77.11 per cent of the bank, while Japan’s Mizuho Corporate Bank holds 15 per cent of its stakes.

Back in 2016, Vietcombank inked a memorandum of understanding with Singapore’s sovereign wealth fund GIC to sell 7.73 per cent or 305.8 million of its stakes out of the lender’s initial plan to issue 359.77 million new shares in a private placement in 2017.

However, the deal fell apart, as both parties could not come up with an agreeable and fair price. GIC offered a discount from the market price to buy VCB stocks, which then posed a major obstacle for the government to approve the deal. VCB stock price more than doubled over the course of the year, with its price listed at VND74,400 ($3.38) a share last Wednesday, up almost 115 per cent in value year-on-year.

Meanwhile, the largest lender in terms of assets, BIDV (HSX: BID), with 95.28 per cent owned by the state, is said to be close to signing an agreement with Korean KEB Hana Bank as part of an attempt to boost its capital and CAR under the requirements of the Basel II guidelines. BIDV’s foreign ownership limit (FOL) is set at 30 per cent, and the bank does not currently have any strategic foreign investors.

Gaining popularity

It is not until now that local banks have become attractive to foreign investors. Foreign banks took the initiative to invest in their local peers over a decade ago. Banks like HSBC Holdings Plc., Standard Chartered Plc., and BNP Paribas were once major shareholders at local lenders like Techcombank, ACB, or OCB. They have now disposed of their holdings in their local counterparts.

Others like Commonwealth Bank of Australia (CBA), Societe Generale, Bank of Tokyo-Mitsubishi UFJ, Sumitomo Mitsui Corporation, and Mizuho Corporate Bank are still holding on to their stakes at VIB, SeABank, VietinBank, Eximbank, and Vietcombank, respectively. The International Finance Corporation (IFC) also owns 4.99 per cent of TPBank.

The past years also saw several successful transactions, such as TPBank in 2017 sealing a deal with Finland-based PYN Fund Management to hand over 4.99 per cent of its stakes in exchange for approximately $40 million.

VPBank, through its initial public offering (IPO) last year, got a total of $250 million in foreign funds. Available room for foreign investment at the bank filled up fast as soon as it got listed on the southern bourse.

HDBank, with its recent debut on HSX, was of interest to some 76 foreign investors, including Deutsche Bank AG, Credit Saison, and JP Morgan Vietnam Opportunities Fund, which had earlier paid $300 million for 21.5 per cent of the lender’s holdings.

According to HSBC Vietnam CEO Pham Hong Hai, foreign investors now have a new basis for their investment decision, as the health of the local banking sector has improved over time following the restructuring progress, on the back of a more competitive environment and better legal foundation, and it promises to be a sector of foreign interest in the future.

“In my view, foreign investors are pretty optimistic about Vietnam’s economic prospects and are looking to enlarge their businesses here. The finance and banking sector is set to benefit from such moves, as the growth of the economy and businesses will lead to an increase in demand for finance and banking services,” Hai told VIR.

“To ensure sustainable development, I think that now and then, international financial institutions may not invest on a widespread scale, but rather invest intensively into areas of strength as well as in corporate governance and risk management. Enhancing customer experience with digitalised features will also be an area of focus for banks to invest in,” Hai added.

Equity investors vs bank investors

It is worth noting that currently, local banks seem to attract attention and investments from non-banking or private equity investors rather than banks. While finding a bank as a strategic foreign investor used to be a goal for Vietnamese banks, as they were expected to provide not only financial capacity but also experience and expertise in the banking industry, it is not always easy to find one now.

Foreign banks may also experience a conflict of interest when they hold a local incorporate and at the same time manage their investments here. This could be explained with a look at the recent case of BNP Paribas, which divested from its partner OCB.

“As our stake in OCB was a minority stake without strategic involvement and was not in line with our overall business development plan in Vietnam, we decided to dispose of our remaining holdings,” said BNP Paribas country head for Vietnam Aymar de Liedekerke Beaufort in an emailed interview.

“We now see a tendency of foreign lenders not spreading their investment, but rather focusing on developing the markets in which they have the competitive advantage as well as those with the scale and capability to generate growth in line with the parent banks,” said HSBC’s Hai. “They may also not focus on mergers and acquisitions or become strategic partners of local banks, but focus more on their organic growth, in this case on the local unit of the foreign banks.”

“Foreign investment funds, meanwhile, are more likely to actively seek to invest in local banks with room for growth and healthy corporate governance.”

For VPBank’s Dung, he stressed that now is the right time to conduct a private placement, as foreign investors, in this case foreign investment funds, are making their way to Vietnam.

By Trang Nguyen

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