All calm before the next M&A storm

Nguyen Thuy Duong Banking and FSO leader, E&Y Vietnam

People wonder whether this quiet implies a negative turn for the market or is simply a pause to “gather momentum” to race ahead once again? There was a series of M&A agreements among banks and financial institutions in previous years, yet there has been not a single deal so far this year. The market is quiet, without even the usual odd piece of information or flitting rumour about upcoming deals. We can view this as a period when the market is settling into shape after a wave of M&As. The banking and finance sector is concentrating on restructuring so as to consolidate newfound M&A synergies.

For banks and corporations that are new to the M&A scene, this is the time to assess deals conducted, draw conclusions, and digest the accumulated experience and resources for the next wave of transactions.

The above picture provides a plausible answer for the calm in transactions and indicates an evolutionary cycle for the market. According to expectations, this cycle will be followed by a cyclical boom, reinvigorating M&A activities. Grounds for robust M&A growth in the banking and financial market stem from objective factors, such as the foreseeable opening of the market as the ASEAN Economic Community (AEC) and the State Bank of Vietnam (SBV) loosen regulations on cross-ownership, or subjective factors like financial institutions’ intrinsic need to sharpen their competitive edge.

M&A activities are expected to pick up in the second half of the year

Bank divestment pressure brings activity

Circular 36, intended to reduce cross-ownership ratios among banks, prescribes that a credit institution is allowed to purchase and hold a maximum of 5 per cent voting equity in another credit institution. Accordingly, shareholders with more than 5 per cent will have to make a corrective divestment to bring their assets in line.

Despite several successful rounds of divestments and acquisitions, there are a number of credit institutions holding more than 5 per cent equity in other banks or finance companies. For example, Vietcombank currently holds a 7 per cent stake in Military Bank, 5.07 per cent in Orient Commercial Bank, and more than 8 per cent in Saigon Commercial Bank. Vietinbank also has a 10.4 per cent stake in Saigon Bank for Industry and Trade, while An Binh Bank owns 8.4 per cent of EVN Finance Company.

Given the strict provisions of Circular 36, certain banks are expected to make divestments in the near future, which points to heightened market activity in the trading of banking shares.

“Zero dong” bank restructuring

In 2015, SBV purchased Vietnam Construction Bank (VNCB), Global Petro Bank (GPBank) and OceanBank at “zero dong.” Currently, these three banks have executives in their management boards approved by Vietinbank and Vietcombank, as directed by SBV. The short-term goal is to restructure these banks to stabilise and streamline their operations. Thereafter, SBV will determine their future, subject to the degree of success of the restructuring process.

Nevertheless, given foreign financial institutions’ increasing demand to penetrate the Vietnamese financial market in the context of a set number of credit institutions, “zero dong” acquisitions can be seen as a highly coveted entrance ticket.

Previously, a foreign bank expressed interest in restructuring GPBank by purchasing its entire stake. This is also a precedent in the market that denotes a very high possibility of “zero dong” bank acquisition. The key issue here is that the operating licence attached to such an acquisition is attractive enough for foreign banks, but a takeover in this manner cannot guarantee to solve the bank’s issues.

Small banks need mergers to stay afloat

According to statistics, the current banking system includes up to 12 banks that have chartered capital below VND4 trillion ($179.4 million). This is fairly modest as capital goes, especially in the context of fierce competition. Funds are needed to promote lending activities, finance trade, as well as invest in business infrastructure facilities, and information technology systems.

In the foreseeable future, small and medium banks will have to navigate their ways to sustainable growth as competition grows ever more ruthless. When it is not possible to raise funds from existing shareholders, a bank is forced to look for an adequate partner to merge with, so as to maintain a competitive edge. This trend has previously been forecast and is expected to continue.

Foreign alliances to take over the consumer finance sector

The current face of the consumer finance industry is being rapidly reshaped by entrants and newcomers. 2014 and 2015 witnessed a number of deals between banks and finance companies. Examples include Maritime Bank acquiring Vinatex Finance Company, Techcombank acquiring Chemical Finance Company, Military Bank acquiring Song Da Finance Company, and Saigon-Hanoi Commercial Joint Stock Bank (SHB) acquiring Vinaconex–Viettel Finance Company.

Following the development trend of the consumer finance market, banks may imitate HDBank by entering joint ventures with foreign financial institutions that possess excellent experience in the field.

Leveraging foreign consumer finance experience and management competency is a wise step, as domestic credit institutions do not have the adequate capacity to operate in the sophisticated consumer finance segment. In the near future, numerous M&A deals may take place to establish joint venture finance companies.

AEC brings foreign giants to the yard

The AEC took effect from December 31, 2015, and saw member countries pledge to open all service sectors, including financial services, such as banking, insurance, and securities, and allow a minimum 70 per cent foreign ownership in local service companies. Given this pressure, stakeholders rightfully wonder about the chances of domestic banks going on sale.

As mentioned above, Vietnam has up to 12 banks with chartered capital below VND4 trillion ($179.4 million). These banks’ competitiveness will be impaired significantly when faced with regional rivals with deep pockets. For a bank to survive and grow sustainably in the market, it may opt for a capital hike, merger, or to redefine its development direction. If a bank fails to carry out any of these, it will be highly exposed to acquisitions. Specifically, the Vietnamese banking and financial market is opening up at full throttle, luring capital-rich foreign financial institutions to seek entry. As the number of credit institutions is not likely to increase under SBV’s policies, small and medium sized local banks will face increasing acquisition pressure from foreign banks.

Although M&A activities in the banking and financial market found a relative calm in the first half of 2016, the second half promises more prominent transactions.