Bank merger raises concerns

The prime minister last week approved the merger between PetroVietnam Finance Company (PVFC) and Western Bank, which would allow PVFC to shift its model from a finance company into a commercial bank.

The merger is expected to help PVFC upgrade operations and take advantage of its partner’s experience and retail banking network, as PVFC currently only issues loans and helps arrange investments for local companies, mostly PetroVietnam, the state-run national oil and gas giant.

PetroVietnam currently holds a 78 per cent stake in PVFC. While PetroVietnam is facing the government’s pressure to divest non-core businesses, the group is still asking the government for maintaining a 20 per cent stake in PVFC, just down from the current 78 per cent.

Morgan Stanley is now PVFC’s foreign strategic shareholder which holds 10 per cent of its charter capital.

Western Bank, much smaller than PVFC, represents an affordable purchasing target. The bank had asset of VND20.6 trillion ($990 million) and equity of VND3.1 trillion ($149 million) by the end of 2011. Its scale and credit operations are especially small compared with PVFC.

Any details related to converting shares and the road map for the merger has yet to be announced by the two sides. However, some market observers had a cautious look for the merger. They said the deal may open a  a new way to restructure Vietnamese finance companies, but the efficiency of the model should still be under consideration.

Dao Van Hung, director of the Academy of Policy and Development under the Ministry of Planning and Investment, said the model to merge a finance company and a bank had a high risk because it was a place for state groups to both invest and mobilise capital for lending mainly to its members under the groups. Therefore, the loan quality was often low with high risks of instability, he said.

“Thus, the merger may not be a good way to restructure finance companies,” he said. “We should learn from international experience that finance companies were born to support consumption for producers and distributors through many methods such as repurchasing installment sales contracts and lending for individual consumption.”

Vu Hoang Chuong, investment and consultant manager of EVN Finance Company under the Electricity of Vietnam (EVN), warned that its efficiency would depend on the new bank’s competitiveness and specific advantages after the merger. “In fact, the two institutions are weak in term of financial capacity with big bad debts, so the efficiency of the merger will not be really high as expected,” said Chuong.

He added that the biggest challenge for the merged bank was the problem of assets, which were added up from two weak different systems and it would be difficult to develop the new asset system for greater benefit.

Currently, besides six 100 per cent foreign-ownership companies operating in the field of consumer credit, Vietnam has 12 state-owned finance companies established in late 1990s.