Banks taking over financial firms shapes a growing trend

illustration photo source Baodautu

Early this month, Vietnam Chemical Finance JSC (VCFC) announced the transfer of around 90 per cent of their stake to Techcombank, increasing the latter’s total stake in VCFC to 99.87 per cent.

This transfer received approval from the State Bank of Vietnam (SBV) in December 2014.

In addition to this deal, scores of other mergers between financial companies and banks are expected to become a reality this year, including between the Saigon-Hanoi Bank (SHB) and Vinaconex-Viettel Finance JSC (VVF), and between Maritime Bank and Textile Finance JSC (TFC), both of which have received in-principle approval from the SBV.

In the latter case, Maritime Bank already possesses an 11 per cent stake in Textile Finance JSC.

Industry experts have cited a number of reasons why this trend looks likely to continue for the year ahead.

First of all, state-owned groups and businesses are obliged to finalise capital divestment from non-core businesses – including financial companies – this year.

Secondly, according to a draft circular regulating the consumer credit activities of financial companies, commercial banks need to establish financial companies if they want to venture into consumer lending.

Thirdly, in light of the SBV’s Circular 36/2014/TT-NHNN, banks are only allowed to possess a stake in a maximum of two credit institutions, and the stake ownership must not be greater than 5 per cent.

At present, many banks have several stake in financial companies, and in many cases their stakes surpass the 5 per cent benchmark.

For example, ABBank possesses an 8.4 per cent stake in EVN Finance JSC, Military Bank owns an 11 per cent stake in Song Da Finance JSC, and state giant Vietcombank possesses a 10.8 per cent stake in Cement Finance JSC.

In the deal between Techcombank and VCFC, Techcombank had previously possessed a 10 per cent stake in VCFC, and so this deal was a way to buy out this financial company in order to come in line with the new regulations.

Senior financial expert Can Van Luc predicts that consumer lending will be become an increasingly vital field in Vietnam’s banking sector.

“At the moment, consumer lending accounts for just 6 per cent of total outstanding loans in Vietnam. Meanwhile this rate is 15-20 per cent in many other countries, and as high as 35-40 per cent in US market,” said Luc.

“State groups and businesses are facing huge pressure to exit from financial companies. This is an opportune time for banks to fully merge with these companies and boost consumer lending,” Luc noted.

Buying out financial firms, however, has both advantages and disadvantages for banks.

Although the buy-out would help banks boost their consumer lending business, many financial firms are currently underperforming, and so banks run the risk of being saddled with a venture that could bleed them financially.

Cement Finance JSC’s bad debt ratio stood at 9.65 per cent as of 2014’s second quarter, while the profits at VCFC, VVF, and TFC were minimal, or even in decline.

For example, at VVF the company only reached 32 per cent of its full year profit target in 2013, and the capital adequacy ratio was only 54.6 per cent.

Its business results for 2014 have yet to be released.