M&A Outlook talks to German Business Association (GBA) board member and banker, Dr. Andreas Stoffers about rescuing banks in trouble by merger or restructuring measures
Do you think that the restructuring of banks is an urgent task now?
The restructuring of banks is definitely an urgent task for Vietnam. Too many banks were set up in the past few years but without sound financial and good management capacity.
This fact led to unfair competition between banks and inflated the growth of banks, but at the same time with a lack of sustainable quality.
Banks are sometimes quite small, and sometimes – even if they are big (private or state-owned) – too weak to contribute reasonably to the funding of the economy.
Moreover, it is getting more and more difficult for these credit institutions to attract liquidity. This lack of liquidity is becoming a threat especially for some smaller banks. Coupling with the loose supervision from the watchdogs and weak enforcement of regulations there arose a situation which is risky for customers and the whole economy.
Last year in August, the State Bank (SBV) intervention to put a 14 per cent ceiling on deposits made it more difficult to keep the urgently needed assets within the banking system. It is understandable that Vietnamese savers were not satisfied with interest rates for their savings clearly below the inflation rate. While keeping their savings on banks for the official interest rate, they were losing money.
Thus, in 2011 savers kept on looking for apparently more profitable investment alternatives such as real estate, currencies and gold, especially because advanced investment products were not permitted in the Vietnamese banking market. (By the way, the lack of investment products is still a real issue in the Vietnamese retail banking market.) The withdrawing of money by the savers resulted in higher Dong interbank rates, which encouraged banks to withdraw money from the primary market and to lend it in the interbank market. Shrinking deposits made it also extremely difficult for banks to have a reasonable funding for their credit business.
Due to various successful and forceful measures undertaken by the SBV, inflation appears to have been put under control in 2012. This is an essential, but only one, prerequisite for the Vietnamese banking industry’s recovery. Nevertheless, the SBV should keep an eye on inflation and continue its efforts in this regard.
Moreover non-performing loans (NPLs), which are inherent consequences of unfair competition between banks in the past couple of years to grow their balance sheet hastily, remain a big challenge for the banking industry. As compared to 2010, several banks see a clear increase in their NPL ratios.
The reason may be that many banks have low corporate governance capacity especially in risk management. Although some banks have started setting up a risk management function, they sometimes only focus on the framework while implementation capacity was not properly and adequately enhanced.
Recently reported fraudulent cases in some banks are examples for a weak operational risk management. Increasingly high NPLs, mainly being affected by the excessive credit to real estate sector – are the consequence of a poor credit portfolio management, without consideration of concentration risk.
Another problem could be illegal black market banks, who promise higher interest rates for savers and loans for customers who do not receive them in the official system. These investments which have the character of dubious and illegal ponzi schemes are another thread for the regular financial industry.
To put it in a nutshell, Vietnam’s banking industry is currently under pressure. Besides internal and systemic problems, the global economy is – especially regarding the development in the Euro-zone - still challenging. It is therefore necessary to restructure banks and the banking industry in order to create an effective, robust and powerful partner for the economy and the rest of the society on Vietnam’s economic growth path.
Banks are often restructured in various ways, such as restructuring in the bank itself, or M&A; what do you think is the appropriate manner to restructure banks in Vietnam?
Some banks in Vietnam have a very small funding. Others are serving only a very small regional segment within the market. It is not wrong to serve a niche market, but in case a bank is not sound, it should be restructured, be it voluntarily, be it by intervention of the regulators.
Sometimes the size can be a problem. The SBV already recognised this part of the problem and tried to introduce minimum chartered capital limits for banks. Many banks successfully reached and partly exceeded this required minimum chartered capital (VND 3 trillion by December 2010).
Nevertheless some banks did not meet these requirements but are nevertheless operating without being seriously disturbed. Thus the restructuring could start here, but certainly after having identified in a transparent system the weak players in the market.
Banks with a too small liquidity basis could merge with others in order to create synergistic effects. Moreover the administrative rules and regulations should be enforced by the authorities.
Nevertheless it is important that Vietnam asks for expertise from outside the country. There are nations, supranational institutions and individuals with expertise and operating experience.
Vietnam should make use of these proven and tested means to restructure the banking industry in general and banks in particular.
How can Vietnam apply international practices in restructuring its banks?
An absolutely relevant international practice is a transparent banking system. Currently, it is not always clear which bank is sound and which bank has difficulties. Moreover the ownership structures are often imbalanced and unclear. Transparency should be a main focus in the restructuring.
Another point is allowing Vietnamese banks to introduce advanced investment products to their customers. Investment products, which are following international standards, could prevent savers from withdrawing money from the official sector to a risky and partly illegal asset allocation.
Currently these products are missing in the market. Introducing these investment products could be a great leap forward in the bank restructuring process. Banks could attract and retain customers as well as diversify their revenues by increasing their fee and commission based income.
Taking into account international practices and experiences would help Vietnam in restructuring its banking system. Foreign advisors as well as investors, especially banks can be very supportive in implementing international recognized good and efficient ideas, products, processes and regulations in the Vietnamese banking industry.
It is always good to learn from each other. Germany, for instance, with its various state owned regional and national players in banking as well as its efficient private sector, has a long experience in making its banking system fit for the 21st century.
Another good example are the German “building and loan associations” (“Bausparkassen”), which offer clients a worldwide unique combination of savings and building society loans, which could perfectly fit in the Vietnamese society because of the traditional value of own residential property… certainly provided that the inflation is under control. - Cooperating with international banks and institutions will be supportive for Vietnam in applying international practices in restructuring its banks.
Where should the restructuring start?
There are not only single banks which should be restructured. In fact the entire banking system has to be analyzed first and then restructured. First of all it is essential to strengthen the role of the SBV, as it was already the case in the last months when banks in Vietnam became aware of the fact that the SBV is not only preaching but forcefully implementing the measure. In the past there have been for instance several attempts by the SBV to implement ceilings, but it was partly undermined by the banks.
With the new SBV Governor Nguyen Van Binh there are positive signs to observe. He seems to be committed to a change of mindset within the State Bank, which is in fact necessary. Therefore his efforts are worth to be supported. All in all it is relevant that the SBV is a transparent, independent and powerful institution, which is serving the market and the national economy as a whole.
Besides, there could be tougher regulations regarding minimum requirements for leading a bank as senior manager. Standards have to be set up and reinforced. Creating transparency within the banking system is the core starting point for the restructuring. Currently, it is not always clear which banks are sound and which banks are weak.
The market has a right to get to know which banks are in trouble and which not. After this preliminary analysis, measures can be taken to rescue banks in trouble by merger or restructuring measures.
Nevertheless, without establishing a transparent system, every change in the system is worthless. To put it in a nutshell: On the one hand the SBV has to be independent and powerful, on the other hand the entire banking system has to be operated in a transparent manner.
How should the banks be restructured?
As mentioned above, first of all weak banks have to be identified regardless their size and ownership structure. Early this year, the SBV disclosed that five to eight banks should be merging, but the names are mostly still unknown.
However, moving forward and not slowing down is essential. It is not important if these banks are privately or government owned. For all banks the standards should be the same. The market has the right to see clearly which banks are in a good condition and which banks have difficulties.
Certainly, everyone has to be careful with overhasty profit warnings. But rumours could be even worse. A transparent system which is valid for all players and which urges the authorities to intervene in case rules and regulations are violated, would be supportive as a preliminary step.
This goes hand in hand with a strong, independent and transparent State Bank. The second step could be mergers of weak banks or support to banks which are not sound in several aspects. But, never do the second step before the first!
For German companies, Vietnam is a country with plenty of opportunities for investors. Nevertheless some essential steps have to be taken quickly and with a high commitment in order to make Vietnam fit for competition. In every economy a good and efficient banking system is the key factor for success.
Thus the restructuring of the Vietnamese banking system – following transparency and international best practice standards – is a difficult, but inevitable Herculean task for Vietnam.
GBA, representing German companies, is always ready to assist as a match maker and source of expertise. Germany’s sound financial industry could be a pattern for Vietnam’s restructuring.