Opportunities and risks in Vietnam’s banking shake-up

>> A hot sector in a cool economy

The opportunities were from the ASEAN economic community, capital markets, small- and medium-sized banks and fee-based income, said Deloitte consultant Mohit Mehrotra.

He was speaking at the 2012 Vietnam M&A Forum in Ho Chi Minh City June 7, attended by 30 speakers and 450 participants.

Vietnam’s stock market capitalisation to gross domestic product (GDP) ratio was one of the lowest in the region and this showed strong future potential and current heavy reliance of industries on the commercial banking sector for funding, he said.

Last year, small- and medium-sized enterprises (SMEs) in Vietnam contributed 47 per cent to the country’s GDP, proving that SMEs provides large potential for growth to the Vietnamese banking sector.

Mehrotra added the regional economic integration now meant several advantages for businesses and bankers in Vietnam, but also disadvantages such as increased competition due to elimination of tariffs, increased interest from other regional countries to enter the Vietnamese market.

A way for Vietnamese banks to address the opportunities  was through restructuring, he told the merger and acquisition (M&A) forum, where the main topics included banking restructuring.
“It is essential for [Vietnamese] banks to reassess their current strategy to remain competitive in the current uncertain environment with changing supply, changing demand and regulatory uncertainties.”

Dr. Pham Do Chi, former senior economist at the International Monetary Fund and former senior international banking adviser who helped to manage Laos’ banking restructuring efforts, said Vietnam’s current banking restructuring was not a mechanical solution aimed at reducing the number of commercial banks so that the State Bank of Vietnam (SBV) could easily manage and regulate them.

In the present situation, banking system restructuring through M&A solutions could generate profound reform in Vietnam’s banking system, he said.

According to him, for banks with liquidity and bad debt difficulties, the SBV could inject money into the banks and in return receive partial or majority ownership. After the troubled banks recovered, the SBV can sell its shares in the market and return profits back to the budget. For example, the US government bought a large number of Citi Bank and Bank of America shares and cashed them in later with huge profits.

Chi said that if there was no partner buying troubled banks, the SBV would act as the acquirer of last resort to buy banks. The SBV can restructure the banks and resell shares.

Last year, Japanese bank Mizuho bought 15 per cent of Vietnam’s Vietcombank for $567 million, and World Bank member International Finance Corporation invested $182 million into Vietnam’s Vietinbank.

Mizuho’s Yutaka Abe, a Vietcombank board of directors member, said the Japanese bank “is very happy with the investment in Vietcombank because this has achieved good results.”

“We’re very happy also because this alliance aims to further improve services for our Japanese and non-Japanese customers in the high-growth emerging country of Vietnam.” He described the buying as “a capital and business alliance” with Vietcombank, and cooperation included corporate finance, retail finance and investment banking.

Investment banking and securities business will begin with syndicated loans, project finance, trade finance and payment operations.

The Japanese banker added Mizuho and Vietcombank would also consider the establishment of a partnership in retail and consumer finance in Vietnam. Other opportunities for business partnerships with all members of Mizuho Financial Group, the parents company of Mizuho Bank, will also be considered. Former SBV governor Le Duc Thuy told the forum that banking restructuring was a critical mission for the Vietnamese government now.

Thuy said it was essential to align scope and scale of change with resources available in order to be able to minimise the risk of failure.

“The banking restructuring process requires a broad-based effort of the whole society.”