Pending frustrations in M&A unnerve investors

OCB is pondering selling stakes in the lender to Japan’s Aozora Bank, photo Le Toan

The first few days of the New Year have witnessed bullish wagers on domestic banking activities.

Vietnamese commercial lender Ocean Bank (OCB) is mulling the sale of 11 per cent of its charter capital to Japan-based Aozora Bank Ltd., which is listed on the Tokyo Stock Exchange with around $3.16 billion of market capitalisation. The deal would be based on the current trading price of OCB, at an expected total price of VND1.22 trillion ($52.8 million).

However, cautious market watchdogs warned that the outlook for takeover deals is not that rosy.

French bank BNP Paribas previously divested its entire 18.68 per cent stake in OCB, ending a decade-long partnership in 2017. Last March, Hanoi-based private creditor SeABank announced that its French strategic partner Société Générale Group (SocGen) offloaded 20 per cent stake after a 10-year alliance.

It is rumoured that besides the lack of cultural fit, there are concerns over the long-term health of some local lenders, poor corporate governance, conflict of interest, and portfolio reshuffles taking a bite out of M&A activity in the field.

When tie-ups fail

According to a recent report of researchers at the Vietnam M&A Forum, an annual event held by VIR and the CMAC Institute, recent shifts in the marketplace have begun to bring large tie-ups back in favour, driving an emphasis on consolidation and scale. The value of M&A deals is expected to reach $7.5 billion this year, equal to the combined deals of two years earlier.

Deputy Prime Minister Vuong Dinh Hue recently confirmed that 100-per-cent foreign-invested banks would not be allowed to be established in Vietnam, hence M&A is the quickest way to penetrate the market.

Notwithstanding, challenges still colour the landscape and vary for each bank, spanning different factors such as corporate governance, downgraded ratings, or lack of transparency in information disclosure.

Top of the list of issues is that foreign investors often force more financial discipline, which Vietnamese standards often lag behind.

“Local banks have to comply with the specific disclosure requirements prescribed in International Financial Reporting Standards (IFRS), but vast differences between local and global standards might pose a challenge for domestic lenders,” Phan Dung Khanh, investment director at Maybank Kim Eng Securities told VIR.

According to Nguyen Thuy Duong, chairwoman of EY Vietnam, many overseas investors deem that information disclosure in Vietnam is not transparent and clear enough.

“While for almost all leading financial markets, information transparency has been a prerequisite, investors from the United States, the United Kingdom, or Australia might face great challenges to understand Vietnamese accounting standards due to its significant deviation from IFRS. This, consequently, makes the due diligence process much more complicated,” said Duong.

Oanh Nguyen, partner at Baker McKenzie Vietnam, added that many Vietnamese banks refuse to let foreign partners do due diligence on their business, which deters many interested suitors.

Another main obstacle is that valuations and conflicts arising along the way also act as a cause of the decline in attractiveness of Vietnam’s banking sector. Some expressed their concern that foreign shareholders are not guaranteed sufficient influence over the management of local banks.

Back in 2017, it was rumoured that insufficient control was the main reason that saw HSBC offload its shares in Techcombank. While HSBC shareholders expected to receive dividends, Techcombank did not pay any dividends for six consecutive years since 2010 in a bid to further raise charter capital.

Poor handling of change management after the deals could hurt banking profits as well. Before being wholly acquired by SHB, Habubank sold 10 per cent of its stake to German lender Deutsche Bank. After five years of collaboration, the amount of non-performing loans rose to 32 per cent. It means the assistance from Deutsche Bank did not live to its expectations, and Habubank was then acquired by SHB.

In the case of SeAbank, the sale was part of SocGen’s recent strategy of exiting non-core markets in all of Asia to consolidate its positions in places where it is already strong.

Last year, UK lender Standard Chartered Bank divested its entire 8.75 per cent of shares in Vietnam’s publicly listed Asia Commercial Bank (ACB) after a 12-year collaboration. Standard Chartered Bank had previously withdrawn its representatives from ACB’s board of directors for unspecified reasons.

Adhering to the process

In 2013, United Overseas Bank (UOB), a Singaporean lender, was ramping up its interest in acquiring 100 per cent of the distressed local lender GPBank. But the lengthy year-long negotiation yielded no fruit, since GPBank refused to accept the low takeover premiums from UOB though the local lender was struggling to recover its non-performing loans at that time.

In addition, harsher scrutiny, along with a lengthy process, may add a sense of urgency to any potential tie-ups.

“The approval process for M&A deals is rather long and complicated. Hence, both buyers and sellers struggle to reach an ideal price. The current law is that price has to be based on the latest 10 trading days,” said economist Can Van Luc.

Nguyen Duc Vinh, general director at VPBank, cautioned that some foreign investors are seeing Vietnam as a short-term investment destination, kicking off a wave of divestments.

Foreign acquirers often show great interest in the corporate governance of Vietnamese banks. That includes how banks can set their operational vision and strategy, determine their risk appetite, execute their daily operations, and protect their shareholders’ interests.

It could stem from the fact that banks become more global after M&A deals, and so the burden on boards of managers is rising steeply. Hence, investors’ assessment of poor local bank’s governance is quite substantial.

Eximbank, for example, is not receiving much attention from overseas investors. Investment analysts have been raising questions about its prudence since the bank has faced an uphill battle to regain the trust of its shareholders and depositors, following a series of embezzlement and fraud scandals.

Plenty of prospective bank M&A only look at the two banks on paper, without taking their people or culture into account. It may answer why the number of European banks in Vietnam is shrinking, which is in stark contrast with the greater participation from banks in other Asian countries.

While South Korean, Japanese, or Chinese lenders are gearing up to enter into Vietnam’s financial market thanks to the similarities among Asian nations, Western players still remain a modest part of the game and, in worst-case scenarios, some have left or divested their shares in the country.

In some cases, the foreign ownership limit (FOL) is another issue since most cases are required to be under 30 per cent of the foreign cap.

For instance, VietinBank, despite reaching its FOL and no longer receiving foreign capital injection since 2014, is still stuck in the mud since the bank has not yet qualified for Basel II. Thus, not all M&A deals can deliver expected results.

Economist Luc also highlighted the importance of continued initiatives to relax the FOL from the Vietnamese government, which “should closely following the prime minister’s Decision No.986/QD-TTg released in August 2018 on developing the banking sector until 2025 with a vision towards 2030.”

In the very last days of 2019, global rating agency Moody’s dealt a fresh blow to Vietnam’s financial sector by downgrading the outlook of 18 banks. Experts are cautious since the sweeping downgrades come as unease plagues global markets, thus impeding local banks’ ability to woo more investors from South Korea, such as OCB, HDBank, LienVietPostBank, or ACB, albeit qualifying for Basel II standards. “The downgrading decision would hamper Vietnamese banks on accessing capital from overseas investors,” Luc told VIR.

Financiers looking to invest in state-owned lender Agribank are being urged to hold back after its initial public offering was postponed last year. The Moody’s downgrade will be fuel for the fire, making divestment and capital mobilisation even tougher for the bank.

Some lenders that are still working towards Basel II standards such as ABBank, Agribank, and Nam A Bank will likely be exposed to more volatility after this vote of no confidence.

Consequently, many acquirers could be in wait-and-see mode on strategic transactions until they have a better idea of how some of the uncertainties will play out. How integrated banks can harmonise their geographic footprint to affect growth, costs, and asset efficiency in the meantime is still a large problem to consider.