VietNamNet Bridge – It is clear that the current bank merger & acquisition (M&A) trend will lead to a sharp cut in the number of banks in the system. But the quality of the banks after the M&A remains questionable.

M&A is the hottest topic in the agendas of a series of banks’ recent shareholder meetings. Governor of the State Bank of Vietnam Nguyen Van Binh has confirmed that another 6-7 banks will be restructured in future M&As.

Pham Nam Kim, a banking expert from Switzerland, noted that mergers are a good way for the State Bank to cut down on the number of banks. But no one can say for sure if the approach can help restructure the weak banks and create more powerful ones.

Kim said that the bank M&As will only achieve their desired ends if the restructuring fosters new flows of investment capital.

“When you bind two or three crippled fowls together, you create a bigger crippled fowl, which only has bigger difficulties in moving about because it has to bear an overly large body,” Kim commented.

Victoria Kwakwa, the Vietnam Country Director of the World Bank, noted that merging banks is just one of the measures of financial system reform for countries to consider. She warned that a sick bank might only harm a strong bank if it is merged into the latter.

Nguyen Tri Hieu, a well known banking expert, noted that Vietnam seems to be in too much of hurry to merge banks, and may not foresee the possible risks.

He pointed out that the bank mergers would only help banks hide their bad debts longer, while creating heightened risk for the big banks, which have to take on the bad debts incurred by their smaller brethren.

In fact, Vietnamese banks have undergone many restructuring campaigns in the past already. Most recently, they were told to increase their chartered capital to VND3 trillion at minimum or they would have their operating licenses revoked.

Ten years ago, a series of small banks, which operated in rural areas and targeted limited areas, reluctantly upgraded themselves into “urban banks”. However, the upgrading turned out to do the institutions more harm than good.

In early 2000, the My Xuyen Rural Bank Joint Stock Bank was enjoying its golden days. Shareholders received a stable dividend of 25 percent a year. Credit was the main operation of the small bank, while its principal clients were farmers and businesses in An Giang Province and some neighboring localities.

Eventually, the bank raised its chartered capital to tens of billions of dong, then hundreds of billions, VND1 trillion and, ultimately, to VND3 trillion.

Lam Hoang Loc, a shareholder of My Xuyen, once said he could not understand why the bank had to become bigger. He believed that a small bank with modest capital but good corporate governance still could operate effectively.

However, My Xuyen could not “swim against the stream”. It became a bigger bank with many new shareholders, including a foreign one, Fullerton Financial Holding, from Singapore, which holds 20 percent of stakes. But its golden days are over.  the bank has gone downhill.

Tran Thuy