More than a decade after Vietnam tried to increase the efficiency of local banks without disrupting the human capital and knowledge embedded in existing structures, under a policy of “strategic partnerships”, divestitures of minority stakes in important local banks by several foreign investors last year put an end to the hotly-debated policy. 

Despite the shifts in mission among these foreign lenders, with their long-term commitments reportedly remaining unchanged, consecutive divestments by foreign banks in a single year raised many questions, especially when the easing of restrictions on foreign bank ownership and the positive track taken towards resolving bad debts added to the dynamism in Vietnam’s banking sector over recent years.

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Different tastes

Vietnam has seen a growing number of foreign banks withdraw from its under-banked economy, the latest indication that all might not be as well as bankers often claim. Last July, the Commonwealth Bank of Australia (CBA) sold its branch in Ho Chi Minh City - a presence it had maintained since 2008 - to VIB. In the fourth quarter, HSBC Holdings and Standard Chartered Public Co. offloaded their shareholdings in Techcombank and ACB, respectively, while ANZ shut its doors in a transaction that transferred two retail branches, six transaction offices, and 125,000 individual customers to Shinhan Bank Vietnam. 

The four divestments seem reasonable on the surface. HSBC, CBA, and Standard Chartered established wholly-owned subsidiaries in the country, meaning that their Techcombank, VIB, and ACB stakes were no longer necessary for exposure to Vietnam’s banking sector. 

In ANZ’s case, its business focus in Asia has reportedly shifted to institutional banking, so the divestment of its retail banking business in Vietnam can be viewed as being in line with its change in strategy.

The trend of foreign banks fleeing Vietnamese banks was because the partnership didn’t bring the desired profits, while the low foreign ownership limit seemingly discouraged the majority of foreign investors from continuing to inject capital into Vietnam-based commercial banks due to the little say given them in the banks’ decision-making process, banking expert Mr. Nguyen Tri Hieu told VET. 

“As long as this cap remains shy of 50 per cent, foreign investors will not be able to sway the decision-making process or the banks’ Boards of Directors and they will not be capable of gaining any substantial investment benefits from a strategic partnership,” Mr. Hieu said.

In addition to governance challenges, potential risks arising from bad debts were specified by think-tankers as a cause of the decline in attractiveness of Vietnam’s banking sector. 

“Bad debt resolution remains slow because of the lack of necessary regulations, debt trading platforms, or alternative solutions such as securitization,” Director of the Vietnam Centre for Economic and Policy Research, Mr. Nguyen Duc Thanh, told VET, adding that the delay, while perhaps easing existing pressure on recapitalization, would increase the size of necessary future recapitalizations. 

“A possible solution would be to offer more equity to incumbent and/or new foreign investors,” he said.

Investment bankers believe the changing nature of the global banking industry and the disruptive influence of financial technology (fintech) also means foreign banks are less-willing partners than they were some years ago. 

The aftermath of the Asian financial crisis also taught many banks that minority stakes and subsequent technology transfers only created more formidable domestic competitors. 

“International banks are less likely to look at a minority investment in a local bank because of the capital impact under Basel III,” Mr. Rehan Anwer, Managing Director and Head of Frontier Markers at Credit Suisse, noted.

But there is growing interest from private equity and sovereign wealth funds. VinaCapital’s flagship fund, the Vietnam Opportunity Fund (VOF), in October invested some $11 million in the Orient Commercial Bank (OCB), for an interest of less than 5 per cent, with Managing Director of VOF and Chief Investment Officer of the asset management firm Mr. Andy Ho saying that the “investment is a rare opportunity to own a meaningful stake in a bank that has high lending and earnings growth.” 

The transaction came shortly before the French banking group BNP Paribas offloaded its entire stake of over 74.7 million shares, or 18.68 per cent of capital, in OCB in December, ending a ten-year alliance between the two.

Comprehensive rebound

The capital flights have taken place despite last year’s strong performance by domestic banks in profit generation as the industry continued to put the mini-crisis of 2012 behind it. 

“With a history of retaining profits with zero dividend payouts to preserve capital to support growth, Techcombank has adopted a balanced approach towards profit enhancement and risk-taking,” Moody’s Investors Service lead analyst, Ms. Daphne Cheng, told VET. 

The bank has rebounded significantly during the last three years, with 2017 pre-tax profit coming in at more than VND8 trillion ($352 million), the third consecutive year the figure has doubled from that of the previous year, while increases in return on equity (ROE) to 30.7 per cent and return on assets (ROA) to 2.69 per cent last year outperformed the entire local banking sector. Foreign banks, meanwhile, are still to announce their results.

As one of only a few that has fully resolved its bad debts sold to the Vietnam Asset Management Company (VAMC) in 2013, the bank is pursuing a retail-focused strategy, particularly among the affluent, while downsizing its chunky corporate exposures to enhance yields. 

It is also considering downsizing its real estate and construction exposure to de-risk its loan book, while its stable deposit base is backed by a sizable contribution from the retail segment, which underpins its funding profile. 

The bank, which saw its rating revised by Standard & Poor’s (S&P) in September to stable from negative, is set to maintain its status as a leading privately-owned bank over the next 12 months with an entrenched retail franchise and above-average profitability. 

For Hanoi-based lender ACB, the shadow of a difficult 2012 and litigation issues related to one of the bank’s major shareholders have been replaced by a successful write-down of its VAMC bonds exposures in the fourth quarter of 2017, thanks to a series of decisive measures to clean up its balance sheet and gradual progress made in the resolution of legacy assets. 

With a credit extension strategy that focuses on the retail segment amid strongly increasing demand for household consumption, the last 12 months proved to be one of the bank’s very best periods. 

By end-2017, total assets had grown by 22 per cent against 2016, deposits 17 per cent, and total pre-tax profits a staggering 60 per cent to VND2.1 trillion ($92.4 million).

Both VIB and OCB have stepped up their game of late. While the former remains among the group of banks with the highest financial strength in the local banking industry, as rated by credit rating agency Moody’s, the latter became the first in Vietnam to successfully apply Basel II standards, in November, after two years of implementation. VIB, which was reportedly among five bidders for ANZ’s retail business in Vietnam but was ultimately outbid, saw pre-tax profit in 2017 double from that of 2016 to VND1.4 trillion ($62 million), while OCB, despite not having released its full-year 2017 results at the time of writing, is expected to exceed the milestone of VND1 trillion ($44 million) in pre-tax profits after reaching $42.2 million in the first eleven months, according to CEO Mr. Nguyen Dinh Tung. 

Who’s next?

While divestments by foreign investors may have a critical impact on the capital adequacy of Vietnamese banks, the loss of expertise is also a blow for the sector in implement much-needed governance improvements. 

While local banks have answers for both issues they may just be quick fixes before they seek new foreign partners willing to work with them for the next decade. 

After immediately reducing its foreign ownership to zero after buying back the 19.41 per cent held by HSBC, Techcombank is now asking for shareholder approval to sell as much as 158.4 million shares to foreign investors this year. 

The bank, which targets 2018 pre-tax profit of VND10 trillion ($440 million) and plans to list on the Ho Chi Minh Stock Exchange (HoSE) this year, has joined ACB in recruiting more foreigners to key positions to tackle the governance puzzle and is looking to domestic shareholders to resolve its recapitalization issue, with it successfully collecting more than VND2.1 trillion ($92.4 million) after issuing 70 million shares to existing shareholders in October. 

ACB’s foreign ownership has been at the limit for many years and there is no immediate reason this will change given the nature of its latest transaction. 

The Standard Chartered deal, estimated at $263 million, involves the sale of 154 million shares, or 15 per cent, and saw Standard Chartered APR sell its 8.75 per cent stake to Estes Investment and Sather Gate Investment, while Standard Chartered Bank (Hong Kong) sold 6.25 per cent to Boardwalk South, Whistler Investments, and Estes Investment. 

An analyst at the Ho Chi Minh Securities Corp. (HSC) told VET that the divestment price may have been determined some time ago and the recent announcement was most likely the result of a long-term negotiation process. 

Regional powerhouses emerging in Vietnam at full speed could perhaps fill the space being emptied as international banks exit. 

Having established a representative office in Vietnam in 2014, South Korea’s Daegu Bank signed a comprehensive cooperation agreement last July with OCB to facilitate the local lender’s business in international payments and services to small and medium-sized enterprises (SMEs). 

And while information regarding the buyer of the BNP deal is yet to be released, the question now is which single foreign bank or investor will come to the country next after OCB locked its foreign ownership at 23.66 per cent in late December.

VN Economic Times