VietNamNet Bridge – Lauded as the land of the rising middle class, with surging spending power and plenty of room for retail banking growth, Vietnamese local banks will likely continue to be merge and acquisition targets of foreign investors in the time to come.

According to senior manager Long Ngo at Ho Chi Minh City-based Viet Capital Security (VCSC) – voted as Vietnam’s best investment bank in 2015 by Finance Asia – the global banking landscape has changed dramatically since 2007, with concerted efforts across the globe by regulators to reign in risk taking by global banks. As such, regulators have tinkered with risk weighting rules for equity investments in other banks. “Any new investments by global banks into Vietnamese banks now carry higher hurdle rates,” stressed Ngo.

In the past few years, local banks have been proactively seeking strategic foreign investors. Despite their eagerness, the process remains sluggish, as the local banking system has been struggling with its own systemic risks, evident in a spider web of interbank lending and cross-ownership, and operational inefficiencies.

The local banking system, however, has gradually rectified its weaknesses through a massive bank restructuring route and drastic measures to wipe out the cross-ownership stature amongst banks, actively trim down the towering bad debts to a set target of 3% by the end of 2015, and reinforce the banking corporate governance.

According to Pham Lien Ha, Hanoi-based senior analyst at VPBank Securities, Vietnam is always attractive enough in terms of its size of population, demographic structures and growing per capita income and middle class. These, in turn, have translated into a boost in consumer spending power and retail financial services such as credit cards, car loans and home loans.

In addition, the country’s banking system in rural areas remains under-developed at present, when coupled with the low penetration of banking products and services in these areas, indicating high potential for banking growth in the future, especially the retail banking market.

“I think that foreign investors are more conservative now when considering making strategic investments. Having said that, I do see that Vietnamese banks remain M&A targets, especially once the government opens up room for foreigners,” said Ha.

“Foreign investors have been showing great interest in banking stocks in recent times and the banking stocks in recent times and the banking stocks, too, have picked up their pace after a long period of being neglected since the peak of 2007-2009,” said Nguyen Hong Khanh, Sacombank Securities head of research. “I think this possibly point towards a long-term trend that strategic of foreign investors will be investing in Vietnam’s banking system in the time to come,” he noted.

Looking back at the trail of foreign investments in local banks, in 2012, the Bank of Tokyo Mitsubishi-UFJ invested approximately US$743 million for a 20% stake in state-owner Vietinbank- Vietnam’s largest bank in terms of registered capital, and consequently became the bank’s strategic foreign investors.

In a similar fashion, Japan’s Mizuho invested some US$567 million in Vietcombank for a 15% stake. Last January, BIDV initiated a US$2.4 billion share offering on the Ho Chi Minh City Stock Exchange and foreign investors could thus trade BIDV shares, subject to the current 20% foreign ownership cap.

Likewise, domestic commercial banks like ACB, Eximbank and Techcombank each found their match in the form of a strategic foreign investor. In 2008, Japan-based Sumitomo Mitsui Banking Corporation acquired a 15% stake at Eximbank for US$224 million, whilst HSBC happened to be Techcombank’s strategic foreign investor in 2005, and in 2008 it became the first foreign bank to reach the 20% foreign owner ship limit in a local bank, following the State Bank’s approval.

Standard Chartered Bank, similarly, became ACB’s strategic investor in 2005 and later in 2008 obtained an additional 6.16% ACB stake from the International Finance Corporation, upgrading its shareholdings in the bank to 8.84%.

VIR