1943p22 upcoming evfta to fortify lenders
Upcoming EVFTA to fortify lenders, illustration photo

The EU-Vietnam Free Trade Agreement (EVFTA) and the EU-Vietnam Investment Protection Agreement are set to amplify European giants’ presence in Vietnam. After the trade deal moves into effect, Vietnam will lift some limits on foreign ownership in local banks to 49 per cent in the next five years, with the exception of the four joint-stock commercial banks in which the state still holds a controlling stake.

However, after the five-year period, this relaxed foreign ownership limit of 49 per cent would be no longer applicable. The current rate is just 30 per cent.

“Vietnamese policymakers should take it really seriously in this regard since finance is a sensitive sector. The new approach, though a bit cautious, is appropriate,” explained Nguyen Thi Thu Trang, director of the WTO Centre at the Vietnam Chamber of Commerce and Industry. The new move is slated to bring more consolidation in the banking sector, though it has also raised concerns of valuations and conflicts arising along the way. Some experts believe that private lenders such as Techcombank, ACB, HDBank, VIB, or VPBank, could be the most promising candidates. However, each has its own praiseworthy aspects and shortcomings.

Private lender ACB possesses the best secured retail banking franchises. Some 90 per cent of loans are secured. Notwithstanding clearer COVID-19-driven impacts in upcoming quarters, ACB is one of the best candidates standing out strong, outperforming local listed peers.Last year, the United Kingdom-based Standard Chartered divested its entire 8.75 per cent of shares in ACB after more than a decade of partnership.

“ACB’s foreign room is full and highly concentrated by a few foreign shareholders. But the bank is listed on the Hanoi Stock Exchange (HNX), which could hamper its ability to be added to any existing or new exchange traded funds trading indices,” said Tran Dang Manh, analyst at Bao Viet Securities.

Techcombank, on the other hand, capped a positive earnings for the first quarter of VND2.5 trillion ($108.7 million) despite the market volatility – a nearly 20-per-cent increase compared to last year. It was also one of a few banks recording upbeat performance in Vietnam, but still maintaining sound operational safety ratios. Techcombank’s foreign investors include Norges Bank – the central bank of Norway which also manages the Norwegian government’s pension fund. However, it is still too early to say if Norges Bank would further inject capital into Techcombank, as they “do not comment on single investments,” Line Aaltvedt, manager of Communications and External Relations at Norges Bank, told VIR.

HDBank also followed suit with first quarter earnings rising by 14 per cent to VND1 trillion ($43.5 million).

“The bank’s management continued its strategy of building strategic partnership with corporate clients to sustain high credit growth despite the more cautious lending environment. Its first quarter’s strong credit growth was largely thanks to loan agreements signed with strategic partners in late 2019,” noted Harrison Kim, head of equity research at KB Securities.

However, the substandard loans are the apple of discord of HDBank. The early signs of erosion in credit quality were more pronounced in the precautionary and below ratio, which rose to 3.08 per cent.

Regarding VPBank, its board of management will request approval from shareholders to lower the foreign ownership limit to 15 per cent from the current 23 per cent, as well as launching a treasury buyback for 5 per cent of shares to realign the ownership structure. Despite the shrinking foreign ownership cap, VPBank boasts immense potential thanks to its stellar performance. The bank posted robust net profit growth of around 62.7 per cent on-year in the first quarter of 2020 amidst the outbreak, thanks to efficient cost control and risk management.

VIB, on the other hand, is expanding its business swiftly by employing more staff, adding to the cost-to-income by 45.5 per cent during the first quarter. Despite other banks’ massive layoffs, VIB seems to be more confident in its prospects. Hence, potential tie-up deals could be possible.

Looking on the bright side, a substantial change that will lure attention of overseas investors is the upcoming adoption of International Financial Reporting Standards (IFRS) in Vietnam.

If any local banks implement IFRS at the early stage, they would consequently gain the upper hand for tie-up deals. The new IFRS is expected to mark the milestone on the path of financial reporting in the country. “IFRS adoption will affect every part of the entity. The successful implementation of IFRS extends beyond the accounting department,” said Tran Hong Kien, partner of Assurance and Accounting Services at PwC Vietnam.

On the flip side, experts believed controlling cost is key for European lenders at this moment, so looking for lucrative land in Asia might not be on their top priority now. Banks have been caught between a rock and hard place given the low and negative interest rates across the continent. Deutsche Bank, which entered Vietnam in 1992, now finds itself in uncharted waters due to the COVID-19 pandemic forcing it to set aside money for loan losses and disrupting its targets. The bank now holds 2.52 per cent of shares at Vietnamese lender SHB.

HSBC, the international institution which also operates in Vietnam, has targeted to cut 18,000 of its approximately 92,000 jobs as a part of a worldwide overhaul plan by 2022. But the bank’s business in Asia-Pacific seems to be more resilient than elsewhere.

French bank BNP Paribas previously divested its entire 18.68 per cent stake in Orient Commercial Joint Stock Bank, ending a decade-long partnership in 2017.

Societe Generale SA (SocGen), one of the top 10 largest banks in Europe, divested 20 per cent of stakes in local lender SeABank after a decade-long partnership. Still, SocGen’s expertise in Asia-Pacific could help it stay one jump ahead of other competitors if the bank makes further inroads to Vietnam.

According to global ratings agency Fitch Ratings, surging overdue loans from the pandemic-induced economic fallout threaten Vietnamese banks’ earnings and capital accretion momentum, with many banks likely to face capital shortfalls should the weak economic conditions persist. Increased slack in the labour market is also increasing pressure on the banks’ asset quality and profitability, especially given the rapid growth in the retail and consumer banking segment in recent years.

Should banks continue to make timely provisions on newly impaired loans, Fitch estimates that under the stress scenario, Vietnamese banks may face a capital shortfall of up to $2.5 billion (27 per cent of their combined at the end of 2019’s equity) in meeting the State Bank of Vietnam’s Basel II minimum total capital adequacy ratio requirement of 8 per cent.

Fitch’s stress test assumes that rated banks’ problem loan ratios rise to about 6-9 per cent (from 0.5-1.2 per cent at the end of 2019) with margins compressing by 70-80 basis points. The latter could happen if the state bank continues its aggressive monetary easing and directs banks to further lower lending rates to ease borrowers’ financial burdens and prop up the economy. VIR

Luu Huong

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