Feb 16, 2013

Vietnam - Banking in Vietnam Loses Appeal

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Vietnam could use foreign investors’ help fixing a banking system that is hobbling its economy, but slowing growth, bad loans and a lack of transparency make for a challenging sales pitch.

The government may allow foreign investors to take positions as big as 49% in state-owned banks, or even majority stakes conditional upon later divestment, people familiar with the proposed plans have told The Wall Street Journal. Selling those stakes would help Vietnam attract the foreign capital and expertise it needs, according to Ivan Tan, a director at Standard & Poor’s.

Foreign banks are now allowed to own 20% of a Vietnamese bank as an individual investor, or 30% with a partner. The government owns a majority—in some cases, 100%—of all five state banks.

Vietnamese government officials couldn’t be reached for comment.

Not too many years ago, foreign banks might have been eager to buy into Vietnam  HSBC Holdings PLC, Société Générale SA and Australia & New Zealand Banking Group Ltd. all invested in the country’s banks prior to the global financial crisis, although ANZ sold its stake in January 2012 as it shifted its strategy to focus on its own Vietnam operation.

Now, although Japanese lenders have recently bought into the sector, Vietnam’s banks look less inviting.

The economy has slowed from an average of 7% annual growth since the early 1990s, according to HSBC, to 5% last year, according to a government estimate. Property prices have slumped and bad loans have piled up, making banks reluctant to lend and further weighing on economic growth. Annual credit growth, which exceeded 20% from 2006 through 2010, slumped to 8.9% last year, S&P says.

Making matters worse, because of a lack of transparency and weak accounting practices, no one is sure how many bad loans are in the system. State Bank of Vietnam, the country’s central bank, said in November that the ratio of bad debt to total loans was 8.82% as of the end of September, up from 6% at the end of 2011. But Moody’s Investors Service said in a report in October that nonperforming loans totaled at least 10% of outstanding loans late last year, and could be much higher. Fitch Ratings Co. analysts last year put the figure as high as 15%.

S&P’s Mr. Tan said foreign capital is needed to recapitalize larger, state-owned banks, but “the appeal of the Vietnamese banking system has diminished somewhat.”

To be sure, the government has acknowledged the problem and is taking steps to fix it. For one, it is cracking down on mismanagement at state-owned banks, arresting bank executives and at least one prominent businessman in connection with allegations of improper lending.

Last March, Prime Minister Nguyen Tan Dung approved a three-year restructuring plan for the banking sector, including the consolidation of smaller lenders and the creation of a “bad bank” to buy distressed assets.

Japanese banks stand out as active, even counter-cyclical investors in Vietnam’s banking sector, providing an important source of capital for banks there, where lending growth remains robust compared with Japan.

Mitsubishi UFJ Financial Group Inc. for example, took a 20% stake in Hanoi-based Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank), one of Vietnam’s largest banks by market share, at the end of last year for $741 million Mizuho Financial Group Inc. bought a 15% stake in the Vietnam Bank for Foreign Trade, the country’s largest listed bank by market value, for around $560 million in September 2011.

And Sumitomo Mitsui Financial Group Inc., which bought a 15% stake in Vietnam Import-Export Commercial Joint Stock Bank for $225 million in 2007, is currently in talks about buying a stake in Saigon Thuong Tin Commercial Joint Stock Bank, known as Sacombank.

“Japanese banks are much more long-term, and tolerant of minority positions and are happy to sit on small stakes,” said Joe Gallagher, co-head of Asian-Pacific mergers and acquisitions at Credit Suisse AG.
Japanese banks also have somewhat unique objectives. Their interest in Vietnam is partly motivated by their desire to provide loans to Japanese corporations operating there, especially to manufacturers, many of whom are looking to diversify away from China, and that requires taking a minority stake in a Vietnamese bank, an executive at one of Japan’s biggest banks said.

As a result, the recent deals by Japanese lenders may not portend further acquisitions by foreign banks.

Existing foreign stakeholders have no incentive to inject capital into the banks, Moody’s said, because most are near ownership limits already, and capital requirements under new international banking regulations, known as Basel III, make banks more reluctant to take minority stakes.

Value is another deterrent. Many deals so far have come at less-than-bargain prices of 2.5 to three times book value, according to S&P. Such prices could be harder to justify in the new, slower-growth environment.

“If the Vietnamese banks are still demanding very demanding valuations… the pace of investment will slow down this year,” Mr. Tan said.

Cynthia Koons and  Isabella Steger

Atsuko Fukase contributed to this article.

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