Making M&A deals in banking sector not easy task

While observers predict a rising wave of merging and acquisition (M&A) in many industry and service sectors, they believe that there would not be many M&A affairs in the banking sector, because of the lack of the laws.

The observers say there are many favorable conditions of M&A deals to be made now.

The non-performing loan ratio has been increasing from 2.17 percent in late 2010 to 2.72 percent now. The figures have been released by Governor of the State Bank Nguyen Van Giau, who commented that this is not a worrying figure. However, this shows that it is necessary to restructure the banking system to make it healthier, while M&A is a solution for the restructuring.

According to Nguyen Manh Dung, Deputy General Director of the Deposit Insurance of Vietnam, in fact, nearly 50 percent of banks have weak points in many fields, and this would be a factor which can push up the M&A activities to restructure the banks.

While the demand for selling bank stakes is big, the demand for purchasing bank stakes is also high, especially from foreign banks. A lot of foreign banks are considering purchasing domestic banks, considering this the “shortcut” to expand their retail market share in Vietnam.

However, the lack of a transparent legal framework and the “sensitiveness” of the issue may hinder the M&A, even when the maximum allowed foreign ownership ratio has increased to 30 percent.

High demand

To date, nearly 20 foreign banks and financial institutions are holding 10-20 percent of stakes in Vietnamese banks.

The deadline for increasing chartered capital to three trillion dong has been delayed until the end of 2011. Domestic banks are trying to look for strategic partners before thinking of M&A deals. However, experts believe that small banks will not be able to compete with big banks and they will have to look for M&A partners to survive and develop.

Nguyen Duc Huong, Deputy Chair of Lien Viet Bank, described the M&A in the banking sector as “using money to buy money”.

Commonwealth Bank (CBA), the Australian bank with strong retail network, has purchased 15 percent of stakes of VIB Bank, while it expects to hold 20 percent of stakes in 2011, aims to expand the retail banking services in Vietnam. Meanwhile, Le Duc Tho, Deputy General Director of VietinBank, said that the IFC’s holding of 10 percent of Vietinbank’s share is the priority purpose for the bank which aims to attract capital from big and healthy financial institutions. VietinBank now needs experiences in corporate management and risk management, together with the experiences in service development and technology upgrading. Meanwhile, this is the way that the institutions like IFC gets involved more deeply in the equitization of the commercial banks in Vietnam.

Barriers

Dung said that there still have not been many precedents for M&A activities in general, and in banking sector in particular. The Deposit Insurance of Vietnam is making research works to support the M&A of banks when necessary. There are many questions to solve: what are the measures to assess commercial banks and how can they be applied in the Vietnamese conditions? What are the basic techniques to deal with dissolved banks and what are the solutions for Vietnamese banks?

According to To Hai, Chair of Ban Viet Securities Company, banking is a specific sector which is the life line of the national economy; therefore, there would still be strict regulations in the banking opening process. That explains why Hai does not think one should expect big M&A deals in the banking system.

He said that banks themselves find it hard to merge into other banks, because the post-merger period proves to be complicated with high risks. Meanwhile, it is difficult to swallow businesses due to the current laws.

Gordon Parker, Managing Director of Morgan Stanley Hong Kong, also said that foreign investors still hesitate to make M&A deals in the banking sector, because of the unclear regulations in the issue and the difficulties in asset valuation. – SGTT

Tags: Vietnam banking industry, Vietnam finance, Vietnam financial