Ailing banks face merger danger

The deadline for Vietnamese small sized banks to raise capital to the compulsory capital level of three trillion dong is coming, but many of them have not yet known to find out the capital source for the raising plan.

20 of 37 operational banks have not reached the chartered capital level under current regulations. However, according to SBV, there to date have been six applications of capital increase of banks obtaining approval. In which, three applications were submitted by the over-3 trillion dong banks.
Therefore, remaining 17 banks have big headache to arrange capital. In line with ordinary way, most banks carry out hiking capital via issuing shares to existing shareholders and employees while others are seeking domestic and foreign strategic partners or listing on the stock market. But any way is difficult.

At shareholder meetings of small banks, the important concern was how banks will raise chartered capital and sell shares. As a result, a huge volume of small sized bank shares will be offered between Q3 and Q4 of 2010 along with a lot of shares of listed banks capitalised at trillions of dong, leading to the bank share oversupply on Vietnamese stock market by the year end.

More importance is that banks will have to control the credit growth target at 25 percent. Meanwhile, network expansion of banks are more limited than previous because opening a branch will cost 100 billion dong in HCM City or Hanoi and 50 billion dong in other provinces instead of 20-50 billion dong as previously. Due to this, just if banks finish capital increase, they will be hard to ensure an expected dividend for shareholders.

On the market, the transaction of small sized bank stocks is almost frozen at a price of lower face value so these banks will face many hardships as offering new shares. Even, internal shareholders also do not like to take new shares of their banks because they only can trade shares (additionally issued stocks of banks) after two holding years from issue date according to current securities laws.

Le Ho Khoi, general director of Trang An Securities Co said that raising capital via the stock market at this time is very difficult because a line-up of enterprises (that find it hard in accessing bank loans) also use the method to hike capital.

Regarding technical factor, listing shares will help increase the liquidity for bank shares. But, this year many businesses including big banks plan to go public so the small banks will difficultly attract investors on the official stock market.

As assessed by National Finance Supervision Commission’s chair Le Duc Thuy, in the current context, the faith of investors in bank shares is falling. Massive stock issues of commercial banks will damage to the interest of existing shareholders.

To finish the capital increasing plan, banks need foreign shareholders’ support along with calling for capital from domestic shareholders, said Dr Le Xuan Nghia-vice chair of National Finance Supervision Commission. Factually, raising capital from foreigners is not easy for banks because current laws limit foreign ownership ratio in the banking field at no more than 15 percent.

Since the year early, only Vietnam International Bank (VIB Bank) succeeded in selling its 15 percent stake to Commonwealth of Australia Bank. Now other banks still are making negotiations.

Meanwhile, TrustBank is one of banks seeking foreign strategic investors to work out the chartered capital increase problem. Its chair Hoang Van Toan reported, TrustBank selected a foreign strategic shareholder but the director board has not agreed they [foreign strategic shareholder] to start capital contribution at this time when market price of bank shares remain low. We [TrustBank] cannot sell shares at low price and make our existing shareholders disappointed, he added.

Many banks proposed government to extend the above deadline of Decree 141 on the chartered capital roadmap of commercial banks.
Though seeing difficulties which small commercial banks have to face, Le Duc Thuy still kept his point of view that credit institutions not raising chartered capital under regulations will have to be merged to speed up banking M&As. There should not have too many small banks.

“M&A always is good for both the banks with enough chartered capital under laws and others who cannot raise capital. In addition, the M&A operation will help reduce the number of credit institutions being operational in such a small market like Vietnam”, Thuy shared.

The relation between customer and bank is fairly loose so buying a bank does not mean to buy whole customer system of that bank. Moreover, a strong bank unlikely wants to shoulder an ailing bank, he said.

Quoting Hoang Xuan Quyen, deputy general director of Tan Viet Securities Co, banking is the business field with special conditions, meaning that businesses must meet standards on capital adequacy ratio (CAR). It seems that none of countries offer requirement on capital size of banks. Which basis did SBV apply to regulate in the minimum compulsory chartered capital of three trillion dong ($150 million).

The US Federal Deposit Insurance Corp (FIDC)’s statistics showed that US now has 6,839 commercial banks including 2,525 banks with total assets of below $100 million each. Total ownership capital of these 2,525 banks is $16.5 billion or average $6 million per bank. Whether only big banks can exist in Vietnam, he wondered.

Is it necessary to force small banks to reach the chartered capital scope of three trillion dong. In his opinion, there should offer requirement on minimum CAR. Depending on each character and business condition, each bank should select a suitable operation size.

DDDN

Tags: Vietnam finance, Vietnam financial, Vietnam M&A