Banks in Vietnam seek foreign strategic investors

Illustrative photo

Foreign investors

In late March, Vietnam Prosperity Joint Stock Commercial Bank (VPBank) announced that it had reached an agreement to sell 15 percent shares to Sumitomo Mitsui Banking Corporation (SMBC), a subsidiary of the Sumitomo Mitsui Financial Group (SMFG) in Japan. This was done through private placement and the agreement was made by SMBC Group, a strategic investor of VPBank.

According to VPBank, the investment from SMBC will bring the bank VND35,900 bln in Tier 1 capital, and VPBank will increase its total equity from VND103,500 bln to approximately VND140,000 bln. Earlier at the end of 2019, a cooperation between the Bank for Investment and Development of Vietnam (BIDV) and KEB Hana Bank of South Korea was signed with a total transaction value of nearly VND20,300 bln.

Signing with foreign investors brings in an extremely large source of capital for banks instead of just increasing capital by paying dividends which takes several years for capital to grow. Strategic cooperation with foreign investors is the direction that Vietnamese banks would like to take.

For instance, by the end of 2022, Vietnam International Bank (VIB) had consulted shareholders on adjusting the maximum share ownership ratio of foreign investors from 20.5 percent to 30 percent, and at the same time, it is proposed that shareholders authorize the Board of Directors to proactively decide the contents of the work on maximum share ownership ratio of foreign investors within the scope of less than or equal to 30 percent of the charter capital of the Bank.

Sacombank also revealed that after completing the restructuring and handling of bad debts in 2023, the bank plans to sell 32.5 percent of its equity to two foreign partners. Recently, Mr. Do Quang Hien, Chairman of the Board of Directors of Saigon-Hanoi Commercial Joint Stock Bank (SHB), shared at the 2023 Annual General Meeting (AGM) that finding foreign strategic shareholders is a big goal of SHB this year.

In a report on promulgating the Decree amending and supplementing Decree 01/2014 of the Government on the recent purchase of shares by foreign investors of Vietnamese credit institutions, the State Bank of Vietnam has added Clause 6a to Clause 6. Article 7 states that the Government shall decide the total amount of shares owned by foreign investors in credit institutions receiving the compulsory transfer and not exceeding the limit  specified in Clause 5 of this Article when approving the plan for compulsory transfer. As seen in the sketch above, the foreign capital sought by Vietnamese banks is large.

Mainly Asian investors

It is natural that domestic commercial banks want to find foreign strategic partners in the need to increase charter capital. However, to do this, credit institutions must fulfill Basel II standards and maintain a Capital Adequacy Ratio (CAR) of 8 percent.

To complete all three pillars of Basel II, banks must comply with regulations on internal control systems, including requirements on risk management, and internal assessment of capital adequacy, including the stress test inherent in the adverse scenario. Therefore, in recent years, most banks have joined the race to increase capital to meet the above criteria.

Up to now, more than 20 commercial banks have implemented Basel II at the request of the State Bank of Vietnam. However, across the world most advanced countries have implemented Basel III and some countries are entering Basel IV. Vietnam is having a delay compared to the global banking system, so it has to both deploy Basel and prepare for Basel III and Basel IV.

In recent years, banks have also increased capital by using internal resources to increase capital, pay dividends in shares and say no to cash payments for dividends. However, internal resources can hardly increase capital forever. In this situation, if banks can invite foreign investors, they can immediately add a huge amount of capital for long-term investment.

Compared to stock dividends, the path to raising capital is many times more arduous. For instance, VPBank and SMBC negotiated for two long years before they came to a final cooperation agreement. In general, the economic situation in the world is facing difficulties, and the banking industry is also severely affected.

According to a financial expert, many foreign investors withdrew their capital because they saw that Vietnamese banks did not follow world standards and made mistakes with some individuals and major shareholders. Other partners withdrew because the foreign ownership ratio in banks was too low, and they felt that they did not have a voice even as strategic shareholders.

Therefore, a noticeable trend seen recently is that foreign investors from Asia have strategic cooperation with Vietnamese banks, while foreign investors from the West are mainly short-term investors. The latter group still fills in as a foreign partner in some banks but does not support the long-term development of the bank and only buys shares for a profit.

Mr. Do Quang Hien said that at SHB many foreign investors want to learn for the purpose of short-term or medium-term cooperation, while the bank prioritizes long-term partners. In this situation, the bank is forced to change its strategy and accept both short-term and medium-term foreign investors.