However, this will turn into a compulsory activity if these institutions do not volunteer.
The SBV is finalising the draft plan on restructuring the system of credit institutions combined with solving bad debts during 2016-2020 under the government’s directions, to submit to the Politburo. On the basis of approval and instructions from the Politburo and the government, the SBV will be armed with these solutions in 2017.
SBV Governor Le Minh Hung said that in the coming time not only weak commercial banks, but weak financial institutions, financial leasing companies, and people’s credit unions will also be forced mergers or acquisitions if necessary. The SBV has identified ailing financial institutions and their main weaknesses so that it can consult the appropriate solutions.
In particular, SBV has pointed out five weak commercial banks, including three “zero VND” banks Global Petro Commercial Joint Stock Bank (GP Bank), OceanBank, and Vietnam Construction Bank (CBank), and has outlined suitable solutions to be used right after getting approval from the Prime Minister.
The restructuring project of five weak banks, including the three “zero VND” banks mentioned above, as well as DongA Bank and Sacombank after acquiring SouthernBank, have been submitted and approved by the Politburo. SBV has made a detailed plan for restructuring these banks and will implement it in the coming time.
Beside small financial firms, financial leasing companies and people’s credit unions have also been noted.
In Directive No 02/CT-NHNN on strengthening the safety of the banking system through the restructuring of credit organisations, bad debt management, and monitoring and maintaining bad debts at a safe level, the governor of the SBV has emphasised the facilitation of the merger of weak credit institutions.
Eligible investors are encouraged to join these restructuring initiatives to diminish the number of weak firms and enhance their competitive capacity.
M&A is the way forward
In fact, without M&A, it would be difficult for small and weak banks to survive and compete in a financial market unrecovered from crisis. Notably, when the chartered capital of these ailing banks is around VND3 trillion (US$131 million), amidst poor administration and declining profits, voluntary M&A is the best option.
Over the last three years, raising the chartered capital of some small banks was very hard, even when they issued preferred stocks. SaigonBank and DongABank are prime examples, with their difficulties in raising funds for numerous consecutive years.
Four years ago, Saigonbank planned to increase its chartered capital from VND3 to 4 trillion ($131.4 to 175 million), but its capital was unchanged in 2016.
Because existing shareholders are not willing to contribute more capital due to pessimism over growth potential, Saigonbank was proposed to merge into Vietcombank. Although the majority of shareholders in Saigonbank disagreed and vowed to restructure, the bank’s performance showed little results.
Low chartered capital affects a wide range of indexes, such as total assets and the ability to lend. When Basel II is going to be applied (it is currently being tested in 10 banks), many small banks will be unable to meet capital requirements.
However, raising capital is not easy for small banks at the moment when the stock market is past its peak. Existing domestic and foreign investors are no longer willing to buy stocks.
Director of VinaCapital Andy Ho believed that it is necessary to loosen policies for foreign investors in the banking sector, allowing them to own more than 30%.