Wednesday, June 19, 2024
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Vietnam’s banking sector is at a crossroads as major banks seek to increase the current limits on foreign ownership. This move has the potential to create a host of opportunities for foreign financial and banking entities. In this article, we delve into an overview of Vietnam’s banking sector, highlighting the prospects and risks that foreign firms need to consider.

The banking landscape in Vietnam is witnessing an increasing potential for mergers and acquisitions as domestic banks look to foreign capital to address ongoing challenges. These challenges include the rising levels of non-performing loans and credit growth limitations that have impeded lending activities. Additionally, foreign investment has the potential to mitigate the sector’s exposure to real estate bonds in Vietnam’s nascent bond market.

However, it is important to note that the banking industry in Vietnam is heavily regulated, and foreign investment is generally limited to a maximum of 30 percent. Banks can seek special permission to exceed this limit, as some have recently requested due to the sector’s challenges. If these challenges persist, it is likely that permission will be granted to exceed the foreign ownership limit.

Foreign firms considering investments in Vietnamese banks must possess a comprehensive understanding of the country’s banking sector and the implications of foreign partnerships.

Under the provisions of Decree No. 01/2004/ND-CP issued in 2014, foreign ownership limits for Vietnamese banks are outlined. Generally, foreign investment is restricted to a maximum of 30 percent of a bank’s charter capital. However, the specific limit for foreign investors varies based on their type:

  • Foreign individuals are limited to owning no more than 5 percent of a bank’s charter capital.
  • Foreign institutions can own a maximum of 15 percent of the charter capital of a Vietnamese credit institution, unless they are classified as “foreign strategic investors,” in which case the limit is 20 percent.
  • Foreign investors, in general, are limited to owning no more than 20 percent of a bank’s charter capital.

There is a caveat that allows circumvention of the foreign ownership limits in certain circumstances. Decree No. 01/2004/ND-CP permits exceptions for “special cases” where a bank is considered “weak” and requires restructuring to ensure the stability of the banking system. In these situations, foreign ownership limits can be lifted at the discretion of the Prime Minister.

Looking back at previous partnerships with Vietnamese banks, numerous foreign firms have invested in the sector. Investors have come from various countries worldwide. Here are a few notable examples:

  • Deutsche Bank-Habubank: In 2007, Germany’s Deutsche Bank acquired a 10 percent stake in Vietnam’s Habubank. However, five years later, Habubank merged with Vietnam’s SHB Bank, diluting Deutsche Bank’s share to just five percent and resulting in the loss of its voting rights.
  • ANZ-Sacombank: In 2005, Australia’s ANZ Bank and Vietnam’s Sacombank entered into a strategic partnership, with ANZ purchasing a 9.87 percent stake in Sacombank. However, ANZ divested from Sacombank years later, marking the first time a foreign investor had exited a Vietnamese bank.
  • HSBC-Techcombank: HSBC announced its acquisition of a 10 percent stake in Vietnam’s Techcombank in 2005. Ten years later, HSBC sold its entire shareholding in Techcombank. Despite the divestment, HSBC and Techcombank maintain a positive relationship, as evidenced by HSBC’s involvement in arranging a US$1 billion syndicated loan for Techcombank in the recent past.

Investing in Vietnamese banks over the past decade has been a popular choice for foreign firms, albeit not without challenges. Several factors have contributed to the entry and exit of investors from the market:

  • Money: The limits on foreign investment, coupled with a booming economy, have created competition among investors, driving up the value of shares owned by foreign entities. For example, Oversea-Chinese Banking Corporation (OCBC) sold its stake in VPBank, not due to relationship issues, but because the offer made was too attractive to refuse.
  • Disagreements: Management issues have been cited as a reason for foreign and Vietnamese banks separating. The power imbalance between foreign investors and domestic firms, caused by ownership limits, can create friction as their goals, interests, and processes may not align.
  • Ground conditions: Challenges such as interest rate caps, gray market banks, risk management concerns, and difficulties in introducing new products in the investment and insurance sectors have made operating in Vietnam’s banking sector complex. However, these challenges can be overcome by taking the time to understand the unique nature of Vietnam’s banking sector and the cultural nuances that underpin it.

In terms of trends, Vietnam’s banking sector is witnessing a mixed state:

  • Digital payments: The popularity of digital payments is on the rise in Vietnam, driven by a booming e-commerce industry and a thriving fintech sector. With an increasing number of Vietnamese gaining access to the internet and the proliferation of mobile technology, digital payments are experiencing a significant surge in demand.
  • Near-term risk: Vietnamese banks face growing risks in the near term, particularly due to their exposure to the real estate sector. Moody’s downgraded Vietnam’s banking sector from positive to stable in January due to the impact of the real estate market’s woes. Some banks have significant exposure to real estate bonds, raising concerns about their repayment.
  • Foreign investment: Over the past year, foreign investment in Vietnamese banks has been on the rise. Notable examples include Switzerland’s BlueOrchard Finance investing US$20 million in Nam A Bank and Japan’s Sumitomo Mitsui Banking Corporation (SMBC) acquiring a 15 percent stake in VP Bank. The inclusion of Vietnamese banking stocks in the FTSE Russell and MVIS index funds is also expected to attract significant investment.

In conclusion, Vietnam’s banking sector faces challenges that make foreign investment an appealing option to strengthen balance sheets. While foreign ownership limits remain a significant obstacle, the discretion of the Prime Minister may lead to their lifting in the future. If the limits are indeed lifted, it could unlock numerous opportunities for foreign investors. However, it is crucial for interested firms to carefully consider the challenges that have arisen in the past and thoroughly understand Vietnam’s banking sector before making any investment decisions.


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