Interest among foreign investors in Vietnam’s banking and finance sector is rising as major changes come into play.
Vietcombank (VCB) early this year announced it had successfully completed a private placement of over 111 million new shares to Singapore’s sovereign wealth fund, GIC Private Ltd, and one of Japan’s largest financial services providers, Mizuho Bank, raising around $265 million in equity investment. This increased the bank’s charter capital to nearly $1.6 billion and gave it a solid capital buffer as it meets capital requirements under Basel II and maintains its leading position in Vietnam’s banking sector.
The improved business performance of Vietnamese banks and a government regulation requiring local banks meet stricter capital regulations as part of the Basel II standards seems to have brought about a new wave of foreign investment into the country’s banking and finance sector this year, with positive signs seen since the beginning of last year.
The last 15 months has seen two significant international private equity buy-ins into Vietnam’s banking sector, though the transaction between GIC and VCB was less than the hoped-for 10 per cent post-money shares outstanding, according to Mr. Long Ngo, Associate Director at the Research Department at Viet Capital Securities (VCSC). “Given the smaller investment by GIC, we are unsure how active they will be in VCB going forward,” he said.
There is continued interest from foreign parties in the consumer finance space, as evidenced by Lotte Card’s purchase of Techcom Finance and Shinhan’s purchase of Prudential Finance, both at the start of 2018. “Though Vietnam’s consumer finance industry is currently going through growing pains, as evidenced by falling loan yields in 2017 and 2018 and growing risk cost during the same period, the attraction of the unbanked ‘mass’ segment in Vietnam remains alluring,” Mr. Long noted. “In the fintech space, the focus of new investment continues to be e-payments, though in our opinion it’s still very early days in picking a winner in this space.”
Foreign investment in the sector has been marked by major M&A deals in the last year. “Foreign investors are very optimistic about Vietnam’s steady economic growth and plan to expand their coverage in the market,” said Dr. Oliver Massmann, General Director of Duane Morris Vietnam. “They believe economic development will drive more demand for banking and finance activities and thus more opportunities for growth in the sector.”
Moreover, he went on, M&A activities have helped local banks improve their financial capacity and competitiveness in the market. Local credit institutions have diversified their products and services and applied more modern technology in their operations. Under competitive pressure from foreign credit institutions, the only option for local players is to enhance banking governance capacity as well as human resources quality. This in turn helps local credit institutions grow in a more stable and safe manner.
Foreign financial organizations with track records in other countries and broad networks and customer resources coming to Vietnam have brought in high technology, a wide variety of banking and finance products and services, as well as management and governance expertise, according to Dr. Massmann. Local financial organizations have learned a great deal, modernizing their own systems and creating more products and services for Vietnamese customers who are not a major part of the customer portfolios of foreign financial organizations. These local organizations and the financial services on offer have developed at a modern, international standard, making them more attractive to foreign investors.
Of a similar mind, Ms. Jodi West, CEO of ANZ Vietnam, said the local banking sector has made great progress over the last decade, particularly with banking licenses being issued to 100-per-cent foreign-owned banks. “ANZ is proud to be one of the first foreign banks licensed in Vietnam,” she said. “Foreign banks have played an important role in the development of the banking sector, improving the terms of products and standards of service, expanding regional and global networks, and improving processes and productivity as well as risk management.”
From a foreign bank’s perspective, she told VET that with the recent surge in FDI there has been a great opportunity for foreign banks like ANZ to facilitate trade and capital flows and to support multinationals entering and expanding in the country. ANZ aspires to be the bank of choice for foreign investors and a contributor to the development of the local economy.
Trade liberalization, according to Ms. West, is one of three key contributors to Vietnam’s rapid economic growth. A signatory to 16 bilateral and multilateral free trade agreements, Vietnam is a member of the WTO and ASEAN and has concluded bilateral agreements with the US, Japan, South Korea, and the EU. In 2018, it became one of eleven countries joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
Vietnam has eleven FTAs in effect with countries that account for almost 40 per cent of global GDP and those yet to come into effect cover 24 per cent of global GDP, giving Vietnam major access to the global economy. According to ANZ Research, this could boost its economy by 15 per cent of GDP, to the benefit of all sectors in the economy, including banking and finance.
Both the CPTPP and the EU - Vietnam Free Trade Agreement (EVFTA) have higher levels of market access commitments than the WTO. Investors are also better protected in both, with Investor State Dispute Settlement (ISDS) mechanisms ensuring the highest standards of legal certainty and enforceability for investors. Under such provisions, Dr. Massmann noted, when disputes arise, investors have the right to bring claims to the host country by means of international arbitration. The arbitration proceedings are made public as a matter of transparency. Such legal certainties along with the government’s attempts to improve the investment environment drive more FDI flows into the country.
Given that the government is encouraging investment in existing banks rather than the establishment of new ones, he went on, M&As in the sector will become more common. “In recent years, many investors have expressed an interest in becoming shareholders in certain commercial banks, especially weak or ‘VND0’ banks that need assistance in recovery, handling bad debts, and restructuring,” he said. “Moreover, the Basel II standards apply from 2020, so there will be huge demand for capital to meet such strict requirements. As local banks are still looking for appropriate partners, we expect more major successful deals in the upcoming time.”
Raising foreign ownership
Meanwhile, Mr. Long from VCSC said investment trends would depend on when the government lifts the foreign ownership limit (FOL) on the banking sector. The FOL issue will not change if the draft Law on Securities is passed later this year, and would require a separate act from the National Assembly changing the Law on Credit Institutions.
Thus, Mr. Long believes, this is not something that will happen this year. If and when the FOL on banks is changed, and it’s his forecast that it will happen in 2020, there will then be a marked pickup in foreign investment into the banking sector. Thus, for 2019, foreign investment flows into Vietnam will be limited to the few banks that still have space under their FOL, like BID and VCB and perhaps MBB if they open the FOL headroom they have locked up.
Dr. Massmann also believes the government should open up more room for foreign ownership in local financial institutions, as most have nearly reached the allowed limit. This would lure more foreign participation in the market, creating opportunities for the local financial sector to acquire experience, management capacity, and technology to become a stable and promising market in the region. The government should also continue to complete the legal framework for the financial services sector to comply with its commitments under FTAs, thus raising investor confidence in the system and their willingness to invest further. VIR