M&As in Vietnam's banking sector have been relatively quiet in recent years but more deals appear to be on the horizon.

Vietnam’s crowded banking sector posted a busy fiscal 2017, with most local commercial banks reporting handsome business results and setting ambitious plans for 2018. 

A few months after listing on the Ho Chi Minh Stock Exchange (HSX), the Ho Chi Minh City Development Commercial Bank (HDBank) posted impressive revenue of more than $37 million in the first quarter of this year, a three-fold increase year-on-year. 

The bank’s annual general meeting (AGM) in late April saw consensus among shareholders over a plan to merge with the Petrolimex Group Commercial Bank (PG Bank), at a time when Vietinbank has withdrawn from a merger and acquisition (M&A) with PG Bank that was agreed upon in 2015. 

The HDBank move has raised questions about other M&As in the local banking sector this year.

Few successful engagements

The M&A deal is in line with HDBank’s retail development orientation and service diversification to reduce its dependence on credit activities. 

According to its roadmap, the merger will be completed in July this year after a certificate of public securities offering is received from the State Securities Commission. 

HDBank is quite experienced in M&A activities, having merged with DaiABank and acquired 100 per cent of the SGVF consumer finance company in 2013.

In order to carry out the new merger, HDBank will issue a total of 300 million shares to secure 100 per cent of PG Bank’s charter capital. 

Of this, 186.3 million shares will be issued as a swap for PG Bank’s shares at a ratio of 1/0.621, meaning that each PG Bank share is equivalent to 0.621 HDBank shares. 

The remaining 113.7 million shares will be distributed to existing shareholders at a price of $0.44 each and will then be bought back for $0.57 by HDBank as treasury shares.

The partnership between HDBank and PG Bank astonished the local market, as the acquisition planning was implemented and completed within April. 

Some financial experts have observed that the interchange rate will benefit PG Bank’s shareholders, as its shares are now valued at around $1.18 compared to a real value of about $1. 

Despite being considered a “clean” bank, PG Bank’s charter capital has only grown negligibly in recent years and been stable at around $132 million.

Banking sector M&As

Source: StoxPlus, 2018

PG Bank offers HDBank an expansive customer list and “leveragability”, according to Mr. Steven Brown, Senior Manager, Institutional Sales & Brokerage, at Viet Capital Securities (VCSC). “PG Bank has many clients that should benefit from HDBank’s extant client model and franchise,” he said. “The merger will undoubtedly boost HDBank’s customer reach. Given the proven marketing excellence of businesses, HDBank’s brand awareness should also increase in the Petrolimex ecosystem, where some 20 million customers engage. All things considered, HDBank will also solidify its position as a major Top 10 bank post-merger, which is expected to take place during the third quarter of this year.” 

While some local banks conducted initial public offerings (IPOs) last year, a few major, non-stock-market related M&A activities also took place, including South Korea’s Shinhan Bank purchasing ANZ Vietnam’s retail banking division and the Vietnam International Commercial Bank (VIB) buying out the Commonwealth Bank of Australia’s Ho Chi Minh City retail branch, adding well over 22,000 customers to its books.

Positive signs

M&A activities in Vietnam’s banking sector remain on a positive and reasoned footing, Mr. Brown said. Many large commercial banks, including MBBank and VPBank, announced at their recent AGMs plans to raise capital to finance future M&A transactions. VPBank is to nearly double its charter capital this year, to $1.86 billion. One of the reasons, CEO Nguyen Duc Vinh explained, is to prepare for M&As and many other business development plans.

The country’s largest bourse was also incredibly active last year, with VPBank listing on HSX. It was one of the most successful listings by a Vietnamese bank to date, with the offer being about $500 million in deal size and about five times oversubscribed; a level of success only surpassed in scale by this year’s IPO of Techcombank, the biggest of the year with nearly $970 million shares allocated at $5.62 apiece. 

Additional activity is expected during the second half of the year, with the Orient Commercial Bank (OCB) likely to offer about 25 per cent to foreign investors and then list an estimated 750 million shares on HSX.

At the same time, M&As are one of the strategies MBBank has identified for this year. The bank recently collected opinions from shareholders on seeking and implementing M&A opportunities in line with the bank’s strategy and the State’s policy on bank restructuring. In documents sent to shareholders before its AGM, LienVietPostBank also stressed that it would study plans to increase its capital and conduct M&A activities. It set a clear goal of participating in the restructuring the credit organizations with State Bank of Vietnam (SBV) approval.

M&As are considered a better way to expand customer bases and transaction networks than organic growth, according to Mr. Khieu Duy Hai, Assistant Manager of Biinform at StoxPlus. “However, we believe that local banks should be conservative, as seeking a suitable M&A target in terms of business strategy, asset quality, valuation, and synergy creation is no easy task,” he said. “In addition, the government’s Resolution No. 42 last year on the pilot resolution of non-performing loans (NPLs) of credit institutions is expected to be an effective tool for banks to resolve NPLs upon M&As with other banks and thus help accelerate the M&A process.”

Similarly, Mr. Bernard Lapointe, Head of Research at Viet Dragon Securities (VDSC), forecast positive signs for M&A activities in the banking sector during 2018. Per the government’s plans for restructuring the banking system, the total number of credit institutions is to be reduced to 15-20 in the future. Higher requirements on liquidity and capital adequacy ratios require banks increase their capital to adapt, and given the increasingly fierce competition in the banking sector, especially in retail banking, banks with large networks are in an advantageous position. M&As with the other banks would therefore help the acquirer save time, he noted.

Given the brighter outlook and following the recovery of the economy, Mr. Lapointe expects the risky assets of poorly-performing banks to improve. Moreover, M&As would help acquirers save time on expanding networks and branches. Therefore, with encouragement from the SBV, it’s expected there will be numerous M&A deals involving weak banks in the years to come.

Mr. Hai believes that good local banks will not rush to identify and execute M&A deals with smaller and weaker banks in the short term. They will be quite conservative in selecting their target, preferring transactions that create real synergy in terms of customer base in deposits and lending, branch network, and capital base.

Foreign ownership limits (FOL) in banks are now at 30 per cent and a single foreign strategic investor is limited to a one-fifth stake. Thirty per cent, however, is not overly appealing to strategic investors, since they would not have any significant impact on the target’s corporate governance and operational improvements, according to banking expert Mr. Nguyen Tri Hieu.

Nonetheless, Vietnam’s banking sector remains attractive in many ways to foreign investors, as setting up a bank and obtaining licenses is a time-consuming and complicated process. With banks able to recapitalize more efficiently, in time one could see Basel II capabilities fast-tracked, and a lift in the FOL would be a positive boost to M&A activities, he said.

VN Economic Times