The Vietnam government is contemplating raising the foreign ownership cap on domestic banks beyond the current maximum limit of 30%, according to a recent report by Reuters.

The changes would also allow for non-strategic investors to acquire an ownership interest of up to 15% and strategic partners to obtain a maximum stake of 20%.

According to Reuters, Prime Minister Nguyen Xuan Phuc this month told a group of investors in Hong Kong that the foreign ownership cap may be increased in the near future.

This comes on the heels of Moody Investors Service initiating a review that may result in an upgrade of the credit rating of seven Vietnam domestic banks. The banks subject to the review have experienced month-to-month improvement in their credit profiles, asset quality, profitability, and funding stability.

This is not the first time the government has suggested an increase in the foreign ownership cap on Vietnam banks may be in the offing. In early 2015 then-Prime Minister Nguyen Tan Dung insinuated a decree declaring a raise was in the works, but it never materialized.

The allure of a raised foreign ownership cap comes amidst an ongoing restructuring of the nation’s banking segment. East Asia Forum reports that the Vietnam Assent Management Corporation (VAMC), created in July 2013, had reduced the industry’s ratio of non-performing loans (NPLs) to total banking assets to 2.58% from as high as 17% in 2012.

Meanwhile, nine ‘weak’ banks were merged and 15 out of a total of 37 domestic banks were eliminated.

However, major structural issues remain. The largest customers of the domestic banks are the major state-owned enterprises (SOEs), many of which are embroiled in debt and struggling to attract foreign investors despite government efforts to sell shares.

Though VAMC banks are allowed to swap their NPLs for bonds, this is not generally accepted as a valid long-term solution. If SOE reform stalls, the Vietnam banking segment may continue to struggle, with or without an increase in the foreign ownership cap.

Banking segment fundamentally sound

Despite these issues the banking segment of Vietnam is considered fairly solid. Last November Moody’s gave the segment a ‘stable outlook’, largely due to overall health of the economy.

However, profitability and capitalization remain weak points.

Corruption in the Vietnam banking segment also remains a hot issue, despite the government’s hard-line anti-corruption policies, which has found the courts handing out harsh penalties for wrong-doers.

Pham Cong Danh, former chairman of the Vietnam Construction Joint Stock Commercial Bank is the latest to feel the wrath of the courts. Earlier this month, the Ho Chi Minh City People’s Court sentenced Danh to a 30 years in prison for illegally embezzling more than over US$400 million from the government.

Tuoi Tre News reports that Danh was convicted on charges of ‘violating lending regulations of credit institutions’ and ‘deliberate acts against state regulations on economic management, causing serious consequences’.

Along with Danh nearly 36 other defendants were incarcerated with prison sentences ranging from three to 22-years. Among other things, Danh and his accomplices created false lending documents to surreptitiously withdraw funds from bank customer saving accounts for their personal or other unauthorized uses.

In 2014, Huynh Thi Huyen Nhu, a former official at VietinBank, was sentenced to life in prison for a US$178.5 million fraudulent scheme.

The possibility of an increase in the foreign ownership cap in Vietnam banks comes during a period of intense overseas investment in Vietnam. FDI inflows hit an estimated US$9.8 billion in the first eight months of this year, jumping 8.9% over the same corresponding period last year.

VOV