Working out Appropriate Approach for Banking System Restructuring

9:00:03 AM | 15/1/2020

Restructuring Vietnam's banking system, with a focus placed on commercial banks, plays an important role in the economic restructuring process aimed to achieve the goal of improving labor productivity, quality, performance and the competitiveness of the economy.

With the effort to promulgate and implement restructuring policies, the liquidity of the commercial banking system is guaranteed and stabilized. Cross-ownership in the system is minimized and there is no mass bankruptcy in the banking system, especially in times of economic difficulties, rising inflation and deposit interest rate galloping to 18% in the end of 2011.

The reshuffle of the commercial banking system is carried out through M&As of weak lenders. Three commercial banks were acquired by the State Bank of Vietnam for 0 Vietnamese dong, including Vietnam Construction One Member Limited Liability Bank (VNCB), Global Petro One Member Limited Liability Bank (GP Bank) and Ocean One Member Limited Liability Bank (Ocean Bank). Vietcombank is assigned to administer and operate VNCB; and Vietinbank manages and operates Ocean Bank and GP Bank. Currently, VNCB, Ocean Bank and GP Bank have returned to normal operations, with business results improved significantly and operating losses slashed month by month. In addition, seven other commercial banks (Habubank, Western Bank, DaiABank, MDBank, MHBank, Southern Bank and GP Bank) were also merged into other banks with stronger financial health and better business results.

Sharp drop in NPLs

In addition to rate cut and preferential lending policies for priority borrowers, credit institutions have actively adopted measures to handle nonperforming loans (NPLs), helping improve financial health and reduce bad debt in the past time.

According to Vietnam Asset Management Company (VAMC), five banks have written off their debts at VAMC, including Vietcombank, MBBank, Techcombank, OCB and VIB. In addition, some lenders have intended to settle all special bonds held by VAMC, such as VPBank, TPBank and KienLongBank.

According to the State Bank of Vietnam’s report, from 2012 to the end of December 2019, the credit institution system was estimated to have handled VND1,064 trillion (US$46 billion) of nonperforming loan. From August 15, 2017 to the end of December 2019, the credit institution system dealt with VND305.7 trillion (US$13.3 billion) of bad debt defined by Resolution 42 (excluding risk provisions and debts sold to VAMC through special bonds).

On average, from August 15, 2017 to December 2019, the system handled VND10.5 trillion per month, VND 4.9 trillion higher than the average of bad debt handled in the 2012-2017 period before Resolution 42 took effect. This positive sign is showing that Resolution 42/2017/QH14 is working. Since then, this rule has helped deal with difficulties and obstacles and enabled credit institutions to handle bad debts.

At a recent conference on banking tasks in 2020 in Hanoi, the banking industry announced continuing restructuring solutions along with dealing with bad debts incurred by credit institutions in the 2021-2025 period, striving to bring the NPL ratio to below 2% and coordinating closely with central and local agencies to promptly remove difficulties and obstacles in applying measures to handle bad debts under Resolution 42 on approval of the project “Restructuring the credit institution system and dealing with bad debts in 2016-2020.”

At the same time, many banks have successfully applied Basel II standards ahead of schedule. Capital adequacy ratio (CAR Basel II) is at 11.84% and will be further be improved through many measures. Many banks set aside high provisioning and ensured hedging for economic fluctuations.

In addition, in order to fulfil requirements imposed by Circular 22 of the State Bank of Vietnam, lenders have actively reduced the proportion of loans to risk-prone industries (e.g. real estate and construction), strengthened long-term capital mobilization. The ratio of short-term funds used for medium and long-term loans is currently at 27%.

Many bottlenecks

Although the credit institution system restructuring along with dealing with bad debts has achieved encouraging results over the past time, according to many experts, a lot of difficulties still exist.

Notably, state-owned commercial banks have numerous hardships to raise share capital to boost their financial capacity to ensure their leading role in the financial and monetary market.

They will need a huge additional fund to meet the minimum Basel II capital adequacy requirements while State resources which can be used for this are also quite limited.

For example, Vietnam Bank for Agriculture and Rural Development (Agribank) is currently a 100% state-owned commercial bank. In the past five years, its total assets valued more than VND1,300 trillion (US$56.5 billion), more than doubling the value in 2015, but it has not yet been granted additional fund to increase the registered capital. Currently, its registered charter capital is VND30,518 billion (US$1.33 billion), the lowest among the four state-owned commercial banks, leading to the capital adequacy ratio on the verge of the mandatory minimum level.

Although it actively issued bonds to supplement Tier II capital, it is allowed to count up to 50% of the equity capital, according to current regulations. Therefore, without additional funding granted, Agribank can only increase credit until the end of the first quarter of 2020 even if the economy needs and the lender can lend.

In addition, the restructuring of non-bank credit institutions which are owned by State-owned corporations is still slow, as it depends on their restructuring plans.

However, the restructuring of State-owned corporations must be approved by the Prime Minister or their administering ministries. At the same time, many of them are still facing financial difficulties and lacking resources to handle losses and restructure non-bank credit institutions.

Furthermore, the settlement and restructuring of three compulsorily purchased banks and weak credit institutions are still fraught with policy matters. The handling depends on negotiations with investors and must be consulted with many ministries and agencies. Therefore, it is difficult to quickly solve bad debts, especially to apply measures to deal with bad debts under the National Assembly's Resolution 42/2017.

The definitive handling of non-performing loans, the recovery of unprofitable assets of these credit institutions requires the mechanism to distribute loss and reduce financial burdens with appropriate financial policies to enable credit institutions to recoup loss and overcome financial difficulty.

Still, the handling and recovery of debts and collateral assets of obligatorily purchased banks are difficult because most collaterals for debts are distrained, related to lawsuits and legally incomplete.

In addition, as restructuring plans for mandatorily bought banks have not been approved, the exercise of the rights to represent the ownership of these banks (ratifying business plans, financial plans and property procurement plans) is very difficult.

M&A – a suitable solution for restructuring

Mr. Nguyen Phi Lan, Director of the Credit System Safety Supervision Department, Banking Inspection and Supervision Agency under the State Bank of Vietnam, said, M&A is still an appropriate solution to restructure the credit institution system.

The handling of weak credit institutions over the past years has affirmed that the encouragement of voluntary merger and acquisition is the right guideline for restructuring credit institutions. The State Bank facilitates merger, consolidation and acquisition of new credit institutions and new investors with capital, technology and governance will participate in bank restructuring.

Therefore, M&A is still one of the best solutions for the time being, in addition to other restructuring solutions such as improving governance, management, and financial capacity in order to implement criteria set out in the Prime Minister’s Decision 1058/QD-TTg.

In recent years, M&A negotiations of financial companies are quite active, boosted by the participation of domestic and foreign investors which target the rapidly growing consumer finance market of Vietnam. For example, Shinhan Bank Vietnam acquired the retail segment of ANZ Vietnam Bank; Shinhan Group (South Korea) took over Prudential Finance Company; Techcombank transferred the entire stake at TechcomFinance for Lotte Card (South Korea); and SeABank bought into Post and Telecommunication Finance Company. Notably, BIDV Bank and KEB Hana (South Korea) struck a record deal of US$875 million, wrapping up a very exciting 10-year M&A phase in the banking industry. Entering 2020, the M&A wave is expected to continue rolling because many deals are under negotiation.

A series of M&A deals are being negotiated and pending for the Government's approval, such as deals by MBBank, Vietcombank, Ocean Bank and GPBank. Mr. Can Van Luc, a banking expert, said, the M&A wave will roar in 2020 because banks need to sell shares to increase their capital, Vietnam’s economy is outperforming the region, the government declared not to grant new licenses for foreign-owned banks till the end of 2020, and the government will gradually reduce the ownership ratio in State-owned banks.

Quynh Anh (Vietnam Business Forum)