Overheating Banking Reform

This is not the first time the bank restructuring is mentioned but it seems to be the first time this policy will be realised. Authorities, specialists and bankers share the same point of view that the banking system is now performing poorly and even engendering adverse impacts on the economy if no proper reshuffling is made.

 

The tie-up between Lien Viet Bank (LVB) and Vietnam Post Corporation (VNPost) to form Lien Viet Post Bank in mid-2011 shows the urgency of banking reshuffle. This is simply a matter of mutually benefiting cooperation and takeover. LVB aims to become a retail bank but network expansion and competitive enhancement are is not a simple task at this time for a juvenile like LVB. In the meantime, loss-making Vietnam Postal Saving Company (VPSC) of VnPost has a nationwide network. By taking over VPSC, LVB can make use of the latter’s nationwide postal saving outlet network meanwhile VnPost, through the deal, procured margin figures quadrupled VPSC’s book value and stamp out the postal saving firm’s bankruptcy fears.

 

Dr Nguyen Dai Lai, Deputy Director of the Credit Information Centre (CIC) under the State Bank of Vietnam, said: In addition to 50 existing LVB branches, following this merger, any postal outlet will become the bank’s retail outlet. This means that Lien Viet Post Bank will cover all of over 10,000 communes with postal agents in the country. This network will bring the current largest lender Agribank to the second place in terms of service coverage. This deal shows that mutually understanding weaknesses and strengths is the key to success.

 

The State-owned Vietnam Bank for Investment and Development (BIDV) signed bilateral cooperation agreements with Bac A Bank and GP.Bank to provide liquidity support of VND5,000 billion and VND3,000 billion, respectively. This happened when the merger and acquisition (M&A) of banks is a hot topic, many thus wondered what was behind this move. Although related parties branded them a bilateral cooperation agreement, many guessed this was a new step for M&As.

 

These separate events provide a forecast that banks will merge to enhance competitiveness and address weaknesses. Whether weak banks will face hostile takeovers?

 

As regards bank restructuring, the central bank quickly put out four principles: Diversify ownership; improve system safety; Ensure rights and interests of depositors and related parties; and Restructure in different forms, methods and appropriate roadmaps. Each bank will have appropriate forms and methods, basing on its own characteristics.

 

The SBV said takeover or merger is an objective, indispensable tendency as it brings greater value for banks than when it stands alone. They will attain larger economic values, enhance creditability and brand name, reduce costs, exploit business advantage of related parties, develop customer base, and expand distribution network. According to this guideline, banks will not be forced to perform M&A but they will do it on a voluntary basis.

 

Dissolution or bankruptcy is never easy for any business entity in Vietnam, especially those in financial and banking sector. Fearing domino effect, [the central bank] will never let any banks to go bankrupt or likewise as in developed markets. However, according to experts, the current legal system is not coherent enough for M&A deals in such a sensitive industry. M&A deals require a good supportive legal system to troubleshoot any problems that may inhibit related parties to flinch.

 

Legal framework is incomplete for restructuring process. How will banks be categorised to single out small, weak ones? How will restructuring go? Former SBV Governor Cao Sy Kiem said that it is vital to undertake real assessments and correctly touch weaknesses to perform M&As. Ms To Kim Ngoc, Deputy Director of Banking Institute, said it is not the right time for bank merger or bankruptcy because the current legal system for dissolution, merger and takeover is incomplete.

 

However, the SBV has publicly encouraged commercial banks to look for opportunities to restructure and perform M&As. It has taken rapid steps to complete the legal framework for bank M&As. On November 2, SBV Governor Nguyen Van Binh presented the draft Law on Deposit Insurance. This is one of important legal frameworks to be prepared for the restructuring process. The SBV asserted that the legal system for M&A and consolidation is now relatively uniform and complete with the enactment of Enterprise Law, Investment Law, Competition Law, Securities Law, State Bank Law, and Credit Institutions Law.

 

The Circular 04/2010/TT-NHNN dated February 11, 2010 provides the merger, consolidation and acquisition of credit institutions. The SBV confirmed to provide technical assistance to banks to merge and consolidate.

Guidance and legal framework were well-prepared for M&A deals. For example, the match of LVB and VPSC was successfully completed. Banks should find out their own strengths and weaknesses to form stronger, healthier banks, not weakening each other.