Interchange Investment Trend

After foreign banks raced to buy stakes in Vietnamese banks and become strategic partners, Vietnamese companies and banks have now formed a new trend of interchange investment.

 

Electricity of Vietnam (EVN) has sent a official request to raise its stake in An Binh Bank to 40 per cent by 2008 from the current 30 per cent. Previously, giant confectioner Kinh Do Corp. spent US$90 million to buy stakes of Vietnam Import-Export Bank (Eximbank). The Bank for Investment and Development of Vietnam (BIDV) has adopted Vietnam Posts and Telecom Group (VNPT), although it has not been equitised. Similarly, Vinaconex and Vinacoal also agreed with BIDV on cooperation. Not only investing in banks, big companies also buy stakes in other companies, like Cables and Telecommunications Material SJC (Sacom) and Hoa Phat Group. Mutual investment has become a new trend in 2007.

 

Worthy handshakes
Previously, on the financial balance sheet, returns from financial investment were normally understood as earnings from bank deposit interests. Earnings from shares as Vietcombank gains from investment in Vietnam Eximbank, Petrolimex Insurance JSC, (PJICO) and Vietnam International Bank (VIB Bank) is small. This investment form is mainly seen in State-run companies.

 

Mr. Tran Bac Ha, General Director of BIDV, said the Vietnamese capital market is developing and the seeking of foreign strategic partners only aims at acquiring international banking experience, technology and administration or developing trademark. Capital attraction is not the top priority.

 

Similarly, Ha said, cooperation with domestic partners is aimed at taking advantage of other distribution networks to sell products and services. For example, VNPT and BIDV agreed to mutually tap their nationwide networks. BIDV can supply banking services for tens of thousands of VNPT staff, while VNPT will supply telecom services for more than 300 BIDV transaction places nationwide. “These are relationships of mutual benefit to increase competitiveness when Vietnam opens its service market,” Ha pointed out.

 

But according to financiers, apart from their business expansion purpose, such financial investments will bring in big returns for enterprises, especially at the growing Vietnamese market. The information about corporate handshakes pushes up stock price quickly. Especially, when the stock price is high, financial investment is in the round cycle. For example, Company A invests 10 per cent in Company B, which invests in Company C, which then reinvests in Company A. The resulting high stock price will bring big capital surplus from the selling of shares.

 

If a shareholder looks at the relationship between companies, he/she will enjoy a big capital surplus. This is an indispensable factor in calculating stock price. On the contrary, enterprises buying strategic stakes will also benefit, thanks to sharp stock price rise following each handshake.

 

For example, Kinh Do bought shares of Vietnam Eximbank at a price eight times higher than the face value (in April, the market price is 15 times higher than the face value) . The stock price high helped the bank enjoy a capital surplus of VND12,000 (US$720 million) and Kinh Do also enjoyed a double profit. Last but not least, according to Mr. Pham Van Thiet, General Director of Vietnam Eximbank, the bank plans to sell 30 per cent stake to foreign and domestic partners, enabling the bank to increase capital by VND8,400 billion, with a capital surplus of VND5,800 billion.

 

Paying profits by shares
While the stock market is growing, profit payment by new shares or share separation from capital surplus does not lead to price dilution, following the rise in supply, but increases stock price. This is also a principle to increase corporate value. Late last year, Vietnam Association of Financial Investors (VAFI) called on companies to pay profits by shares to save cash for reinvestment.

 

In early 2007, information about such deals among companies, especially with giants like Petrolimex and PetroVietnam, is frequent. Petrolimex invested in Dong Thap Muoi Commercial Joint Stock Bank, and PetroVietnam bought stakes of Global Commercial Joint Stock Bank. These banks were then renamed PG-Bank and GP-Bank, respectively. Saigon Trading Corp. (Satra) has a foothold in Phuong Nam Bank, Habubank and is eying others. Vinatex and Geruco also had similar business deals.

 

According to experts, this cooperation will form real groups in Vietnam. Previously, dozens of giant groups and corporations wanted to team up to become a banking-industry-construction conglomerate. However, this has not been taken shape. Many believe this financial investment trend will enable the formation of such business conglomerates, like Chaebols of South Korea.