Limited upside from recent reform of foreign investment law for banks in Vietnam

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Vietnam bankRecent press articles regarding Vietnam’s decree Decree 01/2014/ND-CP, which supersedes Decree 69/2007/ND-CP on 20 February 2014, on foreign ownership limit in Vietnamese banks have been unilaterally positive.

ABB Merchant Banking however sees limited upside in the current changes and believes that the system will require more fundamental reform to clean up the bad debt problem and bring in much needed foreign technical expertise from global banks.

The foreign ownership limit in Vietnamese banks will remain at 30 per cent. There are however changes in how the ownership is broken down and allocated to various investors. The table below sets out the changes made:

 New decree New % Previous %
All foreign investors 30% 30%
An individual 5% 5%
An institution 15% 5%
A strategic partner 20% 15%.20% requires the Prime Minister’s approval

The key benefit of the law is that the room for foreign institutional (or financial) investors has been increased from 5 to 15 per cent (and with related parties a total of 20 per cent). The track record of financial investors in Vietnam to bring technical improvement to companies in Vietnam is however limited. While this change will increase the economic exposure that financial investors can get to banks in Vietnam, we do not see how this can bring systemic benefits to the Vietnamese banking system.

The key thing to watch when looking at the potential for M&A and reform of the banking system in Vietnam is the limit for foreign ‘strategic partners’. Strategic partners are defined as foreign banks. The cap for strategic partners however will unfortunately remain at 20 per cent. The only change is that while, before the strategic partners in the past needed a signature from the prime minister when buying more than 15 per cent, and now that signature is not needed. This does remove some of the political risk of investing in banks in Vietnam, however it does not materially improve the climate for M&A of banks with the stake being effectively capped at 20 per cent.

Under Basel III regulations, banks that invest less than 50 per cent in other banks will suffer from punitive deductions from their Tier 1 equity. As we are recovering from the financial crisis, and banks are in the process of deleveraging, banks are reluctant to pursue strategies that penalise their capital base. As a result they prefer majority acquisitions of assets that can benefit to their capital and risk profile. In addition, the management commitment and real potential for technical transfer is much higher with majority acquisitions than with minority investments of 20 per cent stakes.

In conclusion, while the legal changes have limited upside, we do see upside from the option value of investing in Vietnamese banks at current pricing level (close to book value) assuming that investors have done proper due diligence on loan books. As a result, we currently advise foreign strategic investors to actively look at the Vietnamese banking market.

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Reading Time: 2 minutes

Recent press articles regarding Vietnam’s decree Decree 01/2014/ND-CP, which supersedes Decree 69/2007/ND-CP on 20 February 2014, on foreign ownership limit in Vietnamese banks have been unilaterally positive.

Reading Time: 2 minutes

Vietnam bankRecent press articles regarding Vietnam’s decree Decree 01/2014/ND-CP, which supersedes Decree 69/2007/ND-CP on 20 February 2014, on foreign ownership limit in Vietnamese banks have been unilaterally positive.

ABB Merchant Banking however sees limited upside in the current changes and believes that the system will require more fundamental reform to clean up the bad debt problem and bring in much needed foreign technical expertise from global banks.

The foreign ownership limit in Vietnamese banks will remain at 30 per cent. There are however changes in how the ownership is broken down and allocated to various investors. The table below sets out the changes made:

 New decree New % Previous %
All foreign investors 30% 30%
An individual 5% 5%
An institution 15% 5%
A strategic partner 20% 15%.20% requires the Prime Minister’s approval

The key benefit of the law is that the room for foreign institutional (or financial) investors has been increased from 5 to 15 per cent (and with related parties a total of 20 per cent). The track record of financial investors in Vietnam to bring technical improvement to companies in Vietnam is however limited. While this change will increase the economic exposure that financial investors can get to banks in Vietnam, we do not see how this can bring systemic benefits to the Vietnamese banking system.

The key thing to watch when looking at the potential for M&A and reform of the banking system in Vietnam is the limit for foreign ‘strategic partners’. Strategic partners are defined as foreign banks. The cap for strategic partners however will unfortunately remain at 20 per cent. The only change is that while, before the strategic partners in the past needed a signature from the prime minister when buying more than 15 per cent, and now that signature is not needed. This does remove some of the political risk of investing in banks in Vietnam, however it does not materially improve the climate for M&A of banks with the stake being effectively capped at 20 per cent.

Under Basel III regulations, banks that invest less than 50 per cent in other banks will suffer from punitive deductions from their Tier 1 equity. As we are recovering from the financial crisis, and banks are in the process of deleveraging, banks are reluctant to pursue strategies that penalise their capital base. As a result they prefer majority acquisitions of assets that can benefit to their capital and risk profile. In addition, the management commitment and real potential for technical transfer is much higher with majority acquisitions than with minority investments of 20 per cent stakes.

In conclusion, while the legal changes have limited upside, we do see upside from the option value of investing in Vietnamese banks at current pricing level (close to book value) assuming that investors have done proper due diligence on loan books. As a result, we currently advise foreign strategic investors to actively look at the Vietnamese banking market.

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