What It Means When Foreign Shareholders Divest From Vietnamese Banks
Tags: Banking, Vietnam, Ownership, Investment

What It Means When Foreign Shareholders Divest From Vietnamese Banks

In 2017, the Vietnamese banking sector was impacted by divestitures by several foreign investors. Standard Chartered PLC and HSBC Holdings in April and June confirmed plans to divest their shareholdings in Asia Commercial Joint Stock Bank (ACB) and Vietnam Technological and Commercial Joint Stock Bank (Techcombank), respectively. Meanwhile, Australia and New Zealand Banking Group (ANZ) reached an agreement to sell its entire Vietnamese retail banking business to Shinhan Bank Vietnam Ltd in April.

Three divestments in a single year raised questions. Most importantly, why have the foreign banks divested and what are the implications for the Vietnamese banking sector as a whole?

At the first glance, the Standard Chartered, HSBC and ANZ divestments seem reasonable within the context of their Vietnamese businesses. Both HSBC and Standard Chartered have established wholly-owned subsidiaries in the country, meaning that their ACB and Techcombank stakes were no longer necessary for exposure to Vietnam’s banking sector. Furthermore, because local Vietnamese banks are now competitors, the Techcombank and ACB investments could represent potential conflicts of interest. In ANZ’s case, its business focus in Asia has reportedly shifted to institutional banking. Hence the divestment of its retail banking business in Vietnam can considered as in line with its change in strategy.

However, the divestments also highlight issues within the local banking sector that affect foreign shareholders. In its Vietnam Quarterly Macroeconomic Report published in June 2017, the Vietnamese Institute for Economic and Policy Research (VEPR) stated that poor governance in local banks made the sector less attractive for investors. One common governance issue cited was concentration of ownership. In some banks, a few key executives retain significant ownership and hence control. The ownership structure of Techcombank exemplifies this issue; the combined stake held by Ho Hung Anh (chairman), Nguyen Dang Quang (vice-chairman), Nguyen Canh Son (vice-chairman) and four companies related to these executives is 26.03%. The three executives are known acquaintances, as they studied and did businesses in the former USSR in the 1980s and 1990s before returning to Vietnam. In contrast, ownership of each foreign investor is capped at 20% and total foreign shareholdings in local banks is capped at 30%. As such, foreign shareholders are not guaranteed sufficient influence over the management of local banks. In fact, Vietnamese newspaper Dan Viet in July 2017 reported an unconfirmed claim that insufficient control was one of the reasons that HSBC divested its stake in Techcombank. An unnamed source close to the matter claimed that HSBC was frustrated with its inability to challenge Techcombank’s decision not to pay dividends for six consecutive years from 2010. Moreover, Techcombank planned to raise charter capital by offering more equity, further diluting HSBC’s stake.

Techcombank chairman Ho Hung Anh and vice-chairman Nguyen Dang Quang are key executives of Masan Group Corporation, which has 15% ownership in Techcombank. Source: Datarama Platform

In addition to governance challenges, potential risks arising from bad debt were also specified by VEPR as a cause of the decline in attractiveness of Vietnam’s banking sector. This argument is supported by Credit Suisse’s Vietnam Banks Sector Review issued in February 2017. According to Credit Suisse, bad debt resolution remains slow because of the lack of necessary regulations, debt trading platforms or alternative solutions such as securitisation.

Credit Suisse also highlighted weak recapitalisation a serious unresolved long-term problem within the Vietnam’s banking sector. Recapitalisation is vital for banks to meet local capital requirements, which according to Credit Suisse, remain tied to the Basel I Accord. The Financial Market Overview Report 2016 issued by Vietnam’s National Financial Supervision Commission (NFSC) showed a decreasing trend in the sector’s Capital Adequacy Ratio (CAR) between 2012 and 2016. The average CAR was 11.3%, but the NFSC noted that adjusted CAR would fall significantly if the research methodology fully complied with the Basel II Accord. In January 2017, the State Bank of Vietnam delayed the implementation of Basel II by three years. Credit Suisse stated that the delay might relieve the current pressure on recapitalisation, but would increase the size of necessary future recapitalisations. A possible solution for successful recapitalisation for local banks would be to offer more equity to incumbent and/or new foreign investors.

Conversely, divestments by foreign investors could have a critical impact on the capital adequacy of Vietnamese banks. Firstly, if local banks repurchase their shares from the foreign investors, capital of the local banks will decline, resulting in more recapitalisation pressure. Secondly, without foreign investors, local banks will depend on raising local institutional and individuals investors. However, according to Vietnamese business newspaper Thoi Bao Kinh Te Saigon, not many local investors have the sufficient financial capability to acquire large stake in the bans. Local investors also lack confidence in the banking sector because it is not in good shape and still restructuring. Hence, massive investments in banks are not unlikely. Recapitalisation will not be successful if bank cannot raise capital from local and foreign investors.

Moreover, foreign shareholders are established financial institutions which have expertise and experience which Vietnamese banks can leverage on. In fact, HSBC used to send its own employees to Vietnam to assist Techcombank in improving the bank’s operation and governance. In October, Pham Doan Son, vice-chairman of Vietnamese bank LienVietPostBank disclosed that the bank was negotiating to sell stake to a foreign shareholder. The vice-chairman emphasized that the he expected the foreign partner would help LienVietPostBank to develop governance and organizational strategies. Clearly, expertise shared by foreign shareholders are also important to the developments of local banks

It is as yet unclear whether the divestment of foreign shareholders is a temporary phenomenon or a worrying long-term trend. But it is clear that the departure of the foreign shareholders is not beneficial. Local banks are likely to require capital from fresh foreign investors to meet international standards on capital adequacy. More importantly, the loss of expertise shared by experienced foreign partners is a blow to the local banking sector. Such expertise is critical for the sector to implement the improvements in the governance so sorely needed.

Written by Datarama Analyst Hieu Nguyen.