M&A activities in banking sector not strong

The banking sector has been considered the most favorable for M&A activities given the strong restructuring and the raising of capital in this sector over the last few years. However, in practice, M&A activities in the banking sector currently have not been as strong as expected.

M&A activities in banking sector not strong

High demand

At the beginning of 2018, many experts expected the M&A activities of the banking sector to be strong in coming times, as many banks had built plans to find strategic partners and the government had also encouraged banks to do M&A.

However, during 2018, there were just few M&A deals that were approved by the government. Specifically, the government approved HDBank to merge with PGBank; BIDV to sell 17.65% stake to KEB Hana Bank of Korea; and Vietcombank to sell 10% stake to raise chartered capital.

Nonetheless, the above three deals have not yet been done till 2019. At the beginning of 2019, Vietcombank issued 111mn shares to GIC Private Limited of Singapore and Mizuho Bank. In July 2019, BIDV Board of Directors issued the decision to approve deals with foreign investors and announced that the bank needs more time to complete the due diligence process. The merger of HDBank and PGBank is expected to be complete by end of this year.

The demand of M&A in banking sector has been maintained strongly given the pressure to raise capital to meet the requirement of Basel II and the urgent progress of restructuring of the banking system. Currently, Vietcombank plans to continue selling 6.5% shares to investors. SHB is busy working with many international and domestic financial institutions to find a suitable strategic partner. MB is also seeking shareholders’ approval to do M&A when opportunities come.

The investors have been very interested in acquiring more shares of banks or joining the restructuring process of some weak banks. For example, J. Trust has studied CBBank for a long time and has sent an investment proposal to the State Bank.

Constraints remain

Practically speaking, to be successful in M&A deals, investors as well as banks have to do many things. According to Dr. Bui Quang Tin, lecturer at the Banking University, Ho Chi Minh City, the state owned banks need to make sure not to create loss for government capital during the M&A process. In M&A deals of state owned banks, mostly investors offer the price which is lower than the market price, hence, it needs longer period of time to propose and get approval of the government. Consequently, the longer time to propose and get approval, the bigger difference between offer price and market price is created. This spiral creates difficulties in processing of M&A deals.

“The lack of an independent consulting and valuating institution has caused many difficulties for M&A activities in the banking sector”, says Dr. Tran Du Lich.
According to Dr. Nguyen Tri Hieu, a banking expert, with target to reduce the number of banks to 15 or 20, there will be bigger banks with strong financial status having conditions to apply high technology or improve the banking infrastructure. To reduce the number of banks, M&A activities are most essential. However, the owners of small banks do not want to be merged with bigger banks as it will not be easy to be the owner of the bank again, given termination by the State Bank when approving the establishment of new banks.

As the smaller banks do not want to be merged with bigger banks, they have tried to find strategic partners to sell their shares. However, this method is not very easy or successful. So far, there is still no such deal happening because of the difficulties in negotiations. Most foreign investors want to buy the controlling stake but the foreign ownership limit is capped at 30%.

Encourage domestic M&A

According to several banking experts, if there is no change in the foreign ownership limit, the M&A activities in the banking sector will continue quietly.

The difficulties in finding foreign strategic partners for small banks is expected to remain in coming times as when doing the M&A deals the foreign investors have many requirements that the small banks have to qualify for, such as requirements related to audit, valuation, consulting, brokerage, information transparency, confidentiality, ownership transferring, legal status changing, financial responsibilities, brand name, and mechanism to solve the various disputes. Currently, many small banks have not been able to meet these requirements.

If each small bank continues to find strategic partners alone, the process of banking system restructuring will be impacted. Some experts suggest that the State Bank should allow volunteered M&A as this way can help increase the size of banks as well as reduce the number of banks in the sector.

The State Bank may use the Basel II requirement as a solution to encourage banks doing M&A activities. For example, there should be a threshold that if banks cannot meet the requirement of CAR within a certain period of time, they have to be merged with bigger banks.

Do Linh

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