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Legal framework for M&A called for
Experts have called for state management agencies to set up a legal framework for merger and acquisition (M&A) activities, saying that after the hot development period, the banking system has shown a lot of shortcomings, which has prompted many of them to merge into each other to raise their competitiveness.
At a workshop on the banking system’s renovation and development in the period of global integration, a representative from the Bank for Investment and Development of Vietnam (BIDV) pointed out three weak points of banks.
First, bank services are not diversified. They mainly provide credit, payment and remittance services. Card services have just been provided recently, while other services like asset and investment management have not been developed.
According to the State Bank of Vietnam, foreign banks now provide 1,000 different services, while domestic banks only have 100.
The second weak point is limited financial capability. The average stockholder equity of the 10 biggest banks in Vietnam is $500mil only. While state-owned banks have chartered capital equivalent to that of regional banks, other banks have little chartered capital, and need to increase capital in order to become more competitive.
The third problem of the banking system is limited risk management capability. The credit growth rate has been very high in recent years, while banks’ technology remains weak. Banks’ operation scales have been expanded, but corporate governance and risk management skills have not improved accordingly.
Nearly 50 credit institutions had growth rates of outstanding loans at over 50% in 2007, while nearly 30 institutions had growth rates at over 100%.
Nguyen Thi Mui, Deputy Director of the Finance Institute, said that a recent survey of the operations of 32 commercial banks in Vietnam showed that only 79% of banks use capital effectively, while a lot of banks have been found as using short-term capital for long-term loaning.
The surveyors have also pointed out that risks are latent in the operations of joint-stock banks due to low capital levels, while these banks are always under pressure from the overly high expectations of shareholders.
Mui said that with the existing problems, commercial banks should be restructured. She said that management agencies should set up a mechanism to encourage banks to merge into each other in order to, on one hand, improve their financial capabilities, and on other hand, reduce the number of banks.
Le Dac Son, General Director of VP Bank, also said that the government should set up a suitable legal framework to encourage small banks to merge into bigger ones. Banks may want to do the M&A now, but they do not know which regulations to follow in pursuit of the goal.
Regarding the standards for banks’ operations, Le Thi Huyen Dieu from Vietcombank said that banks need to have the capital adequacy ratio at 10% in the current period (the ratio should be 8% in normal conditions); the ratio of lending on mobilised capital at less than 60% (the ratio should be less than 80% in a stable economy); the proportion of capital mobilised from the interbank market accounts for 5% of total assets.
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