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The longer, the tougher

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Restructuring and reviving ailing banks requires large capital, but investors can opt for other forms of cooperation or investment to tap into the finance sector in Vietnam.

According to the “plan for restructuring credit institutions in association with bad debt treatment in 2016-2020” stated in Decision 1058/QD-TTg dated July 19, 2017, the first and likely most important target is to continue restructuring credit institutions with the focus on fundamental, resolute treatment of bad debts and ailing banks by methods in line with the market mechanism.

Nevertheless, while the treatment of other credit institutions in association with bad debts has produced some positive results, the restructuring of ailing banks has yet to be completed as expected. If the restructuring process prolongs, it will make it more difficult to handle those banks and take more time for their recovery.

Why prolonged?

First, it should be admitted that the restructuring of ailing banks over the past five years still depends mainly on the Government’s resources under two aspects: First, the State Bank of Vietnam (SBV) must buy back targeted banks for zero dong, and second, authorities must  assign personnel from the SBV and State-owned commercial banks to manage those ailing banks.

These efforts, in essence, can help ailing banks with mechanisms and solutions to deal with difficulties, obstacles and restrictions in their operations. However, with no fresh capital injection to improve their financial strength, it’s obvious that those banks can hardly increase their already weak competitiveness.

Meanwhile, to attract foreign investors to the restructuring of ailing banks, the SBV has formulated many policies, such as allowing 100% foreign ownership in ailing banks and restricting the establishment of 100% foreign-owned banks. In reality, however, foreign investors have not shown keen interest, as evidenced by the slow progress of selling banks acquired at zero dong to foreign organizations.

A case in point is Ocean Bank. After being acquired by the SBV at zero dong in April 2015, the bank began to work with foreign partners in 2017 but the transfer deal has not yet been completed. Another case is Construction Bank (CBBank). One and a half years ago, Japan’s J Trust revealed that it could buy this bank to serve as the gateway for Vietnamese businesses to cooperate and join investment with Japanese partners. However, to date, the deal has yet to have any new information.

Some local organizations also want to join the restructuring of ailing banks, and management authorities also have some special mechanisms to support credit institutions to join the restructuring, such as they are not restricted by cross-ownership. However, the biggest difficulty lies in financial resources, as the SBV requires investors to have “fresh and real” funds and to prove the origin of the funds.

While many ailing banks restructured through merger and acquisition (M&A) under the plan for restructuring of credit institutions in 2010-2015 have gradually resolved their weaknesses to survive, ailing banks restructured under the restructuring plan for 2016-2020 are tough deals. TrustBank is an example. The SBV allowed Thien Thanh Group to buy TrustBank in 2013, but it had to buy back the bank at zero dong in 2015 after the restructuring failed.

The longer, the tougher

With the difficulties and restrictions mentioned above, it’s understandable that the restructuring of ailing banks in 2016-2020 has failed to achieve the target.

First, those ailing banks have already had many weaknesses and faced many problems which cannot be resolved. Financially, since their clients have switched to dealing with better banks with healthier financial status, their operations have declined and incomes from many services have fallen and usually failed to achieve targets.

Take credit operations as an example. Falling and excessively low outstanding loans have made income from lending interest insufficient to offset cost, so it’s hard to reach the break-even point. In particular, since their brand and reputation are adversely affected, those banks are facing many difficulties in capital mobilization. To ensure liquidity and keep clients, they have to offer deposit rates much higher than the average level in the market, thus reducing significantly their profit margins and affecting their profitability.

Meanwhile, those banks still have to maintain fixed spending for personnel, management or assets. Of note, they have to suffer human resources loss, which not only affects their business targets but also poses potential risks for their operations. To attract sufficient, qualified human resources, they have to offer attractive salaries, causing more upward pressure for their costs.

As a result, losses may increase, swallowing up their capital and making recovery tougher as well as the time for loss erasure and profit gain longer. This may prompt investors and partners keen on restructuring of those banks to re-assess their situations and recovery capacity and to relinquish the deals.

In addition, the loss of too much time for handling irregularities at ailing banks, such as the judgment of the case and the assessment of losses and the recovery capacity as well as recoverable properties, has prolonged the deals.

For foreign investors, apart from the above mentioned reasons, the growth potential of the banking sector has come to the saturation phase and not as attractive as the initial phase of opening of the sector, as banks now have thick, extensive networks and their market shares and positions are defined clearly and not easy to change at will. The retail banking segment, deemed as having much potential, is now in the hands of a few finance companies which are also subsidiaries of local banks. The clear evidence is strategic foreign shareholders have recently withdrawn funds from local banks, and some foreign banks have downsized operations and sold some business segments to other partners.

Meanwhile, banks acquired at zero dong are not strong banks and do not have many competitive edges. The capital needed for restructuring and reviving those banks is not small, while investors can opt for other ways of cooperation or investment to tap into the local finance sector, such as buying the retail segment from other banks as mentioned above.

Furthermore, with the strong growth of Industry 4.0, new trends and technology have continuously come into existence. New business models like Digital Banking and Neo Bank, along with the strong development of financial technology (fintech), have eroded the attractiveness of the traditional banking which is subject to fierce competition and the possibility of being replaced is not ruled out. In the future, activities of the traditional banking will face more challenges, and therefore, it’s foreseeable that the handling and sale of ailing banks will become tougher if the process prolongs further.

By Trieu Duong

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