Foreign ownership increase important for bank restructuring

The State Bank of Vietnam prioritizes increasing foreign investor ownership to boost transfers of weak banks

Mandatory transfers of weak banks remain a major part of mergers and acquisitions (M&A) in the financial and banking sector.

According to the SBV, the search for and negotiation with commercial banks qualified to undertake mandatory transfers of weak banks are prolonged and challenging due to the significant reliance on voluntary participation by commercial banks. It takes time to convince shareholders, especially major and foreign strategic shareholders.

Associate Professor, Dr. Nguyen Huu Huan, Head of the Financial Market Department at the University of Economics Ho Chi Minh City, stated that to accelerate the restructuring of banks, it is necessary to attract more foreign capital, and greater openness in foreign ownership limits and specific mechanisms are needed to encourage foreign investors to participate in weak banks’ restructuring.

Vietnam previously called for foreign investment in weak domestic banks’ restructuring, but no successful transactions have been made, as weak banks are under special control and have major bad debts and even negative equity, Huan said.

He also attributed the problem to some other barriers, including the 30-percent foreign ownership limit, which makes it difficult for foreign investors to have a controlling voice in the board of directors of a Vietnamese bank.

At a meeting with foreign businesses hosted by Prime Minister Pham Minh Chinh in 2023, SBV Deputy Governor Pham Thanh Ha noted that the State Bank prioritizes increasing foreign ownership to facilitate transfers of weak banks.

Attracting domestic and foreign investment in credit institutions’ restructuring is an important part of the 2021-2025 project for restructuring credit institutions pertaining to addressing bad debts, as well as the State Bank’s action plan to realize this project.

Nguyen Linh Phuong, Deputy Head of the SBV’s Monetary Policy Department, stated that the State Bank has taken numerous measures to attract foreign capital. The 2024 Law on Credit Institutions, taking effect on July 1, 2024, introduces several amendments to enhance system transparency and safety, and minimize risks. Notably, shareholders owning one percent or more of a credit institution’s charter capital must disclose information. This provision aims at reducing cross-ownership and manipulation risks in commercial banks.

The mandatory transfer of weak banks is facing challenges

The banking sector has recently implemented Basel II and III standards, particularly Basel II with advanced methods, moving towards Basel III. This implementation has had positive effects, promoting information disclosure, risk awareness, and risk policy development, helping stakeholders better supervise commercial banks. It also enables banks to better assess capital demands and risk management capabilities based on the disclosed information.

Decree 01/2014 specifies that a foreign strategic investor can own up to 20 percent of a commercial bank’s charter capital, with total foreign ownership at the bank not exceeding 30 percent. For weak credit institutions, this ratio can be higher as decided by the Prime Minister.

The draft amendments and supplements to Decree 01 are being submitted to the Government for approval and issuance, Phuong said. Significant changes include allowing foreign investors to own up to 49 percent of shares in a commercial bank undergoing mandatory transfer, as approved by the Prime Minister, she added. This favorable condition provides foreign investors with more investment opportunities and encourages their collaboration in the credit system’s restructuring in compliance with international standards, she said.