A government decree, announced on Tuesday said effective on Feb. 20, foreign banks could be allowed to buy majority stakes in domestic lenders considered weak, and marginally greater shares than at present in stronger banks. It did not stipulate what constituted a "weak" bank.

The move is one of a series of incremental steps taken by Vietnam's communist government to revive a once-thriving economy that has been stuck in a quagmire, in large part due to high levels of toxic debt and tight lending that has hurt retail growth and led to bankruptcies of tens of thousands of small businesses.

The State Bank of Vietnam (SBV) last year set up an asset management firm to buy bad debt from lenders in return for bonds in an effort to tackle the region's highest ratio's of non-performing loans (NPLs).

However, what the central bank's firm does with the NPLs it buys remains unclear.

Independent economists estimate the NPL ratio to be in double digits and say the problem requires a more comprehensive solution, including more transparency and liberalisation of the banking sector to lure foreign expertise and capital.

According to the new decree, a single "strategic foreign investor" will be allowed a maximum 20 percent of a Vietnamese bank without government approval, up from 15 percent now. The 30 percent cap on total foreign ownership remains in place.

It would raise the foreign ownership limit beyond the 30 percent if an overseas institutional investor wanted to buy into weak banks, it said, without elaborating. An SBV report to the legislature in November said there were 11 weak banks in Vietnam, although it said eight had been "restructured".

Bui Kien Thanh, an independent economist and former government advisor, said the changes would have limited appeal to foreigners because stakes permitted in stronger banks were too small and the extent of the NPL problem in Vietnam was still unclear.

"Bad debt barrier"

"It doesn't mean anything to foreign investors as they would still only play a passive role in a bank, they don't have right to decide anything," Thanh said.

"The chance to buy a 100-percent share of a weak bank is also very difficult as no one wants to pay a lot of money to buy a bank with high rates of non-performing loans... the biggest barrier is bad debts."

Overseas banks are among seven foreign strategic investors that have so far bought into about 10 Vietnamese banks - half of them listed - among the nearly 40 in the country, according to Thomson Reuters data

Among the foreign banks with stakes in Vietnamese ones are HSBC Holdings, in Techcombank; Commonwealth Bank of Australia in VIB; and United Overseas Bank of Singapore in Phuong Nam. In those three cases, the foreign bank got government approval to hold 20 percent.

The new decree outlined seven criteria to qualify a bank as a foreign strategic investor, including at least $20 billion in assets in the year before buying a stake.

The concept is similar to what is now on offer in Thailand, which had a debt crisis of its own more than a decade ago, although Vietnam's solution offers significantly lower caps on foreign stakes.

Foreign investors can own up to 49 percent in Thai lenders, while majority foreign ownership has been allowed on a case-by-case basis, such as the 72 percent in Bank of Ayudhya , and 94 percent CIMB Thai Bank, mostly as a means to inject more capital.

Vietnam's government has promised reforms as part of a "master plan" aimed at boosting economic growth that was 5.42 percent last year, up slightly from 5.25 percent 2012, which was the slowest in 13 years. Vietnam's economy grew about 7-7.5 percent annually from 2004-2007.

Tight crip remains

Frivolous lending, much of it to state-run firms, put the brakes on that growth and investors say reforms to date and those in the pipeline have been disappointing, with the state retaining its tight grip on an economy that needs to be liberalised.

The benchmark VN Index closed up 0.2 percent on Tuesday. Although banks were the biggest gainers, changes in foreign ownership caps were unlikely to be a game-changer long-term, analysts said.

"The new decree doesn't have much effect on listed banks, but would boost the banking sector in the long term," said Tran Minh Hoang, a senior analyst at Vietcombank Securities.

An amended law allowing foreign shares of up to 60 percent in some listed firms could soon be approved, according to a draft seen by Reuters that is awaiting executive approval.

However, the draft says restrictions will still apply on sectors "in which the state needs to control foreign capital".

By Ho Binh Minh & Nguyen Phuong Linh - Reuters - January 7, 2014


Vietnam raises foreign bank ownership caps to aid system

Vietnam will allow foreign investors to take bigger stakes in the nation’s lenders in a bid to bolster the ailing banking system.

The limit for foreign so-called strategic investors will be increased to 20 percent from 15 percent, while the cap for total foreign holdings at any local bank remains at 30 percent, according to a statement posted on the government website late yesterday. The prime minister can lift the limits in special cases to help weak banks “restructure and ensure their safety,” according to the decree, which takes effect Feb. 20.

Bank shares rose today on speculation that the steps will help Prime Minister Nguyen Tan Dung’s government reshape the financial system, which is burdened with the highest rate of bad debt in Southeast Asia. Vietnam’s undercapitalized banks are grappling with structural weaknesses that urgently need fixing, according to the International Monetary Fund.

“This is a very important decision and a great step forward,” Alan Pham, Ho Chi Minh City-based chief economist at VinaCapital Group, the nation’s largest fund manager, said by phone. “This decision will allow foreign investors to come and help local banks to recapitalize and restructure themselves.”

The benchmark VN Index (VNINDEX) of stocks climbed 0.5 percent at 1:11 p.m. local time, heading for the highest close since June 13. Vietnam Joint-Stock Commercial Bank for Industry and Trade gained 1.9 percent, and Joint-Stock Commercial Bank for Foreign Trade of Vietnam, or Vietcombank, rose 2.2 percent. Strategic Investors

The stake limit for a non-strategic foreign institutional investor will be increased to 15 percent from the current 10 percent, according to the decree. A foreign strategic investor needs to make certain commitments including establishing a long-term partnership with a local bank, according to the decree.

Under the current law, a foreign strategic investor can hold a 20 percent stake if the prime minister approves it.

Separately, Dung is considering raising foreign ownership caps at listed companies. A proposal calls for lifting overseas investors’ holdings of voting shares in some industries to a maximum 60 percent from 49 percent, Nguyen Son, head of market development at the State Securities Commission, said Nov. 14.

There are about 20 companies whose foreign ownership is at the 49 percent limit, according to Ho Chi Minh City-based ACB Securities Co.

Vietnam’s government forecasts the economy will grow 5.8 percent this year after a 5.42 percent expansion in 2013. That would be a seventh straight year of growth below 7 percent. In another attempt to boost economic expansion, the central bank cut a policy rate last July, after it devalued the currency in the previous month to improve the balance of payments.

Policy makers set up an asset-management company to buy soured loans from banks in July. VAMC, as the entity is known, may purchase as much as 150 trillion dong ($7.1 billion) by the end of 2014, central bank Governor Nguyen Van Binh said in December.

By Nguyen Dieu Tu Uyen & Nguyen Kieu Giang - Bloomberg - January 7, 2014