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Tiêu đề Merger and Acquisition of Vietnamese Commercial Banks
Tác giả Nguyen Tra My
Người hướng dẫn Ms. Can Thuy Lien (MA)
Trường học State Bank of Vietnam Banking Academy
Chuyên ngành Foreign Language
Thể loại Graduation Thesis
Định dạng
Số trang 47
Dung lượng 712,98 KB

Cấu trúc

  • CHAPTER 1: INTRODUCTION (7)
    • 1.1 Background (7)
    • 1.2 Research objectives (7)
    • 1.3 Scope and subject (8)
    • 1.4 Methodology (8)
    • 1.5 Disposition (9)
  • CHAPTER 2: THEORETICAL FRAMEWORK (10)
    • 2.1 Definition of bank M&A (10)
      • 2.1.1 Definition of commercial bank (10)
      • 2.1.2. Definition and classification of M&A (10)
      • 2.1.3. Definition of bank M&A (13)
    • 2.2. Principles and conditions for bank M&A (14)
      • 2.2.1. Principles for bank M&A (14)
      • 2.2.2. Conditions for bank M&A (16)
    • 2.3. Bank M&A process (17)
      • 2.3.1. Parties involved in the process (17)
      • 2.3.2. Bank M&A process (18)
    • 2.4. Motivations and challenges of bank M&A (19)
      • 2.4.1. Motivations of bank M&A (19)
      • 2.4.2. Challenges of bank M&A (19)
  • CHAPTER 3: BANK M&A IN VIETNAM (22)
    • 3.1. The status of Vietnamese economy (22)
      • 3.1.1. Economic indicators (22)
      • 3.1.2. General assessment (25)
    • 3.2. Difficulties and problems of Vietnamese commercial banks (26)
      • 3.2.1. In terms of capital (26)
      • 3.2.2. In terms of non-performing loan (NPL) (29)
      • 3.2.3. In terms of profitability (29)
    • 3.3. The situation of Vietnamese bank M&A (30)
      • 3.3.1. The situation of M&A in Vietnam (30)
      • 3.3.2. Situation of bank M&A in Vietnam (32)
    • 3.4. General assessment (37)
  • CHAPTER 4: OUTLOOK FOR VIETNAMESE BANK M&A AND (39)
    • 4.1. Outlook for Vietnamese bank M&A (39)
      • 4.1.1. Vietnamese economic plan in 2015 (39)
      • 4.1.2. Outlook for Vietnamese bank M&A (40)
    • 4.2. Recommendations (42)
      • 4.2.1. For SBV and other authorities (42)
      • 4.2.2. For Vietnamese commercial banks (43)

Nội dung

INTRODUCTION

Background

The 2008 financial crisis and subsequent global economic recession significantly impacted countries worldwide, including Vietnam Despite some positive indicators, the situation remains concerning for many governments, particularly in developing nations like Vietnam, which faces challenges in managing the crisis and experiencing slow recovery Key issues such as rising inflation, a high number of bankruptcies, and inefficiencies within the banking and financial systems highlight the urgent need for economic restructuring, with a focus on reforming commercial banks and financial institutions as a critical component of this process.

Bank mergers and acquisitions (M&A) have emerged as a highly effective solution for addressing the challenges faced by the banking sector, particularly given its significant impact on the overall economy The urgent need to reduce high levels of bad debt among commercial banks, coupled with the demand for improved competitiveness and market expansion, has driven the increasing trend of bank M&A Additionally, government support and encouragement have further fueled this popularity in recent years.

Mergers and acquisitions (M&A) have become a familiar concept for businesses globally, recognized as a crucial aspect of the modern economy Currently, bank M&A is a significant topic of interest for both bank owners and the public, with expectations for continued growth in the coming years.

As concern about this activity, bank M&A is chosen as the idea that will be covered in this graduation thesis.

Research objectives

Vietnamese banking system is under pressure of restructuring and the appropriate policies for this process is extremely necessary than ever

Many banks have historically been established without robust financial management, resulting in unfair competition and unsustainable growth This has created a landscape where some banks are too small, while others, despite their size, lack the strength to adequately support the economy Common issues such as imbalanced capital structures, high bad debt ratios, and low returns have contributed to a precarious situation for both customers and the overall economy.

The current landscape of banking in Vietnam highlights bank mergers and acquisitions (M&A) as a key strategy for enhancing the banking system In recent years, the status of bank M&A in Vietnam has garnered significant attention, prompting discussions at restructuring workshops A central theme in these discussions revolves around the government's encouragement of such activities, which aims to stabilize and strengthen the financial sector.

This thesis explores the landscape of bank mergers and acquisitions (M&A), offering a comprehensive overview of past activities while projecting future trends in the sector Additionally, it presents strategic recommendations aimed at enhancing the effectiveness of bank M&A initiatives in the coming years.

Scope and subject

The thesis will focus on bank M&A activity in territory of Vietnam in the period from

Methodology

This article provides an overview of bank mergers and acquisitions (M&A) activity in Vietnam, utilizing secondary data sources including financial reports, M&A research, and online information The research employs analytical, comparative, and adjustment methods to present its findings.

Firstly, the thesis will provide some theoretical understand about merger and acquisition which is collected from economic books and official law.

Then, in order to provide an overview about bank M&A activity in Vietnam, the data from official annual report of GSO, SBV and commercial banks will be used.

Based on the analyzed data, this article examines the changes in bank M&A activity over different periods, assessing its effectiveness while highlighting the advantages and disadvantages associated with these mergers and acquisitions.

Disposition

This chapter offers an overview of the graduation thesis, detailing its background, objectives, and scope It also outlines the methodology employed and the structure of the thesis, providing a comprehensive understanding of its contents.

This chapter provides a foundational understanding of the theoretical concepts surrounding mergers and acquisitions (M&A) and their implications for commercial banks, setting the stage for the in-depth discussions that will follow in subsequent chapters of the thesis.

Chapter 3: An overview about bank M&A in Vietnam

This chapter is crucial to the thesis, offering a concise overview of recent M&A activity in Vietnam's banking sector It begins by presenting the current economic landscape of Vietnam, followed by a detailed examination of bank M&A trends during this period Finally, the chapter provides a balanced assessment of these M&A activities, ensuring a fair evaluation of their impact and significance.

Chapter 4: Outlook for bank M&A in Vietnam and recommendation

This chapter explores the future of bank mergers and acquisitions (M&A) in Vietnam, drawing insights from the Vietnamese Government's plans and policies Additionally, it offers several recommendations to enhance bank M&A activities in the region.

THEORETICAL FRAMEWORK

Definition of bank M&A

Appeared in the 14 th century, a bank is a financial intermediary and money creator that create money by lending money to a borrower, thereby creating a corresponding deposit on the bank's balance sheet

Under Vietnamese Law No.47/2010/QH12 of June 16, 2010 on Credit Institutions:

A bank is a type of credit institution authorized to conduct various banking activities as outlined by law Depending on their operational nature and objectives, banks are categorized into three main types: commercial banks, social banks, and cooperative banks.

A commercial bank is defined as a type of financial institution authorized to engage in a wide range of banking and business activities under the provisions of the law, with the primary objective of generating profit.

- Banking operations means regular business and provision of one or several of following activities: a Acceptance of deposits; b Provision of credit; c Provision of payment services through customer’s account.(Point12, Article 4)

In summary, a commercial bank is authorized to perform a wide range of banking functions, including accepting deposits, offering credit, and providing payment services through customer accounts.

2.1.2 Definition and classification of M&A a Definition of M&A

M&A is the abbreviation of “merger and acquisition”

Mergers and acquisitions (M&A) play a significant role in corporate finance, though the terms are often mistakenly used interchangeably A merger involves the combining of two or more companies, where stockholders of one company receive securities from the acquiring company in exchange for their shares In contrast, an acquisition refers to a corporate action where one company purchases the majority or entirety of another company's ownership stakes to gain control, often using cash, stock, or a combination of both.

In Vietnam, “merger”, acquisition” and “consolidation” are three separate concepts But in general, whenever “M&A” is recalled, those three words are considered as three indispensable operations:

Point 1, 2, 3, article 17 in Vietnamese Law on Competition 2004 states the definition of three terms as followed:

The merger of enterprises involves the transfer of all lawful assets, rights, obligations, and interests from one or more enterprises to another This process simultaneously leads to the termination of the merging enterprise(s) existence.

Consolidation of enterprises involves the transfer of all lawful assets, rights, obligations, and interests from two or more companies to a single entity, resulting in the termination of the existence of the consolidating firms.

The acquisition of an enterprise refers to one company purchasing all or part of another company's assets, enabling control over its operations Mergers and acquisitions (M&A) can be classified into various categories based on the nature and structure of the transaction.

M&A can be classified into various types, depending on different criteria.

From the perspective of the value chain, M&A can be classified as horizontal, vertical and conglomerate.

- Horizontal M&A exits between two companies in the same industry segment This kind of M&A substantially reduces the number of competitors in the segment and as a result, improves the competitiveness.

- Vertical M&A is combination of producing different goods or services for one specific finished product In general, the relationship between firms is client-supplier or buyer-seller

Conglomerate mergers and acquisitions (M&A) involve the combination of two or more companies from different industries, aiming to diversify risks and achieve economies of scale.

When consider of relationship between parties, M&A could be divided as either

A friendly merger and acquisition (M&A) takes place when the management and board of a target company consent to being acquired by another firm During a friendly takeover, the acquiring company makes a public offer, either in stock or cash, which the target company's board publicly endorses This agreement is typically contingent upon approval from shareholders and regulatory bodies.

A hostile merger and acquisition (M&A) occurs when one company, known as the acquirer, seeks to acquire another company, referred to as the target company, without obtaining consent from the target's management or shareholders This approach often involves efforts to replace the target company's management to facilitate the acquisition process.

Banks and credit institutions, while unique in their operations, are treated similarly to other entities in the context of mergers and acquisitions (M&A) According to Circular No 04/2010/TT, specific guidelines govern the merger, consolidation, and acquisition processes for these financial organizations.

The merger of credit institutions involves the consolidation of one or more credit institutions, known as merged credit institutions, into another institution, referred to as the merging credit institution This process entails the transfer of all legal assets, rights, obligations, and interests from the merged institutions to the merging institution.

M&A agreement with the target company's management, but by going directly to the company's shareholders or fighting to replace management in order to get the

Figure 1: M&A Classification 2.1.3 Definition of bank M&A

Banks are unique enterprises governed by specific regulations, particularly regarding mergers and acquisitions (M&A) According to Circular No 04/2010/TT-NHNN, the processes for the merger, consolidation, and acquisition of credit institutions are outlined, distinguishing banks and credit institutions from other entities in M&A activities.

The merger of credit institutions involves the consolidation of one or more credit institutions, known as the merged credit institution(s), into another credit institution, referred to as the merging credit institution This process entails the transfer of all lawful assets, rights, obligations, and interests from the merged entities to the merging entity.

Mergers and acquisitions (M&A) can be categorized into friendly and hostile approaches Friendly M&A involves collaboration with the company's management, while hostile M&A occurs when acquirers bypass management and appeal directly to shareholders or seek to replace current leadership Understanding the impact of financial policies and regulations is crucial, as banks and credit institutions play a significant role in the M&A landscape.

NHNN on providing it institutions:

Principles and conditions for bank M&A

On the basis of implementation of a bank M&A deal, these five principles must be followed:

Banks involved in a merger, consolidation or acquisition shall agree on the settlement of rights and obligations of involved parties in accordance with the current law.

When banks undergo a merger, consolidation, or acquisition, it is crucial to prioritize the interests of customers, particularly the depositors from each institution involved Safeguarding these interests ensures a smooth transition and maintains trust in the banking system.

Members of the Boards of Directors, the Controller Committee, General Directors, and relevant stakeholders of banks participating in a merger and acquisition (M&A) must maintain confidentiality to ensure the stable operation of the banks until the M&A proposal is approved by the appropriate regulatory authorities.

In the context of mergers and acquisitions (M&A), it is essential for the Boards of Directors of the participating banks to provide timely, consistent, and truthful information to all stakeholders, including owners and relevant organizations This information should encompass the financial status, organizational structure, and operational details of the institutions involved Additionally, all documentation, materials, and advertisements related to the M&A process must be prepared with care and precision to prevent any potential misunderstandings.

Principle 5 emphasizes that decisions regarding mergers, consolidations, or acquisitions (M&A) must be made by the competent bodies of the banks involved, adhering to the meeting and voting procedures mandated by current law Additionally, the conditions and formalities for conducting meetings and voting on bank consolidation matters must be mutually agreed upon by the banks involved and clearly outlined in the consolidation scheme, in compliance with legal requirements.

To successfully execute M&A transactions, banks must adhere to Vietnamese Competition Law, which prohibits economic concentration exceeding a 50 percent market share in the relevant market However, exceptions apply in two scenarios: if one or more parties involved in the M&A are at risk of dissolution or bankruptcy, or if the economic concentration promotes export expansion that contributes to socio-economic development and technological advancement.

A comprehensive Merge/Acquisition Plan is essential and must include key elements such as the names, addresses, and websites of the banks involved, along with contact details for their Boards of Directors, Control Committee members, and General Directors The plan should provide a summary of the financial status and operations of the banks, outline the reasons for the M&A, and detail the charter capital before and after the deal It must also list the dominant shareholders or owners post-M&A, define the rights and obligations of all parties involved, and present a clear M&A roadmap Additionally, the plan should address personnel changes, operational network adjustments, and other organizational matters, as well as a tentative three-year business plan that includes expected results, minimum capital safety ratios, and operational efficiency criteria Furthermore, it should outline measures for integrating management information systems and detail the methods and timelines for converting capital, along with the responsibilities for merger-related expenses and contingency plans for any party that withdraws from the agreement.

Finally, after the M&A the charter capital of the bank must be at least equal to the legal capital prescribed by the current law.

Bank M&A process

2.3.1 Parties involved in the process a Banks, finance companies, finance lease companies, or/and cooperative institutions: the entities that directly merge/ acquire or be acquired b The State Bank of Vietnam: the entity has power to authorize the bank M&A activity c Consulting expert: banks involved in a merger, consolidation or acquisition may use consultancy services Consultancy service providers must satisfy the following conditions:

- Being an organization licensed to provide finance and banking consultancy services;

- Refraining from providing consultancy services for several credit institutions involved in a merger, consolidation or acquisition;

Credit institutions involved in a merger, consolidation, or acquisition must be certified by their Boards of Directors to confirm that they have no financial relationships that could create a conflict of interest with other institutions participating in the transaction.

Figure 2: M&A process a Step 1: Researching the need of M&A deal:

Partners involved in M&A process must be researched carefully by each other basing on financial situation of each parties as well as the strategy of each.

When parties’ management teams make decision on carrying out the transaction, they can actively contact with potential partner for a meeting. b Step 2: Negotiating and signing M&A contract

Negotiations regarding essential terms and conditions should occur when all parties are informed about the transaction During this phase, it is beneficial for parties to engage experts to assess the asset's value or the transaction's pricing.

As long as agreement is reached, M&A contract should be signed by parties. c Step 3: Approval of authorities

In Vietnam, bank mergers and acquisitions (M&A) require dual approval from the State Bank of Vietnam (SBV) The initial approval pertains to the principle of the M&A, followed by a second approval for the actual transaction The final step involves implementing and closing the deal, which includes thorough research, negotiation, and obtaining necessary approvals.

If the Governor approves the bank M&A, the banks must finish the procedure of modification content of permission for establishment and operation then publish announcement to finish the process.

Motivations and challenges of bank M&A

There are numerous reasons contributing to the popularity of M&A in financial world Although the reason for M&A may vary over time, the main motives for M&A transaction include: a Internal Motives

One of the primary internal motivations for bank mergers and acquisitions (M&A) is to enhance revenue and bolster financial and market positions This drive stems from the declining effectiveness of bank operations, exacerbated by a significant rise in bad debt rates that negatively impact reputations Additionally, banks pursue M&A to boost capital and shareholders' equity, diversify their product and service offerings, and expand their client base.

External factors driving mergers and acquisitions (M&A) include economic conditions, legal-political influences, technological advancements, and competitive pressures Notably, legal-political forces emerge as the primary external motivator, highlighting their significant role in shaping M&A strategies Additionally, companies pursue M&A to integrate expertise, adopt new technologies, enhance competitiveness, and improve service quality.

Mergers and acquisitions (M&A) can significantly enhance banks' positions in the financial market by facilitating organizational integration To navigate the complexities of M&A, banks need to implement strategic decisions and appropriate policies for effective operations One of the primary challenges they face is the potential for culture clash, which must be carefully managed to ensure a successful merger.

When two banks merge, it involves not only the unification of their brands but also the integration of distinct corporate cultures Significant differences in these cultures can lead to conflicts, highlighting the importance of addressing leadership challenges during the merger process.

The loss of leadership positions can lead to a diminished understanding of the business, raising concerns about potential exchanges or replacements at favorable values Additionally, layoffs may contribute to diseconomies of scale, impacting overall efficiency and productivity.

The newly merged bank may face dis-economies of scale due to its increased size, leading to challenges in maintaining effective control and staff motivation Employees might feel like mere numbers in a large multinational organization, which could diminish their drive to perform at their best.

Reducing staff performing similar duties in two banks can lead to cost savings, but it may also create negative consequences for employees This downsizing can instill fear of job loss and erode trust in the organization, ultimately diminishing employee motivation and productivity Additionally, these changes can influence customer and public perceptions of the banks.

When companies merge, it's crucial to assess consumer perceptions of both firms to ensure compatibility Bidder banks often strive to retain the customer base of the target company, particularly amid competition from other financial institutions aiming to boost profits It's commonly believed that stockholders may lose rights during M&A transactions, leading to customer dissatisfaction and a shift to alternative banking options Therefore, banks must prioritize stakeholder interests, especially customer satisfaction, to maintain loyalty and meet public demands.

Post-M&A transactions, if a newly formed entity struggles, it could pose a systemic risk to the entire banking sector Consequently, the State Bank of Vietnam (SBV) and relevant authorities will closely monitor and supervise the bank To address the concerns of all stakeholders, the new entity must implement innovative promotional strategies and enhance both the quality and quantity of its operational packages.

BANK M&A IN VIETNAM

The status of Vietnamese economy

3.1.1 Economic indicators a GDP growth rate

Figure 3: Vietnam GDP Growth rate 2011

As can be seen from the bar chart, the GDP growth of Vietnam

5.8 percent at the beginning of the year.

3.1 The status of Vietnamese economy onomic indicators

: Vietnam GDP Growth rate 2011 –Quarter 1/

The bar chart illustrates that Vietnam successfully met the National Assembly's target in 2014, marking the first achievement of this goal since 2011.

(Source: TradingEconomics.com) the first year since 2011 achieved the National Assembly’s target, which was set at

Vietnamese economy expanded by 5.89 percent, 5.25 percent and 5.42 percent in 201

2012 and 2013 respectively It is clear to see that GDP growth rate of Vietnam improved quarter after quarter over the last four year

Due to the negative impact of global crisis, GDP of Vietnam decreased dramatically since the year end of 2011 and hit a low in

In 2013, the economy demonstrated positive growth, marked by a continued decline in the share of agriculture, forestry, and fisheries Meanwhile, the service sector experienced stability, maintaining figures similar to those of previous years.

In light of the economy's positive trajectory, the National Assembly aims for a 6.2 percent GDP growth in 2015, contingent on the continuation of the upward trend observed in previous quarters Additionally, monitoring the inflation rate remains crucial for sustaining this economic progress.

Figure 4: Vietnamese Inflation rate from 2011 to Quarter 1/2015

Vietnamese economy expanded by 5.89 percent, 5.25 percent and 5.42 percent in 201 ctively It is clear to see that GDP growth rate of Vietnam quarter after quarter over the last four years.

Vietnam's GDP experienced a significant decline due to the global crisis, reaching its lowest point in early 2012 before showing signs of recovery by the end of that year By 2014, the economy's structure was positively evolving, with a continued decrease in the share of agriculture, forestry, and fisheries, while the industrial and construction sectors expanded, and the service sector remained stable compared to previous years.

In light of the economy's positive evolution, the National Assembly has established a growth target for 2015, and current trends suggest that this target is likely to be achieved if the upward momentum continues throughout the upcoming quarter.

Figure 4: Vietnamese Inflation rate from 2011 to Quarter 1/2015

Vietnamese economy expanded by 5.89 percent, 5.25 percent and 5.42 percent in 2011, ctively It is clear to see that GDP growth rate of Vietnam

The global crisis has significantly affected Vietnam's economy, leading to a dramatic decrease in GDP by the end of the year However, in 2014, the economic structure showed positive trends, with the agriculture, forestry, and fisheries sectors continuing to grow, while the service sector remained stable compared to the previous year.

With the positive evolution of the economy, the National Assembly has set a target of

, and it seem that the economy would easily meet the target if the upward trend over the quarter continue to remain as the previous period.

Figure 4: Vietnamese Inflation rate from 2011 to Quarter 1/2015

In mid-2011, the inflation rate in Vietnam peaked at approximately 22.5 percent, coinciding with GDP growth during the latter half of the year Despite this economic growth, the high inflation rate poses potential negative consequences for the Vietnamese economy.

Since 2012, the Government's monetary policy has led to a significant decline in the inflation rate, which decreased from an average of 18.6 percent to 6.81 percent, a reduction of over 2.5 times In the following two years, the inflation rate fluctuated around this lower level.

In 2014, the average inflation rate slightly decreased to 4.09 percent, successfully meeting the government's target for inflation control This achievement was largely due to the government's commitment to stabilizing the prices of essential goods Notably, a significant drop in petrol and diesel prices towards the end of the year contributed to a reduction in the transportation index.

Many economic experts believe that a good control of inflation rate around 5 percent in

In 2015, significant advancements will aid enterprises in lowering input costs and product prices, which will stimulate consumer spending and ultimately enhance overall economic growth.

During 2011, the interest rate in Vietnam constantly increased until it reached a top of

15 percent at the year-end 2011 From that time onwards, SBV lowered its base rate to help struggling businesses and lift growth

The rate has remained stable at 6.3 percent since 2014.

The Vietnamese economy is experiencing its fourth consecutive year of macroeconomic stability, characterized by reduced inflation, robust external trade, and increased capital flow Following a rise in GDP growth in 2013, the economy has shown a consistent recovery, with positive forecasts for inflation moving forward.

And base rate remained stable over a period of more than one year.

Vietnam has made significant strides in its economic plans, transitioning from being one of the highest inflation countries in the region, with rates fluctuating around 5 to 6 percent before 2013, to achieving greater stability and success in recent years.

The economy is entering its fourth year of macroeconomic stability, characterized by low inflation, robust external trade, and strong capital flows GDP growth has gradually increased since 2013, continuing its recovery trend Inflation is expected to remain subdued, reflecting stability over the past year.

With the main objective is to control the inflation rate, until 2013, Vietnam achieved success in its plan Some years before 2013, Vietnam was ranked as the highest

ASEAN However, since 2013, when the inflation rate only

6 percent, Vietnam has given this place to Indonesia Vietnam countries in the region which control inflation most effectively.

The economy has achieved its fourth consecutive year of macroeconomic stability, characterized by reduced inflation and robust external trade and capital flows While GDP growth saw a slight increase in 2013, it remains relatively subdued overall.

Until 2013, Vietnam successfully implemented its economic plan, previously ranking as the country with the highest inflation rate However, in recent years, Indonesia has taken this position, while Vietnam has demonstrated effective control over inflation.

Difficulties and problems of Vietnamese commercial banks

3.2.1 In terms of capital a Pressure in raising capital

Decree No 10/2011/ND-CP, issued on January 26, 2011, mandated that all commercial banks increase their charter capital from 1,000 billion VND to 3,000 billion VND by the end of the year This significant capital increase posed a considerable challenge for smaller banks, as they were required to rapidly raise substantial funds to meet the new statutory requirements Additionally, banks needed to correspondingly boost their total assets to maintain normal operations and prevent financial losses.

Investing in loan notes, real estate, or securities carries significant risk, while issuing new shares to existing shareholders often fails to generate sufficient capital Consequently, many banks faced intense pressure to increase their charter capital during this period Additionally, the capital structure and capital adequacy ratio (CAR) are critical factors in assessing a bank's financial stability and ability to meet regulatory requirements.

Many banks in Vietnam have a small capital base compared to the total assets.

Figure 6: Total asset of Vietnam’s banking system 2012 -2013

At the end of 2014, Vietnam's central bank reported that the total assets of joint-stock commercial banks reached 2,624 trillion VND ($123.7 billion), reflecting a 6.5% increase from December 2013 Meanwhile, state-owned banks had assets valued at 2,172 trillion VND ($102.5 billion), marking an 8.27% rise over the same period However, despite this growth, the capital structure of commercial banks in Vietnam remains inadequate, posing potential liquidity risks.

The Capital Adequacy Ratio (CAR) is a crucial indicator for evaluating a bank's capital structure and financial strength, ensuring the protection of depositors A decline in asset quality results in increased impairment charges, which diminish accumulated profits and equity, ultimately weakening the bank's financial stability While the Vietnamese banking system reports a CAR exceeding the minimum requirement of 8 percent, it remains lower than that of other regional countries.

Figure 7: Vietnamese CAR in 2012 in compared with other regions

In Vietnam, the banking sector faces significant liquidity risks due to an imbalanced capital structure, with over 90 percent of bank deposits being short-term This reliance on short-term deposits while providing long-term loans exacerbates the vulnerability of banks, highlighting the need for a more balanced approach to deposit mobilization and loan offerings.

Figure 8: Ratio of Loan/ Deposits in 2012 (%)

3.2.2 In terms of non-performing loan (NPL)

The banking sector in Vietnam has recently experienced an increase in the bad-debt rate, with the non-performing loan (NPL) ratio rising from 4.08% at the end of 2012 to 4.73% in October 2013 However, by the end of December 2013, this rate decreased to 3.63% due to improvements in the macroeconomic environment and the efforts of credit institutions, particularly the Vietnam Asset Management Company (VAMC) Despite expectations of a decline to 3% by the end of 2015, Vietnam's NPL remains significantly higher than the global average of approximately 0.4%.

The elevated rate of non-performing loans (NPL) stems from banks issuing sub-standard loans, a strategy employed to boost chartered capital since 2011 Additionally, the financial instability of enterprises, exacerbated by the global economic crisis, has contributed to this issue.

To evaluate bank profitability, key ratios such as Return on Assets (ROA) and Return on Equity (ROE) are utilized While large banks consistently demonstrate year-over-year profit growth, small banks face a different financial landscape, often struggling to achieve similar results.

A recent study reveals that the average Return on Assets (ROA) for Vietnamese banks stands at 1.14%, trailing behind other ASEAN nations such as the Philippines at 1.28% and Indonesia at 1.87% Among Vietnam's Big Four banks, only Vietcombank exceeds the national average ROA While Vietnam's Return on Equity (ROE) surpasses that of the Philippines, it remains lower than Indonesia's figures.

In Vietnam, the most effective banking institutions are primarily found within the G12 or Big4 groups Conversely, those with the lowest Return on Assets (ROA) significantly underperform, with MHB recording the lowest ROA at just 0.18 percent Additionally, Southern Bank has the poorest Return on Equity (ROE), standing at only 3.17 percent.

Table 1: ROA, ROE and profit margin of 10 commercial banks in 2014

No Bank name ROA ROE Profit margin

In conclusion, there is a clear polarization in operating effectiveness between small banks and large banks.

The situation of Vietnamese bank M&A

3.3.1 The situation of M&A in Vietnam

Since 1999, M&A activity in Vietnam has experienced an upward trend in both the quantities and the total value.

From 1999 to 2006, M&A activity in Vietnam remained stable, averaging around 30 transactions valued at approximately USD 0.25 billion However, from 2007 to 2011, this activity surged, peaking at nearly 400 transactions and exceeding USD 4 billion in value in 2011 Following this peak, M&A activity declined over the next three years, but recovery has been anticipated since 2014.

M&A activity in Vietnam saw a 15% uptick in 2014 and is expected to increase in

In 2015, there has been a notable surge in interest from international investors, particularly in the latter part of 2014 and continuing into this year Key trade agreements, including the Trans-Pacific Partnership (TPP) involving the U.S and Japan, the EU-Vietnam Free Trade Agreement (FTA), and tariff reductions under the ASEAN Free Trade Area (AFTA), are set to enhance market access for foreign investors in Vietnam while reducing trade barriers in goods and services.

Figure 10: Vietnam M&A_ breakdown by sectors in the next 5 years

If it is breakdown by sectors, it is estimated that banking and other financial service will account for a large proportion of M&A activity in Vietnam in the next five year.

3.3.2 Situation of bank M&A in Vietnam

Table 2: M&A of banks in Vietnam from 2011 to 2014

No Year Old banks New banks Type of

Saigon Joint Stock Commercial Bank (SCB) Merger

 Saigon Joint Stock Commercial Bank

 Vietnam Postal Savings Service Company

Lien Viet Post Joint Stock

Joint Stock Commercial Bank (HBB)

 Saigon - Hanoi Joint Stock Commercial Bank (SHB)

Saigon - Hanoi Joint Stock Commercial Bank (SHB)

Corporation and other individual investors

 Great Trust Joint Stock Commercial Bank

Vietnam Public Joint Stock Commercial Bank

 Dai A Joint Stock Commercial Bank (Đai A Bank)

Ho Chi Minh Housing Development Joint Stock Commercial Bank (HD Bank)

 Maritime Bank Maritime Bank a Bank M&A deals in 2011

In 2011, the State Bank of Vietnam (SBV) implemented its Banking Restructuring Policy, leading to the merger of three banks: First Joint Stock Bank (Ficombank), Vietnam Tin Nghia Joint Stock Commercial Bank, and Saigon Joint Stock Commercial Bank This marked the first significant merger and acquisition (M&A) transaction among domestic commercial banks in Vietnam The newly formed entity was named Saigon Joint Stock Commercial Bank (SCB), boasting a charter capital of 10,583.8 billion VND and total assets amounting to 153,626 billion VND.

Following the merger and acquisition (M&A) transaction, SCB transformed from three small commercial banks with limited management capabilities into one of the largest banks in Vietnam The consolidated financial statements after one year revealed significant growth, including a 3% increase in total assets, a 30% rise in total lending, and a 40.1% reduction in bad debt This successful M&A marked a pivotal moment in Vietnam's banking sector in 2012.

In 2012, a significant merger occurred between Hanoi Building Joint Stock Commercial Bank (HBB) and Saigon - Hanoi Joint Stock Commercial Bank (SHB), resulting in the newly-formed entity retaining the SHB name as per SBV’s decision No.1159 The merger was marked by a high shareholder agreement rate, contributing to its success and boosting SHB's total assets to 8,860 billion VND.

Following the transaction, SHB encountered significant challenges stemming from HBB's substantial bad debt To address these issues, SHB undertook a comprehensive restructuring of both debt identification processes and business operations Consequently, just one month after the transaction, SHB successfully collected a notable amount of outstanding debts.

In 2013, HBB branches reported an outstanding bad debt of 448 billion VND, which equated to an 11 percent return of HBB's charter capital, ultimately enhancing SHB's owner capital through strategic M&A deals.

- Dai A Bank and HD bank

In December 2013, Dai A Bank and HD Bank held shareholder meetings to approve their merger, resulting in the formation of the Ho Chi Minh Housing Development Joint Stock Commercial Bank (HD Bank) Following the merger, the bank's charter capital rose from 5,000 billion VND to 8,100 billion VND, with 3,000 billion VND contributed by Dai A Bank, and its total assets reached 77,244 billion VND, with expectations for significant growth in the future.

VND to 92,656 billion VND in 2014 and to 111,979 billion in 2015, equal to 20.4% jump

The share conversion was calculated based on the formula that one share of Dai A Bank was converted to one share of HDBank (10,000 VND/share)

- The Western Bank and PVFC deal

On September 9, 2013, the State Bank of Vietnam (SBV) issued Decision No 2018/QD-NHNN, merging Western Bank and Petro Vietnam Finance Corporation (PVFC) to form Vietnam Public Joint Stock Commercial Bank (PVCombank), with a chartered capital of VND 9,000 billion PVCombank's network includes 1 headquarters, 30 branches, 67 transaction points, and 4 savings funds.

Table 3: Several estimated business ratios of PVCombank until 2015

Fund mobilization from 1st market/total asset 48% 55% 58%

Fund mobilization from 2nd market/total asset 19% 17% 17%

Loan / Fund mobilization from 1st market 90% 80% 80%

On 9 th September 2014, the central bank approved the merger plan between Southern Bank and Sacombank, Mekong Bank (MDB) and Maritime Bank

However, until the end of the first quarter of 2015, these two M&A transaction have not yet been completed.

General assessment

In general, the bank M&A in Vietnam has several major characteristics as follow:

The increasing total value and volume of bank mergers and acquisitions (M&A) in Vietnam signal a growing attractiveness of the banking sector for investors This influx of capital through M&A transactions enables commercial banks to operate more effectively and efficiently For the government, these developments validate the State Bank of Vietnam's policies, indicating initial successes in restructuring the financial market The streamlined banking system facilitates better supervision by reducing the number of inefficient banks, while high-reputation and competitive institutions emerging from M&A contribute to a healthier economy.

Bank mergers and acquisitions (M&A) in Vietnam have predominantly utilized straightforward methods, with the majority of transactions occurring through the sale of shares to partners.

Before 2011, most mergers and acquisitions (M&A) in Vietnam involved foreign banks partnering with local institutions However, the publication of a new policy by the State Bank of Vietnam (SBV) at the beginning of 2011 shifted this trend Since then, the majority of bank M&A transactions have occurred between domestic partners, reflecting a significant development in Vietnam's banking sector and a new focus for the country's banking system.

OUTLOOK FOR VIETNAMESE BANK M&A AND

Outlook for Vietnamese bank M&A

Vietnamese economy ended 2014, a difficult year on a positive note, recording higher than expected growth, despite challenges such as non-performing loans in the banking sector.

In 2015, Vietnam expects to record gross domestic product growth of 5.98 percent in

In 2014, the government adjusted its growth target to 5.8 percent, surpassing the previous year's rate of 5.42 percent Concurrently, inflation reached a historic low of 1.84%, significantly aided by declining global oil prices.

In 2015, the central bank aims for a GDP growth of 6.2 percent while targeting inflation at 5 percent or lower, focusing on stabilizing the banking system and maintaining price stability.

In 2015, Vietnam aims to maintain macroeconomic stability while fostering conditions for enhanced growth The central bank is focused on controlling inflation and stabilizing the value of the dong, consistent with its policies from previous years Additionally, Vietnam has set a credit growth target of 13% to 15% for the upcoming year, exceeding this year's credit growth rate of 13%.

In 2015, Vietnam is expected to maintain a trade surplus, bolstered by its appeal as an investment destination, with a surplus of approximately $11 billion recorded in 2014 due to increased foreign investment and remittances The State Bank of Vietnam (SBV) aims to keep the dollar/dong exchange rate stable, allowing for fluctuations within a 2 percent range, while currently setting the exchange rate at 21,246 VND per U.S dollar.

In 2014, significant measures were taken to address non-performing debts within Vietnam's banking system, led by the State Bank of Vietnam (SBV) Banks were required to increase their provisions for bad debts to mitigate the risk of new loans becoming problematic Since its inception in July 2013, Vietnam Asset Management Company (VAMC) has acquired approximately 100 trillion dong (around $4.68 billion) in bad debts from local banks As a result, the bad debt ratio in the banking sector decreased from 4.17 percent in June to 3.87 percent by the end of October, with SBV aiming to lower it further to 3.0 percent by the end of 2015 Concurrently, banks are expected to continue setting aside funds for bad debt provisions while enhancing the quality of new loans.

In 2015, the Vietnamese government aims to strengthen collaboration with relevant agencies to accelerate the disbursement of state budget-funded projects and support loan extensions for small and medium-sized enterprises The ongoing restructuring of the banking system will promote voluntary mergers and acquisitions among weak banks to enhance stability and efficiency.

4.1.2 Outlook for Vietnamese bank M&A a General view of bank M&A in 2015

The recent amendments to the Investment Law and the mandate to reduce the number of commercial banks to 13-15 by 2017 are set to trigger a new wave of mergers and acquisitions (M&A) in Vietnam's banking sector Smaller banks, facing intense competition and stringent capital requirements, will seek foreign investors for growth opportunities In response to this evolving landscape, the central bank plans to implement decisive actions to address the challenges posed by weak banks that lack recovery potential.

Six bank mergers are expected to occur this year Some state-owned banks could merge with smaller and more fragile lenders, according to the central bank.

In 2015, Sacombank, the ninth-largest bank in Vietnam by assets, is set to merge with Southern Bank, resulting in the formation of the country's fifth-largest lender This new entity will rank just behind the four major state-owned banks: Agribank, BIDV, Vietcombank, and Vietinbank.

Vietnam's largest bank, Vietcombank, is set to merge with the unlisted Saigonbank, following in-principle approval from the central bank This merger reflects Vietcombank's significant 8.2 percent stake in Saigonbank, indicating potential changes within the Big Four banking sector.

Meanwhile, VietinBank will strike a deal with Petrolimex Bank BIDV would join forces with Mekong Housing Bank, according to the recent announcement from SBV.

In the coming years, encouraging voluntary mergers and acquisitions (M&A) among banks will enable them to identify ideal partners independently However, if banks struggle to find suitable partners, the central bank may intervene and facilitate mergers with other institutions This trend suggests a proactive approach to bank M&A in the future.

- M&A between large banks and small banks

The initial phase of bank mergers and acquisitions (M&A) was characterized by collaboration among small banks, which carved out a niche in the market by offering services often overlooked by larger institutions However, their limited management capabilities led to significant challenges, even post-merger Looking ahead, a notable trend is emerging where large banks are increasingly pursuing M&A opportunities with smaller banks This shift is driven by large banks' ambitions to expand their market presence, enhance competitiveness, and integrate into the global financial landscape Additionally, these mergers may provide banks with political advantages, such as tax benefits from government incentives.

- Bank M&A to establish banking & finance institution

Commercial banks face competition not only from each other but also from various financial institutions, including financial companies, insurance firms, and securities companies Engaging in mergers and acquisitions (M&A) to form Banking and Financial Corporations presents opportunities for these banks to diversify their services, enhance customer value, and leverage economies of scale.

- M&A between banks have the same scale

The trend of mergers and acquisitions (M&A) among banks of similar size is gaining traction in North America and Europe, and it is anticipated to emerge in Vietnam as the banking and financial market stabilizes and resources develop comprehensively For instance, potential mergers such as BIDV with Vietcombank or ACB with Sacombank could enable larger banks to better compete with international financial corporations, thereby enhancing their reputation and market presence.

Recommendations

Bank mergers and acquisitions (M&A) can offer numerous advantages; however, economist Can Van Luc cautions that merging a robust bank with a weaker one does not necessarily yield a stronger institution While some banks may thrive post-M&A, others could become more vulnerable Concerns arise among lenders regarding potential risks associated with bad debt, an issue they already face, particularly when merging with weaker entities Additionally, there are apprehensions about the quality of personnel transitioning from smaller banks This chapter will explore strategies to enhance bank operations during the M&A process.

4.2.1 For SBV and other authorities

The legal system relating to M&A activity should be completed and in accordance with the international rule Legal framework on M&A activity need to be concerned in many different aspects:

- Protect the equal competition in the market according to Competition Law 2004 and State Bank of Vietnam Law 2010.

- Protect the interest of shareholders, especially minority shareholders.

Besides that legal framework for M&A activity should provide convenient conditions for M&A between Vietnamese enterprises to happen quickly and effectively.

Bank mergers and acquisitions (M&A) must comply with Competition Law, as well as various other regulations including those governing Credit Institutions, Investments, Corporations, and Securities The overlap of these laws has led to confusion and hesitation among banks regarding M&A activities.

Bank mergers and acquisitions (M&A) possess unique characteristics that significantly impact the economy, highlighting the need for a unified legal framework under the Law on Credit Institutions Furthermore, it is essential that the requirements governing these activities remain flexible to prevent unnecessary expenditure of time and resources.

Selecting the right partners is crucial in M&A activity, as it should align with each party's objectives Prior to engaging in mergers and acquisitions, the bidding bank must develop a comprehensive M&A proposal and conduct a self-assessment regarding its capacity to acquire another bank Furthermore, a thorough evaluation of the target bank is essential; the ideal candidate is not necessarily the strongest institution, but rather one that aligns with the bank's strategic goals and targets.

Valuation is crucial in mergers and acquisitions (M&A), as it directly influences the success of the transaction If a target bank is overvalued compared to its market value, the acquiring company may struggle with post-M&A operations Conversely, if the target bank is undervalued, its shareholders are likely to reject the sale, resulting in prolonged negotiations or potentially no deal at all.

As a result, bank’s valuation must be calculated accurately Some suggestion valuation methods could be used including discount cash flow (DCF), Cost per Mille (PER) Etc.,

Goodwill, an intangible asset of bank, is one of the most difficult issues in M&A activity in both negotiation process and post M&A period because of many reasons

Measuring the goodwill of a bank is challenging due to its intangible nature, making it crucial for merging or acquiring banks to comprehend their goodwill strategy during M&A negotiations to prevent costly mistakes.

In M&A activities, bank management often focuses on strategies and agreements, overlooking the importance of goodwill In Vietnam, bank services are largely similar, making reputation the key differentiator among banks A strong reputation fosters customer trust and loyalty, making it essential for banks to prioritize reputation building before making M&A decisions Furthermore, all stakeholders, including shareholders and employees, should actively participate in cultivating the bank's reputation rather than relying solely on top management's strategies.

- Culture and human in M&A transaction

A successful M&A transaction is determined by the resolution of post-transaction issues, including organizational culture, management plans, human resource strategies, and inter-departmental communication Among these, achieving cultural harmony poses one of the greatest challenges and is crucial to the overall success of the transaction Therefore, bank management teams must prioritize this aspect to ensure a seamless integration.

Effective management skills are crucial for enhancing competitiveness among banks While bank mergers and acquisitions (M&A) are relatively new, they have become essential in the banking and financial markets Investors rightfully expect banks to operate efficiently and consistently increase shareholder value To thrive in this environment, commercial banks must collaborate to leverage each other's strengths in areas such as business strategies, technology, and finance Additionally, those involved in managing banks must continually update their knowledge and skills to stay relevant.

In conclusion, bank mergers and acquisitions (M&A) are an essential aspect of today's economic landscape Despite Vietnam's recent limitations in the number and value of bank M&A activities compared to other nations, the potential for growth in this sector is significant in the near future.

Vietnam can learn valuable lessons from its past achievements, experiences, and failures as it faces new challenges in the global arena, particularly with the ASEAN integration set to begin at the end of 2015 Accurately assessing the current situation and anticipating future trends is crucial to seizing potential opportunities and overcoming threats These principles are particularly relevant in the context of bank mergers and acquisitions (M&A) The responsibility for navigating these challenges lies not only with the government and lawmakers but also with banks and credit institutions themselves Ultimately, the success or failure of Vietnam's banking sector will depend on their awareness, efforts, vision, and determination, alongside support from the government.

In conclusion, this thesis aims to offer essential insights into bank mergers and acquisitions (M&A), serving as a valuable reference for individuals interested in this topic.

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