Bank M&A_ Theoretical framework
Definition of bank M&A
The presence of banks, especially commercial banks, is a significant aspect of the global economy today However, there is still considerable confusion regarding the precise definition of a bank A bank can be defined based on the services it provides to customers, its economic functions, and the legal framework that governs its operations, with variations in definitions across different countries.
Peter S Rose, an American author, defines a bank as a financial intermediary that provides a comprehensive array of services, particularly in credit, savings, and payments, making it the most versatile business in the economy A commercial bank specifically refers to a type of bank that accepts deposits and extends loans to both businesses and individuals.
In Vietnam, the definitions of bank and commercial bank are regulated in the Law No.47/2010/QH12 of June 16, 2010 on Credit Institutions:
“Credit institution means an enterprise conducting one, some or all banking operations Credit institutions include banks, non-bank credit institutions, microfinance institutions and people’s credit funds”
Figure 1.1: Structure of credit institution in Vietnam
A bank is a type of credit institution authorized to perform all banking operations as defined by law There are various types of banks, including commercial banks, policy banks, and cooperative banks, each distinguished by their specific characteristics and operational objectives.
Figure 1.2: Structure of banks in Vietnam
A commercial bank is defined as a financial institution that engages in a variety of banking operations and business activities for profit, as permitted by law These banking operations encompass accepting deposits, extending credit, and facilitating payments through accounts Additionally, commercial banks may participate in other business activities such as foreign exchange trading and purchasing shares of other companies.
Deposit taking refers to the process of accepting funds from individuals or organizations in the form of demand deposits, term deposits, savings deposits, and the issuance of deposit certificates, bills, or treasury bills This practice is governed by the principle of ensuring full repayment of both principal and interest to depositors as per the terms of the agreement.
Credit extension refers to an agreement that permits an individual or organization to access a specified amount of money, which must be repaid This encompasses various financial operations, including lending, discounting, financial leasing, factoring, bank guarantees, and other related credit activities.
The provision of via-account payment services encompasses a range of payment instruments, including check payments, payment orders, payment authorizations, collections, collection authorizations, bank cards, letters of credit, and other payment services, all designed to facilitate transactions for clients through their accounts.
“M&A” is abbreviation of “merger and acquisition”
According to Broc Romanek and Cynthia M Krus in their book "Mergers and Acquisitions," a merger occurs when two corporations combine, resulting in the survival of only one, while the other ceases to exist This contrasts with a consolidation, where multiple companies merge to create a completely new entity, dissolving the original companies and transforming their shareholders into stockholders of the new firm Additionally, an acquisition involves one company, the buyer, purchasing the assets or shares of another company, the seller, with payment made in cash, the buyer's securities, or other valuable assets.
A merger involves the combination of two or more companies, where the assets and liabilities of the selling firm are absorbed by the buying firm, which retains its original identity despite potential changes In contrast, an acquisition refers to the purchase of specific assets, such as a division or an entire company.
In reality in the UK, the terms “merger” and “acquisition” are two operations of
In the context of Modern Banking by Shelagh Heffernan, "consolidation" refers to the process where two or more independent firms merge their assets to create a new legal entity In contrast, an acquisition involves one firm purchasing a controlling interest in another firm without integrating their assets or forming a single unit.
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:
In Law on enterprises 2005, there is no definition of acquisition but under the article
152, 153, “consolidation” and “merger” can be defined as follow:
Consolidation occurs when two or more similar companies merge to form a new entity, known as the consolidated company This process involves transferring all legal assets, rights, obligations, and interests from the merging companies to the new company, resulting in the dissolution of the original companies.
A merger occurs when one or more companies of the same type combine into a single entity, known as the merged company This process involves the transfer of all lawful assets, rights, obligations, and interests from the merging companies to the merged company, resulting in the termination of the merging companies' existence.
In Law on competition 2004, point 1,2,3 of article 17, three terms above are regulated as follow:
A merger of enterprises involves the transfer of all lawful assets, rights, obligations, and interests from one or more enterprises to another, resulting in the simultaneous termination of the merging enterprise(s).
The consolidation of enterprises involves the merging of two or more businesses, resulting in the transfer of all their legal assets, rights, obligations, and interests to create a new entity, while simultaneously dissolving the original companies.
The acquisition of an enterprise refers to the purchase of all or part of another enterprise's assets, enabling the acquiring company to control or govern the activities of the acquired business.
In short, all the basic concepts about M&A are defined in different ways but normally, they can be understood as follow:
Motivations, principles and conditions for bank M&A
The reasons why M&A occurs are numerous, and the importance of factors giving rise to M&A activity varies over time Here are major motivations for M&A transaction: a Market power:
Mergers and acquisitions (M&A) allow banks to expand their markets and enhance competitiveness by entering new geographical areas or broadening their product offerings When a bank seeks to grow in regions where it has been weak or absent, or aims to diversify its client coverage, it faces the choice between "buying" or "building." Often, acquiring another entity is a faster, more effective, and cost-efficient strategy compared to developing new capabilities from scratch Successful M&A can lead to increased market share and profitability, ultimately boosting the bank's competitiveness.
Mergers and acquisitions (M&A) present banks with a valuable opportunity to diversify their investment portfolios By acquiring another financial institution or finance lease company, banks can expand their investment sectors, potentially leading to increased profits Additionally, the synergy created through such acquisitions can enhance overall operational efficiency and market competitiveness.
M&A transactions are anticipated to create advantageous conditions for the involved parties, resulting in a cohesive entity that aims to enhance both scale and scope By merging, banks can benefit from increased capital and a broader range of strategic products Additionally, operational efficiency is likely to improve as combined administration and fixed costs may be lower than when the two entities operate separately Furthermore, the integration of skilled managers from both parties can lead to the development of effective policies.
Mergers and acquisitions (M&A) serve as an effective tax strategy for businesses, allowing profitable companies to acquire loss-making firms By doing so, they can leverage the target's losses to reduce their overall tax liability Additionally, shifts in government regulations or requirements can further influence M&A activity, making it a strategic move for companies looking to optimize their financial standing.
M&A deals can be driven by new government regulations or policies, whether in a friendly or hostile manner For instance, if the State Bank of Vietnam (SBV) raises the minimum legal capital requirements, credit institutions lacking the capacity to mobilize additional capital may consider mergers and acquisitions as a viable solution Additionally, if the SBV encourages banks to engage in M&A activities, smaller banks facing low liquidity and profits, yet wishing to avoid bankruptcy, may proactively seek potential partners to facilitate a merger or acquisition.
There are five principles that have to be guaranteed throughout any bank M&A transaction They are:
Banks participating in the M&A will come into an agreement in settling rights and obligations among concerned parties in conformity with current provisions of applicable law
Banks participating in the M&A must make sure not to affect rights and interests of their customers, especially of each bank’s depositors
Members of the Board of Directors, Controllers Committee, General Directors, and relevant parties involved in the M&A process of banks are accountable for ensuring information security, maintaining stable operations prior to the approval of the M&A plan by the appropriate authority.
Principle 4: Principle of information supply
During bank mergers and acquisitions (M&A), the Board of Directors is tasked with providing timely, complete, consistent, and truthful information to all stakeholders involved This includes details about the financial status, organizational structure, and operational aspects of the banks participating in the M&A process.
In addition, documents, materials and advertisement of banks participating in the M&A must ensure prudential, accurate principle and not lead to misunderstanding
Principle 5: Principle of making decision on the M&A
The competent body of banks participating in M&A will ratify the decision on the M&A under the condition, proceedings of meeting and voting in line with current provisions of applicable laws
Banks engaging in mergers and acquisitions (M&A) are generally not subject to restrictions on economic concentration under the Law on Competition, provided their combined market share does not exceed 50% in the relevant market However, exceptions apply if one or more parties involved in the M&A are facing potential dissolution or bankruptcy, or if the economic concentration promotes export expansion, socio-economic development, or advances in technical and technological progress.
In order to comply with regulatory requirements, it is essential for entities involved in mergers and acquisitions (M&A) to develop a comprehensive Mergence Plan or Acquisition Plan This plan must include critical information such as the names, addresses, and websites of the participating entities, along with contact details for Board of Directors members, Controllers Committee members, and the General Director Additionally, it should provide a summary of the financial and operational status of the entities, outline the reasons for the M&A, and specify the charter capital before and after the merger or acquisition The plan must also list major shareholders of the acquiring bank post-M&A, define the rights and obligations of all parties involved, establish a timeline for the M&A process, clarify responsibilities for any arising expenses, and propose solutions for scenarios where one or more entities may unilaterally withdraw from the agreement.
Following a merger or acquisition, the merging or acquiring bank must maintain its charter capital at a minimum level that meets or exceeds the legal capital requirements set forth by current regulations.
Bank M&A process
1.3.1 Parties involved in the process a Banks, finance company, finance lease company, or/and cooperative credit institutions: they are entities that directly merge/ acquire or be acquired b The State Bank: is the entity having power to approve the bank M&A activity c Consultancy expert: may be employed by banks participating in M&A transaction and it plays a role of advising for merging/acquiring and merged/acquired parties A consultancy expert shall be required to fully satisfy following conditions:
To be an organization which is authorized to supply consultancy service in finance, banking area
Not to simultaneously provide advices to banks participating in the M&A transaction
The Board of Directors of banks involved in the M&A transaction must confirm that there are no financial relationships that could lead to conflicts of interest with the participating banks.
Mergers and acquisitions (M&A) processes are interpreted differently by various authors globally Picot (2002) outlines a typical M&A transaction in three main stages, while others break it down into five steps: formulate, locate, investigate, negotiate, and integrate To simplify understanding and align with Vietnamese tradition and law, this thesis presents the M&A process in four fundamental steps.
Figure 1.3: M&A process a Step 1: Reaching the need of M&A deal
The M&A process for the merged or acquired party begins with the initial concept proposed by owners or managers This is followed by a thorough evaluation of the project's feasibility, which includes analyzing financial data, assessing liquidity, and determining the capacity for integration.
The M&A process begins with senior leaders proposing an original idea for merging or acquiring A thorough feasibility study is then conducted, taking into account the development plan, financial status, and strategic objectives of the bank.
The process culminates with the Executive Board's commitment to allocate the necessary resources and budget for the project Once both parties agree on the importance of the merger or acquisition, either the merging or acquired bank can initiate contact with potential partners to arrange a meeting The next step involves negotiating and finalizing the M&A contract.
Following the Broads' commitments, the two parties will convene to negotiate key terms and conditions, assisted by a consultancy expert to assess the banks' assets and discuss pricing and operational structure of the prospective new entity Upon successfully navigating the research, negotiation, and approval processes, they will finalize the M&A contract and document the terms in an M&A Plan file The next step involves obtaining the necessary approvals from relevant authorities.
In Vietnam, only if SBV approve twice can M&A transaction occur The former is the approval of principle of M&A; the latter is the approval of M&A
After reaching an agreement, the parties must notify the competition management agency or request a waiver if the merger or acquisition is prohibited under the Law on Competition They then prepare the necessary documents, including an application file for M&A approval in principle, and submit it to the Inspection Agency and Banking Supervision of the State Bank The State Bank will gather opinions from relevant agencies, including provincial branches, local People's Committees, and departments with related functions, to decide whether to approve the M&A in principle.
Within 90 days of the Governor of the State Bank signing the written approval in principle, banks will gather feedback from relevant authorities authorized to approve supplemental project content and other related matters They will collaboratively prepare an application file for merger or acquisition approval to submit to the State Bank for review and approval.
M&A of banks d Step 4: Implementing and closing the deal
If the Governor approves the bank M&A, the banks must finish the procedures of modification content of permit for establishment and operation, publishing announcement to finish the process.
Bank M&A_ post closing challenges
Closing an M&A transaction marks a crucial milestone, yet it is merely the initial phase of a complex journey The integration of two organizations into a unified entity presents numerous challenges that require banks to make informed decisions and implement effective policies Key challenges that banks must navigate during this process include aligning cultures, streamlining operations, and managing regulatory compliance.
One significant threat to banks arises from managerial concerns during mergers When two banks merge, managers from the merging institution may fear job displacement or changes in their roles, leading to anxiety This unease can result in resistance, conflicts, and difficulties in sharing information and managing experiences, ultimately hindering the merger process.
Another difficulty is corporate culture interactions As two parties become one cohesive entity, the two different corporate cultures will certainly meet and be mixed
When corporate cultures clash instead of harmonizing, productivity can decline, leading to lower-than-expected revenue for the new entity Consequently, managers face the critical challenge of effectively and appropriately integrating these diverse corporate cultures.
Merging or acquiring banks often encounter challenges related to staff management, particularly when it comes to deciding which employees will remain after the consolidation of branches This decision-making process can create uncertainty among staff, leading to decreased morale and potential inefficiencies in their work performance Addressing these psychological factors is crucial to maintaining a productive and responsible workforce during transitions.
Following the M&A transaction, the new banking entity will face stringent oversight from the State Bank of Vietnam (SBV) and other regulatory authorities to mitigate systemic risks to the entire banking system Therefore, it is essential for the new entity to implement innovative policies and enhance both the quality and quantity of its operational packages.
1.4.3 Challenges come from customer base
In the wake of a merger or acquisition (M&A), it is crucial for the involved parties to retain the customer base of the acquired entity, particularly in the competitive banking sector of Vietnam Many customers lack a clear understanding of M&A processes, often fearing a loss of rights and benefits, which can lead them to seek alternative banking options before the deal concludes To mitigate this concern, the newly formed entity must instill confidence among its customers by ensuring that their rights, interests, and obligations are preserved and maintained in a favorable manner.
The situation of bank M&A in Vietnam
The status of Vietnam economy
2.1.1 Vietnam economy reflected through main criteria a GDP growth rate
Figure 2.1: Vietnam GDP annual growth rate in period 2009-2012
A glance at the graph reveals a quarterly fluctuation in GDP growth rate of Vietnam from the beginning of 2009 to the current moment
In 2009, Vietnam experienced a challenging economic landscape, with GDP growth reaching only 3.14% in the first quarter, marking the lowest rate in recent years due to the economic recession that began in late 2008 However, growth steadily improved throughout the year, rising to 4.46%, 6.04%, and 6.9% in the subsequent quarters Overall, Vietnam's GDP increased by 5.32% for the entire year, driven by a 1.83% rise in agriculture, forestry, and fishery sectors, a 5.52% increase in industry and construction, and a notable 6.63% growth in services.
In 2010, the economy experienced a notable GDP growth rate of 6.78%, surpassing the previous year's 5.32% and exceeding the target of 6.5% Growth was consistent throughout the year, with quarterly increases of 5.84%, 6.44%, 7.18%, and 7.34% Contributions to this growth included a 2.78% increase in agriculture, forestry, and fishery, a 7.7% rise in industry and construction, and a 7.52% boost in services However, in 2011, GDP growth slowed to an estimated 5.89%, with quarterly growth rates of 5.57%, 5.68%, 6.07%, and 6.10% Despite this decline, the growth remained substantial given the economic challenges faced, with agriculture, forestry, and fishery increasing by 4%, industry and construction by 5.53%, and services by 6.99% As of mid-2012, GDP growth was recorded at 4% compared to the same period in the previous year.
By the end of 2010, GDP growth had rebounded following a significant decline in 2008 caused by the global crisis; however, since then, there has been a noticeable downward trend.
Figure 2.2: Vietnam inflation rate from 2009 to 2012
Inflation is defined as the overall increase in prices relative to a standard purchasing power level It is assessed by comparing the costs of a specific set of goods at two different times, highlighting price increases that do not correspond to improvements in quality Various measures of inflation exist based on distinct contexts, with the Consumer Price Index (CPI) being the most recognized metric for tracking consumer prices.
In 2009, the average Consumer Price Index (CPI) in Vietnam rose by 6.88% compared to 2008, marking the lowest growth rate in six years This decline follows higher rates of 7.71% in 2004, 8.29% in 2005, 7.48% in 2006, 8.3% in 2007, and a significant 22.97% in 2008 This reduction in CPI growth is a positive indication of the country's efforts to control inflation, which had surged dramatically the previous year.
From 2010 to the third quarter of 2011, inflation rates saw a significant increase, with the Consumer Price Index (CPI) rising by 11.75% in December 2010 compared to December 2009, and an average CPI increase of 9.19% for the year By September 2011, inflation surged to a double-digit rate of 22.42%, before gradually declining to 18.13% by year-end, resulting in an average CPI rise of 18.58% from 2010 Fortunately, since January 2012, this downward trend has continued, with inflation reported at 14.57% in the first four months of the year.
Figure 2.3: Vietnam trade balance from 2009 to April, 2012
Vietnam has consistently faced a trade deficit, as illustrated by the data from the General Statistics Office (GSO) In 2009, the export turnover was approximately USD 56.6 billion, reflecting a 9.7% decline from 2008, while imports totaled around USD 68.8 billion, down 14.7% Despite a greater decrease in imports, the trade deficit for 2009 was around USD 12.2 billion, a 32.1% reduction from the previous year The trend continued in 2010, with export and import turnovers reaching USD 71.6 billion and USD 84 billion, respectively, resulting in a trade deficit of USD 12.4 billion, down 5.2% from 2009 In 2011, exports totaled USD 96.3 billion against imports of USD 105.8 billion, leading to an improved deficit of USD 9.5 billion, marking the lowest trade deficit rate relative to export turnovers since 2002.
In four beginning months of 2012, the export turnover reached about USD 33.4 billion and the amount of import turnovers was approximately USD 33.6 billion, the deficit was calculated as USD 174 million
Table 2.1: Vietnam export and import turnover recently
2009 2010 2011 four beginning months of 2012 Export turnover
(source: collecting data from GSO) d Total investment capital
Table 2.2: The structure of Vietnam total social investment capital in period 2009-
704.2 (100%) 830.3 (100%) 877.9 (100%) state sector 245.0 (34.8%) 316.3 (38.1%) 341.6 (38.9%) non state sector 278.0 (39.5%) 299.5 (36.1%) 309.4 (35.2%)
(source: collecting data from GSO)
In 2009, Vietnam's total realized investment capital reached approximately 704.2 trillion VND, marking a 15.3% increase from 2008 and accounting for 42.8% of GDP The state sector contributed significantly, rising by 40.5%, while the non-state sector increased by 13.9%, and the FDI sector saw a decline of 5.8% State budget funding represented 21.8% of total investment, exceeding the yearly estimate at 106.8% In 2010, investment capital grew to around 830.3 trillion VND, up 17.1% from the previous year, with the state sector contributing 316.3 trillion VND (up 10%), the non-state sector 299.5 trillion VND (up 24.7%), and the FDI sector 214.5 trillion VND (up 18.4%) By 2011, total investment reached 877.9 trillion VND, a 5.7% increase from 2010, equating to 34.6% of GDP The state sector's investment rose to 341.6 trillion VND (up 8%), while the non-state sector contributed 309.4 trillion VND (up 3.3%), and the FDI sector 226.9 trillion VND (up 5.8%) The state budget's realized investment for 2011 was estimated at 178 trillion VND, representing 101.8% of the yearly plan.
Difficulties of Vietnam commercial banks
In short, Vietnamese economy in recent years has pointed out these following significant characteristics:
Vietnam's GDP has consistently increased from 2009 to the present; however, the growth rate has not followed a steady trend There was an upward trajectory from 2009 to 2010, but since then, the growth rate has declined This suggests that the Vietnamese economy is currently experiencing a plateau in its development.
In recent years, although GDP growth rates have remained consistently below double digits, inflation has surged significantly, increasing by over 10% in the last three years This rising inflation poses challenges for both individuals, who face higher food prices, and businesses, which struggle with escalating input costs.
Despite improvements in both import and export values, the trade balance of Vietnam remains in a persistent deficit, even as the gap between import and export turnovers continues to narrow.
The government sector significantly influences total investment capital in Vietnam, with state budget financing consistently exceeding planned amounts, resulting in a persistent budget deficit In contrast, foreign direct investment (FDI) levels have remained stable annually, indicating that Vietnam's economic environment continues to attract foreign investors reliably.
2.2 Difficulties of Vietnamese commercial banks
On January 26, 2011, the State Bank of Vietnam (SBV) issued Decree No 10/2011/ND-CP, mandating that commercial banks increase their charter capital from 1,000 billion VND to 3,000 billion VND This requirement also necessitates a corresponding increase in total assets to ensure stable operations and prevent losses Small banks with low reputations face challenges in mobilizing capital, and some institutions, in addition to easily granting loans, have opted to invest in high-risk areas such as real estate, the securities market, and foreign currencies, which are particularly vulnerable to economic uncertainty and VND depreciation.
According to the Vietnam Banking Association, short-term deposits account for approximately 90% of total bank deposits in Vietnam, posing significant challenges for commercial banks in managing their liabilities This heavy reliance on short-term deposits complicates the balance between deposit maturities and loan terms, as banks primarily mobilize short-term funds while providing long-term loans Consequently, this dominance of short-term deposits increases liquidity risks for banks.
The State Bank of Vietnam's decision to lower the ceiling deposit interest rate has led to a significant decline in the growth rate of bank inflows from citizens and organizations, particularly impacting smaller banks that already struggle with public trust With the new cap set at just 11 percent per year, many depositors are withdrawing their funds or shifting their money to larger banks, exacerbating the challenges faced by small banks As a result, these institutions are experiencing increased difficulties and higher costs in mobilizing capital compared to their larger counterparts.
2.2.4 High percentage of bad debts (high NPL)
The banking sector has recently experienced an increase in bad-debt rates, primarily due to the diverse options available to consumers Smaller banks, under pressure to raise capital, are extending large loans with greater ease in hopes of achieving higher profits.
Many banks are issuing sub-standard loans due to the weak financial status of enterprises, particularly those classified under type 1 loan provision The economic crisis has led to inefficiencies, with rising input prices and decreasing consumption resulting in low profits that often fail to cover bank interest payments Consequently, overdue debts and bad debts are becoming increasingly prevalent, with the bad debt rate in the banking system reaching 3.42% as of February 29, 2012, significantly higher than the global average of approximately 0.4%.
Figure 2.4: Bad debt rates of some large Vietnamese commercial banks in 2010-2011
(source: collecting from websites of several commercial banks)
The situation of bank M&A in Vietnam
2.3.1 The status of M&A activity in Vietnam
Figure 2.5: Vietnam M&A activity in period 1999-2011
(source: www.imaa-institue.org)
Obviously, since 2009, the M&A activity in Vietnam has increased significantly in deals decreased by 39.2% and the amount of deals also fell by 10.4% compared with
In 2008, Vietnam experienced a notable trend in its transaction landscape, with deal values slightly decreasing to 1.138 billion USD while the total number of transactions surged to 295, marking a 71 percent increase This upward trajectory in deal volumes and values persisted into 2009 and accelerated further in 2010, culminating in nearly 1.75 billion USD in reported transactions.
In 2011, while the number of M&A transactions remained stable at 345, the total value surged to nearly 4 billion USD, approximately three times higher than in 2010 A recent Thomson Reuters report highlights that M&A activity in Vietnam reached USD 1.5 billion in the first quarter of 2012, positioning the country as the eighth most active in M&A deals within the Asia Pacific region, excluding Japan.
In 2009, the industrial sector represented nearly 25% of all announced M&A deals, while the energy and power sector's share of deal volumes rose significantly from 7% in 2008 to 17% Conversely, the financial sector saw a decline, dropping from 22% to 12% By 2010, the industrial sector maintained the highest number of deals at 23% of total transactions, but consumer staples led in value, accounting for 25% of the overall total However, in 2011, a shift occurred in the M&A landscape, with the financial services sector emerging as the dominant player in deal value, followed closely by consumer staples.
Table 2.3: Vietnam M&A_ breakdown by sectors in 2009-2011
(source: collecting data from pwc, imaa and stoxplus)
In 2009, domestic mergers and acquisitions (M&A) represented 67.8% of total deal volume, while outbound and inbound deals accounted for 1.7% and 30.5%, respectively By 2011, domestic M&A transactions increased to 77% of the total, although inbound M&A dominated by deal value at 66%.
(source: collecting data from Thomson Reuters, PricewaterhouseCoopers research and imma’ M&A report in Vietnam)
2.3.2 The situation of bank M&A in Vietnam a The situation of bank M&A during 2009- April 2012
Since Vietnam joined the WTO in 2006, there has been a significant increase in mergers and acquisitions (M&A) within the banking sector, highlighting the crucial roles played by both foreign investors and domestic financial institutions.
In 2009, despite the adverse effects of the global financial crisis, bank mergers and acquisitions (M&A) maintained a significant share of total economic transactions, with three notable domestic M&A deals and two inbound M&A activities This year also marked the first outbound bank M&A by BIDV Additionally, many strong banks, particularly Asia Commercial Bank (ACB), confirmed their strategic development plans by acquiring shares in other banks By the end of the year, ACB had secured 11% of Dai A Bank and 11% of Kien Long Bank, while its total stake in Eximbank reached 22%, with expectations to increase this to 30-35% in the future.
In 2010, Vietnam's economy experienced significant achievements, making bank mergers and acquisitions (M&A) an attractive activity Despite a slight decrease in the percentage of bank M&A within total M&A transactions, the volume and value of these deals remained high Unlike the previous year, which saw an outbound bank M&A deal, 2010 only recorded three notable outbound announcements without any completed transactions in the banking sector.
Between 2011 and April 2012, the banking sector experienced a significant wave of mergers and acquisitions (M&A), driven by government incentives for economic restructuring and banks’ strategic adaptations to the evolving market conditions Notably, there were no bank mergers recorded in 2009-2010, highlighting the recent surge in M&A activity during this period Several prominent bank merger cases have emerged, drawing considerable attention within the industry.
In recent developments, foreign banks have strategically partnered with domestic institutions, highlighted by BNP Paribas increasing its ownership in OCB to 15% and Maybank raising its stake in ABBank to 20%.
In early 2009, OceanBank appointed PVN as its strategic partner, acquiring a 20% shareholding and increasing its charter capital to 2,000 billion VND Additionally, Maritime Bank and its major shareholders secured a 45% stake in MXBank, with Maritime Bank owning 4.99% of MXBank's shares Furthermore, in the third quarter, an M&A deal between DaiA Bank and Tin Nghia Financial Group resulted in Tin Nghia becoming the largest shareholder of DaiA Bank, raising its ownership from 11% to 49%.
+ An interesting deal related to the investment in banking sector to a foreign country was conducted by BIDV In July, 2009, BIDV said that it had completed
The Bank for Investment and Development of Cambodia (BIDC) was established with a 100% charter capital of USD 100 million, fully owned by Vietnam, with contributions from BIDV and a Southern company Following the acquisition of Prosperity Investment Bank (PIB), a private bank in Cambodia, the bank underwent a name change to BIDC By 2012, BIDC aimed to achieve total assets of USD 303 million, mobilized capital of USD 216 million, and total loan values reflecting its growth in the Cambodian banking sector.
The Commonwealth Bank of Australia has acquired a 25% stake in Vietnam International Commercial Joint Stock Bank (VIB), marking a significant investment in one of Vietnam's largest private banks Although the financial details of the transaction were not disclosed, this acquisition is expected to be the largest deal of its kind since VIB's emergence as a major player in the Vietnamese banking sector.
+ Fullerton Financial Holdings Pte Ltd of Singapore acquired a 15% stake in Mekong Development Joint Stock Commercial Bank, a Long Xuyen – based bank for an undisclosed amount
In 2011, Vietinbank sold a 10 percent stake to the International Finance Corporation for $182 million, while also planning to sell a 15 percent stake to the Bank of Nova Scotia, although this deal remains unfinalized.
+ In January, ABBank sold convertible bonds with value of 600 billion VND to acquirers namely IFC (United State) and Maybank (Malaysia)
On September 30, 2011, Vietcombank finalized an agreement with Mizuho Corporate Bank Ltd of Japan to sell 15% of its total shares, following various approvals from the State Bank of Vietnam The transaction generated proceeds of USD 576.5 million (approximately 11,800 billion VND), enhancing the bank's Capital Adequacy Ratio (CAR) to 14% As a result, Vietcombank is recognized as the most financially transparent bank in Vietnam, with a Non-Performing Loan (NPL) ratio of 2.8% reported in the first quarter of 2012, significantly lower than the sector's average of 3.7%.
In July 2011, the merger of Vietnam Post Corporation and LVB resulted in the formation of Lien Viet Post Bank, highlighting the importance of understanding each party's strengths and weaknesses for successful collaboration LVB aimed to establish itself as a retail bank but faced challenges due to its limited network By acquiring the indebted Vietnam Postal Saving Company (VPSC), LVB gained access to a vast nationwide postal saving outlet network, while VnPost significantly increased its margin figures, alleviating bankruptcy concerns for VPSC This merger raised the bank's charter capital from 5,650 billion VND to 6,010 billion VND, allowing Lien Viet Post Bank to leverage approximately 10,000 transaction points from VPSC, although it also assumed responsibility for VND 145 billion in losses from VPSC.
General assessment
In general, the bank M&A in Vietnam has several major characteristics as follow:
The year-on-year increase in both the total values and volumes of bank mergers and acquisitions (M&A) in Vietnam signals a positive trend for the banking system, indicating that the sector remains attractive to investors This influx of capital from M&A deals enables commercial banks to consolidate resources, enhancing their operational efficiency and profitability Furthermore, this trend supports the government's financial market restructuring policies, demonstrating initial successes As smaller, weaker banks are merged or acquired by larger institutions, the State Bank of Vietnam can more effectively supervise the banking sector, leading to a gradual reduction in inefficient banks This consolidation fosters a market dominated by reputable and competitive banks, contributing to a healthier economy.
Bank mergers and acquisitions (M&A) in Vietnam are currently characterized by relatively simple methods, primarily involving the sale of stakes to partners To date, there has been only one merger, one consolidation deal, and one potential friendly merger case.
Despite the relatively low volume of bank mergers and acquisitions (M&A), the majority of these transactions are medium to large scale, with most deals valued at a minimum of USD 20 million.
Between 2009 and 2012, the majority of bank M&A transactions in Vietnam were inbound, indicating that foreign enterprises possess greater experience and managerial skills in M&A activities compared to Vietnamese banks Additionally, foreign investors, with their robust financial capabilities, are able to execute high-value deals that Vietnamese banks often cannot Notably, BIDV's outbound transaction in 2009 marked a significant milestone in Vietnam's bank M&A landscape Furthermore, an increase in small and medium-sized domestic deals, valued at less than USD 5 million, demonstrates a growing awareness and participation of Vietnamese commercial banks in M&A activities.
Vietnam continues to impose significant regulatory restrictions on inbound investment deals, particularly in the banking sector Foreign investors, along with their related parties, are typically limited to owning no more than 30% of a bank's charter capital Additionally, the M&A procedures for banks can be complex, which often deters foreign partners and diminishes both the volume and value of their investments.
Outlook for bank M&A in Vietnam and recommendation
Outlook for bank M&A in Vietnam
3.1.1 Economic plan in 2012 of the country
In 2011, the national economy demonstrated resilience by achieving notable progress in controlling inflation, stabilizing the macro-economy, and ensuring social welfare However, these accomplishments were overshadowed by persistent challenges, including declining business efficiency due to rising input costs and difficulties in securing loans Despite a decrease in inflation and loan interest rates, these figures remained high, contributing to ongoing inflationary pressures and macroeconomic volatility that continued to raise concerns.
The 2012 Economic Development Plan, approved by the National Assembly, aims to prioritize inflation control, stabilize the macro-economy, and maintain a reasonable growth rate It emphasizes the need to innovate the growth model, restructure the national economy, and enhance the quality, performance, and competitiveness of the economy.
The key targets for 2012 include achieving a GDP growth of approximately 6% to 6.5%, a total export turnover growth of 13%, and maintaining an import surplus of about 11% to 12% of total export turnover to help reduce the trade deficit below 10% Additionally, the state budget overspending should remain under 4.8% of GDP, with total capital investment for social development constituting 33.5% of GDP, while the consumer price index is aimed to expand by less than 10%.
To achieve key economic targets, the government should implement a cautious yet flexible monetary policy, maintain a strict and effective fiscal policy, enhance market and price inspections, and optimize the domestic market Additionally, it is crucial to promote exports, manage imports, and reduce the trade deficit Focusing on the core tasks of economic restructuring and integrating this with a revamped growth model is also essential for sustainable development.
3.1.2 The outlook for bank M&A in Vietnam
Researchers at the Vietnam M&A Forum projected that Vietnam's mergers and acquisitions (M&A) would rise by over 30% in 2012, driven significantly by foreign investor participation The banking sector remains one of the most favored areas for these M&A activities, highlighting its importance in the growth of transactions within the country.
Experts, including authorities, researchers, and investors, anticipate a significant increase in merger and acquisition (M&A) activity within Vietnam's banking sector over the next five years, making these forecasts highly plausible.
From 2011 to 2015, the State Bank of Vietnam (SBV) aimed to enhance the credit institution system by focusing on growth in size, product offerings, service diversity, operational networks, financial and operational capacities, and risk management The SBV also prioritized the comprehensive restructuring of commercial banks, particularly state-owned ones, while promoting mergers and acquisitions (M&A) among joint stock banks with favorable initial conditions Additionally, the issuance of Circular No 04/2010/TT-NHNN signaled the SBV's intent to relax legal barriers, thereby encouraging bank M&A activities.
Bank mergers and acquisitions (M&A) have emerged as a viable solution for the growth of commercial banks in Vietnam, driven by the pressing needs of the banking system As of December 31, 2011, the Vietnamese banking landscape highlighted the necessity for strategic consolidation to enhance efficiency and competitiveness.
Vietnam's banking sector comprises 05 state-owned credit institutions, 35 joint-stock commercial banks, 50 branches of foreign banks, 04 joint-venture banks, 05 wholly foreign-owned banks, and 51 representative offices of foreign banks, including several small and ineffective institutions Merging or consolidating these banks could potentially reduce the number of weak banks Despite the State Bank of Vietnam (SBV) mandating commercial banks to increase their charter capital, domestic banks remain significantly smaller than their global counterparts Engaging in mergers and acquisitions (M&A) can help Vietnamese commercial banks expand their scope and scale, enhancing their competitiveness in the market.
Foreign investors are increasingly interested in Vietnam's bank restructuring project, as highlighted by an Ernst & Young expert The country's large population, robust GDP growth, and rising per capita income make it an attractive investment destination amid global economic challenges Additionally, the fragmented banking industry, lacking a dominant player, presents opportunities for market leadership Investors recognize their competitive advantages in technology and products, believing that mergers and acquisitions in the banking sector can revitalize Vietnam's financial system while yielding significant profits.
Recommendation
3.2.1 For SBV and other authorities a Completing the legal system related to M&A activity and in accordance with the international rules
The legal framework is crucial in bank M&A transactions, establishing essential rules for each deal In Vietnam, M&A activities are regulated by various laws, including the Law on Enterprises, Law on Investment, and Law on Competition, along with numerous decrees and circulars However, the absence of a unified legal source on M&A creates challenges for investors, particularly foreign and new investors, who face complicated procedures and a lack of understanding of the regulations.
The Law on Credit Institutions serves as the primary legal framework governing the operations of credit institutions in the banking sector While Circular No 04/2010/TT-NHNN provides general guidelines for bank mergers and acquisitions (M&A), it lacks clarity on key issues, such as the obligations of parties involved and the responsibilities of banks towards their employees and shareholders Therefore, it is recommended that lawmakers incorporate specific regulations regarding bank M&A into the Law on Credit Institutions Additionally, there is a need to enhance the role of the State Bank of Vietnam (SBV) in guiding and promoting bank M&A activities.
The State Bank of Vietnam (SBV) aims to mitigate the risk of excessive foreign ownership in domestic banks by regulating the maximum shareholding limits for foreign investors To effectively manage this, the SBV should adjust these ratios periodically, taking into account global market conditions, national economic status, and specific objectives for different timeframes.
The State Bank of Vietnam (SBV) should implement favorable policies to encourage mergers and acquisitions (M&A) among domestic banks, enhancing their competitiveness Additionally, SBV should establish stricter regulations for voluntary mergers and gradually raise the minimum required charter capital as the economy and banking system improve It is also essential for SBV to identify weak banks and mandate their consolidation by enforcing robust regulations on capital adequacy ratio (CAR), return on assets (ROA), return on equity (ROE), and bank rankings Furthermore, SBV must actively monitor the strategic plans for the sale of shares in Vietnamese commercial banks, particularly smaller institutions, to ensure proper and effective implementation Finally, enhancing communication on bank M&A through workshops and forums will facilitate better understanding and engagement in the process.
The State Bank of Vietnam (SBV) should take a proactive role in promoting knowledge about bank mergers, acquisitions, and consolidations Regular seminars and workshops aimed at commercial bank directors and managers would facilitate the sharing of valuable insights and experiences from successful M&A transactions both globally and within Vietnam.
3.2.2 For commercial banks a It is time Vietnam commercial banks changed their thinking about and awareness of the bank M&A activity
A recent survey by economic experts revealed that only 46.7% of bank directors confirmed their institutions were developing strategic plans for mergers and acquisitions (M&A) Notably, the affirmative responses came exclusively from banks listed on the stock exchange, suggesting a lack of interest in M&A activities among many commercial banks.
Vietnamese commercial banks must shift their perspective on mergers and acquisitions (M&A), recognizing it as a global trend that they should embrace rather than fear M&A activities do not inherently indicate weakness or unprofitability; instead, well-planned and executed deals can create significant synergies for both parties involved To effectively navigate this landscape, banks should establish clear objectives, strategies, and processes tailored for M&A activities, ensuring they are well-prepared to capitalize on potential opportunities.
The banks participating in M&A activity should research and consider carefully about the four following trademark- strategies because each type will utilize the banks’ outstanding strengths:
The "Black Hole" strategy refers to a merger approach where the acquiring bank retains its trademark while the other banks involved gradually fade away, akin to a black hole This strategy appears particularly feasible for smaller banks looking to consolidate their presence in the market.
The "harvesting" strategy involves gradually phasing out all assets of a trademark until only an empty shell remains This approach is particularly suitable for banks aiming to evolve into financial-banking conglomerates.
The "Combining" strategy involves merging two trademarks to highlight their distinct and meaningful differences in the minds of consumers This approach is particularly relevant in M&A transactions between banks and non-bank credit institutions, allowing for a strategic alignment that enhances brand perception and customer understanding.
The "New Starting" strategy involves creating a completely new trademark when two small banks merge, as neither bank's existing brand holds significant value This approach is particularly effective for small, less impactful banks, allowing them to develop a valuable new identity that can enhance their market presence and attract customers.
To select the most suitable strategy, banks must conduct qualitative research involving key stakeholders, including major shareholders, current customers, bank managers, and potential partners It is essential for banks to consider all relevant issues arising before, during, and after a deal Additionally, commercial banks should collaborate closely with legal and consultancy experts to ensure a comprehensive approach.
Consultancy experts play a crucial role in assisting banks with mergers and acquisitions (M&A) by providing essential support and advice to address related challenges Consulting organizations guide banks in selecting the appropriate M&A structure and evaluating the legal and financial aspects of the transaction Typically, financial assessments are conducted by audit firms or independent auditors With the expertise of consulting organizations, banks can effectively negotiate the terms and conditions of M&A transactions Additionally, it is vital for banks to choose the right timing for these transactions and ensure transparency in all information shared.
Bank mergers and acquisitions (M&A) are increasingly becoming a global trend, and Vietnamese commercial banks should embrace this development with a proactive attitude It's essential for these banks to view merging, consolidating, and acquiring as inevitable and objective processes Consequently, M&A activities must be carefully researched and aligned with the operational and developmental strategies of each bank to ensure successful integration and growth.
Currently, only nine banks (CTG, VCB, ACB, STB, EIB, SHB, HBB, NVB, MBB) are listed on the Stock Exchange, while over thirty other banks primarily trade their shares OTC These unlisted banks often neglect their obligation for periodic information disclosure, focusing only on basic data such as revenues, profits, deposits, and debts, which limits transparency Consequently, potential partners, including other banks and credit institutions, face challenges in identifying suitable M&A opportunities due to the lack of comprehensive business operation updates.