Vietnam relaxes bank foreign ownership rules

Good news for domestic lenders.

According to Moody's, last Monday, the law firm of Allens in a note to clients shared its interpretation of a government decree on foreign ownership of banks published on 3 January.

Although the headline change introduced by Decree 01/2014/ND-CP focused on an increase in the foreign ownership limit in banks to 30% from 20% as of 20 February, Allens’ read of the decree’s likely application is that Vietnam has effectively abolished the upper limit on foreign investments in domestic banks, subject to special conditions.

Here's more from Moody's:

The relaxation of ownership rules is credit positive for Vietnamese banks because it gives foreign shareholders the flexibility to increase their stake. This, in turn, would attract new foreign capital and improve banks’ loss-absorption capacity, which is currently weak owing to the large overhang of problem loans. However, we are skeptical about the extent to which an increase to 30% from 20% will attract broad-based interest given that investors would not achieve control over a bank. This is what makes Allens’ interpretation of the possible majority participation in the future – should it materialize – an even more positive development because such greater flexibility in the ownership regime would likely attract a greater number of investors and capital for the benefiting banks.

If majority foreign ownership were allowed, we estimate that the “special case” status would be more likely for the nine undisclosed banks that have been earmarked for restructuring by the Vietnamese government in a report released in 2012. We also think the special conditions could extend to larger banks in which foreign shareholders already control 15%-20%, because problem loans are plaguing larger banks as well. Foreign investors have almost fully utilized the previous 20% cap, so the higher limit should stimulate additional foreign direct investments into the sector.

Foreign banking groups that already have stakes in Vietnamese banks (see exhibit attached) are more likely to be the first investors to own majority interests in local lenders, followed by investors in low price-to-earnings stocks. Still, new equity investments into Vietnamese banks will be moderate because domestic banks lost some of their appeal after the 2008-10 credit boom. Moreover, banks globally are adjusting their capital structures to Basel III rules, so larger investments in non-consolidated subsidiaries will pressure Tier 1 capital ratios at the parent level.1.

Asian banking groups are better positioned for new acquisitions in Vietnam because of their higher capital ratios and regional expansion strategies. Such banks include Bank of Tokyo-Mitsubishi UFJ, Ltd., Muziho Bank, Sumitomo Mitsui Financial Group, United Overseas Bank Limited and Malayan Banking Berhad. In contrast, European banks such as Societe Generale, BNP Paribas and HSBC Holdings are less likely to expand because of deleveraging strategies.

The foreign ownership cap is being raised as the Vietnamese government steps up its efforts to improve the credit profiles of domestic banks through consolidation, bank sales to new shareholders and swaps of problem loans against government bonds. These measures so far have failed to improve bank asset quality, and we expect the government to implement additional support measures, such as a complete removal of the foreign ownership cap, tax holidays or direct bank recapitalizations from the government.