VIETINBANK STAKE SALE `CREDIT POSITIVE' - MOODY'S STATEMENT
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VietinBank Sells 20% Stake to Tokyo-Mitsubishi Bank, a Credit Positive Falemri Rumondang, Associate Analyst, Moody’s Investors Service Singapore Pte. Ltd.
From "Moody's Credit Outlook", January 10, 2013
On 28 December, Vietnam’s regulators approved the sale of about a 20% stake in Vietnam Bank for Industry and Trade (VietinBank, B3 stable; E/caa1 stable)1 to Bank of Tokyo-Mitsubishi UFJ. Ltd. (BTMU, Aa3 stable; C/a3 stable), which had announced the transaction the day before.
As part of the deal, VietinBank, the country’s second-largest state-owned bank by asset size, will issue new shares to BTMU for VND15.5 trillion (about $743 million). The transaction is credit positive for VietinBank because it will provide a significant and timely boost to its loss-absorbing buffer, including its Tier 1 capital.
We estimate that VietinBank’s loan-loss reserve coverage ratio was low at 43% in mid-2012, after taking into account both reported non-performing loans (NPLs) and special mention loans. The $743 million capital injection gives VietinBank more leeway to address this under-reserving without eroding its capital position, especially in view of Vietnam’s challenging operating environment. We estimate that VietinBank’s Tier 1 capital ratio will increase to about 17% from 11.15% at the end of June 2012 as a result of the capital injection.
The sharp slowdown in loan growth in 2012 weakened VietinBank’s capacity to increase its capital through earnings retention. Its loan growth was a mere 2.6% for the first nine months of 2012, down from 30% over the previous five years. Consequently, net interest income dropped 6.7% between January and September.
Notwithstanding the immediate relief provided by this capital injection, we expect VietinBank -- like other Vietnamese banks2 -- to remain pressured by poor profitability, asset quality and transparency.
VietinBank will challenge BTMU to bring about positive fundamental changes in both its financial performance and governance practices, issues that have plagued Vietnam’s banks. Moreover, BTMU’s 20% stake, after the completion of the acquisition, will remain far below the 64% held by the government of Vietnam (B2 stable), which will continue to exert considerable influence3.
Given that VietinBank will remain a policy-driven bank, with its clientele consisting mainly of state-owned enterprises, the challenges for BTMU will be daunting.
More generally, foreign strategic partners in Vietnam’s banks have had very little success in making sweeping changes. For example, Asia Commercial Bank (B3 stable; E/caa1 stable) has received technical assistance from its foreign shareholder, Standard Chartered PLC (A2 stable)4 since 2005, but corporate governance issues resulted in the arrest of its senior executives in 2012 5.
1. The ratings shown are the banks’ deposit rating, its standalone bank financial strength rating/baseline credit assessment and the corresponding rating outlooks. 2. See our 8 October 2012 analysis of the challenges facing the Vietnamese banks in our report Key Drivers of Vietnamese Bank Rating Actions. 3. The Vietnamese government indirectly owns VietinBank through the stake held by the State Bank of Vietnam, the country’s central bank. BTMU’s acquisition reduces the government’s stake to about 64% from 80%, and the International Finance Corporation’s (Aaa stable) stake to about 8% from 10%. 4. Standard Chartered’s 15% stake in Asia Commercial Bank is held via its Hong Kong- and UK-based subsidiaries. 5. See Moody’s Comments on ACB and the Arrest of its Co-Founder, 23 August 2012.
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