Vietnam Ready to Force Bank Mergers as Bad Loans Hurt Growth

Vietnam Willing to Force Bank Mergers as Bad Loans Hurt
The nation has stepped up efforts to overhaul a banking system hobbled by bad debt after rapid credit growth in recent years fueled a trade deficit and Asia’s fastest inflation. Photographer: Justin Mott/Bloomberg

Vietnam’s central bank said it’s ready to force mergers among weak lenders and keep monetary policy “tight” yet flexible as it grapples with a credit crunch that has forced thousands of companies out of business.

“The central bank can take measures to force some merger and acquisition activities if and when needed, in line with the Law on the State Bank of Vietnam,” Deputy Governor Nguyen Dong Tien said yesterday in a written reply to questions from Bloomberg News.

The nation has stepped up efforts to overhaul a banking system hobbled by bad debt after rapid credit growth in recent years fueled a trade deficit and Asia’s fastest inflation, prompting depositors to favor short-term savings and crimping funding for long-term loans. The central bank said this month that some banks won’t be allowed to expand lending this year, as Prime Minister Nguyen Tan Dung ordered the authority to “solve” a shortage of funds within the first quarter.

The shares of five out of seven publicly traded banks in Vietnam rose today. Vietnam Export-Import Commercial Joint Stock Bank, or Eximbank, gained 4.7 percent, Saigon Thuong Tin Commercial Joint Stock Bank, or Sacombank, climbed 4.7 percent and Asia Commercial Bank, or ACB, advanced 2.2 percent. The Ho Chi Minh City Stock Exchange’s VN Index gained 0.3 percent today.

'More Drastic'

“The central bank should be more determined, more drastic in treating weak banks,” said Cao Sy Kiem, vice-chairman of the National Financial and Monetary Policy Advisory Council, which advises the prime minister. “It will be risky for the stability of the entire economy if the bank restructuring process is not carried out properly.”

Tien said the central bank will allow mergers and acquisitions to be done “in a voluntary manner” as the State Bank focuses this year on improving funding in the banking system, including “implementing” combinations among weak lenders.

The merger late last year of three Vietnamese banks into one under the supervision of a state-owned bank “signals a template for a process of bank consolidation, loss recognition and capital writedown,” UBS AG said this month. The State Bank said in December three unlisted and privately owned banks, First Commercial Joint-Stock Bank, Tin Nghia Commercial Joint-Stock Bank and Saigon Commercial Joint-Stock Bank, would voluntarily merge to bolster their liquidity and cut costs.

'Can't Survive'

“Banks that have been or will be told they can’t increase their loans this year de facto will have to do something, because a bank that can’t increase its loans can’t survive,” said Dominic Scriven, chief executive of Ho Chi Minh City-based fund manager Dragon Capital.

Vietnam has 50 banks, including five state-owned banks and five wholly foreign-owned banks, according to the central bank’s website. The five largest listed banks had total assets of almost $63 billion as of Sept. 30, according to the banks’ financial statements to the stock exchanges.

Bad loans in Vietnam may exceed official estimates by as much as three times, and bad debt may “rise sharply,” according to U.K.-based Capital Economics. The Vietnam Association of Small and Medium-Sized Enterprises estimates about 150,000 companies failed or shut down operations due to financial difficulties last year, or about a third of the country’s companies.

Credit Crunch

Kiem said banks met less than a third of Vietnamese corporate funding demand last year.

“There are quality companies that can’t get access to credit at a price they think is fair, but that’s a function of the monetary policy situation rather than bank capacity to lend,” said Louis Taylor, the Vietnam chief executive for Standard Chartered Plc. “The bigger banks have balance sheet capacity, but the amount of credit that they can give out is being limited by the central bank as part of the effort to curb inflation.”

The State Bank raised some borrowing costs last year, juggling the need to contain inflation while trying to ensure sufficient credit flows to businesses to support economic growth.

Vietnam’s economy expanded 5.89 percent last year, down from 6.78 percent in 2010. The VN Index slumped 27 percent in 2011 as soaring inflation hurt investor confidence. The Southeast Asian nation’s credit rating was downgraded by Fitch Ratings, Moody’s Investors Service and Standard & Poor’s in 2010, and the country devalued its currency 7 percent last year. The stock index is up 21 percent this year.

Flexible Policy

“The central bank in 2012 will pursue a tight, cautious, flexible monetary policy in line with the government’s fiscal policy to stabilize the money market and ensure liquidity at banks,” Tien said.

The central bank cut its repurchase rate to 14 percent from 15 percent in July last year after a series of increases to tackle inflation. It raised the refinancing rate to 15 percent by the end of 2011 from 9 percent at the end of 2010. Last month, Vietnam’s central bank signaled that it may cut rates after the first quarter, even after the IMF and the World Bank said the country must guard against loosening monetary policy too soon.

— With assistance by Jason Folkmanis, and Nguyen Dieu Tu Uyen

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