Melbourne-based Australia & New Zealand Banking Group in late March became the first foreign bank to buy into a Vietnamese commercial bank. ANZ (ANZ ) spent $27 million for a 10% stake in Sacombank, Vietnam's largest commercial bank, outbidding rivals HSBC Group (HSBCX ) and Citigroup (C ). ANZ Group Managing Director for Asia Pacific Elmer Funke Kupper recently spoke to BusinessWeek Asia Correspondent Frederik Balfour about Vietnam's fledgling banking industry and why this investment should pay off. Here are edited excerpts of their conversation. (For more on Vietnam's economic resurgence, see BW Online, 4/5/05, "Vietnam: Vibrancy Revived")
Q: What motivated you to take the stake? A:
Q: What motivated you to take the stake?
A:We have quite a longstanding relationship with Sacombank, as we have for some time been running their ATMs in the local market. It was natural for us when Sacombank looked for a strategic partner to put our hand up and say, how about us?
Q: You certainly weren't the only one interested. A:
Q: You certainly weren't the only one interested.
A:No, pretty much everybody was interested in partnering in Vietnam, which isn't surprising given the attraction of Vietnam in the long term.
Q: But you paid $27 million for a 10% stake, which is equivalent to a valuation of 28 times 2004 earnings. Isn't that awfully high for a bank, even in an emerging market? A:
Q: But you paid $27 million for a 10% stake, which is equivalent to a valuation of 28 times 2004 earnings. Isn't that awfully high for a bank, even in an emerging market?
A:Yes. But there are relatively few good-quality banks to partner with today in Vietnam. And markets like Vietnam are still significantly underbanked, so there is much growth potential. And the absolute size of the investment is modest. Our shareholders don't mind paying high multiples for relatively small investments that are true options for growth.
Q: There are still lots of restrictions on what foreign banks can do in Vietnam, right? A:
Q: There are still lots of restrictions on what foreign banks can do in Vietnam, right?
A:Yes. There are three worth noting. One: Each new branch and off-site ATM of a foreign bank requires an allocation of capital of $15 million [while local banks pay only $200,000]. This makes expansion beyond a few branches and ATMs uneconomic.
Two: Non-U.S. and non-EU banks can only take local-currency deposits up to 50% of their in-country capital [the capital of the banks actually held inside Vietnam, i.e. their registered capital, which in the case of ANZ's two branches is only $50 million]. There are restrictions on American and EU banks, but they're at multiples of other foreign banks [Note: The U.S. and EU have reached a special deal with the Vietnamese government through bilateral trade treaties that allows them to lend a higher percentage of their capital, but they're still subject to restrictions that Vietnamese banks aren't.]
Three: Foreign banks cannot take hard-currency deposits from Vietnamese individuals.
Q: Do you think the ceiling on foreign ownership of local banks [currently set at 30% in total, and 10% for a single investor] will be lifted? A:
Q: Do you think the ceiling on foreign ownership of local banks [currently set at 30% in total, and 10% for a single investor] will be lifted?
A:Maybe in three to five years. This is consistent with the gradual opening of the market. Then we would be interested in increasing our stake in Sacombank.
Q: Isn't transparency a big problem? How did you value Sacombank? A:
Q: Isn't transparency a big problem? How did you value Sacombank?
A:Well, the bank is small and organized in a relatively simple way, so it didn't take that long for us to get a good understanding of its credit portfolio. We don't think it's particularly risky, and we have done due diligence. If it were a larger, state-owned bank, then it would be another story.
Q: What overlap will there be between ANZ's Vietnamese business and Sacombank's? A:
Q: What overlap will there be between ANZ's Vietnamese business and Sacombank's?
A:We see these as separate brands. We're happy to have two brands in one market, as we've done in New Zealand and Indonesia. In Vietnam, ANZ has served international networks, multinationals, trade, and a modest-size personal-banking type business. But there are restrictions on what a foreign bank can do. So we're taking an option to participate in growth of a local bank.
If you want to be a local bank, partnering makes sense to get around restrictions and be truly local. At the end of day, local banks dominate retail banking in most markets as they mature. This is true in virtually every country.