Vietnam's banking sector is poised for an increase in mergers and acquisitions over the next two years, as lenders seek to bolster their capital while the country's stable economic growth attracts investors.
Thailand's Kasikornbank PCL is reportedly in talks to acquire consumer finance provider Home Credit Vietnam in a deal valued at about $1 billion. If successful, this would be the second-largest deal in Vietnam in 2023, following Sumitomo Mitsui Banking Corp.'s acquisition of a 15% stake in Vietnam Prosperity Joint Stock Commercial Bank in March.
"There will certainly be more deals as the joint stock commercial banks look for capital and strategic international partners," Mukuru Kato, managing director and head of frontier markets research at EFG Hermes Research, told S&P Global Market Intelligence in an email.
Deals will likely surge between 2023 and 2024, including among state-owned commercial banks (SOCBs), "as the State Bank of Vietnam is keen to have a Vietnamese bank rank among the top 100 in Asia and I do not see this being possible without one of the SOCBs engaging in M&A," Kato said. "M&A will certainly be a positive for the sector, as it is currently too fragmented with too many small banks."
Attracting investors
Vietnam's robust economic growth and favorable demographics make it an appealing destination for international investors. Although the country's economic growth slowed to 3.7% in the first half from 8% in 2022, the World Bank predicts a rebound in the second half. The World Bank forecasts moderate growth of 4.7% in 2023, followed by an acceleration to 5.5% in 2024 and 6% in 2025, according to an Aug. 10 report.
"Acquiring a strategic stake in the Vietnam banks provides an opportunity for foreign investors to participate in the growth and tap the country’s favorable demographics via retail lending, particularly via digital channels," Ivan Tan, an analyst at S&P Global Ratings, told Market Intelligence.
The Vietnamese banking sector has long-term growth prospects, said Ha Nguyen, research manager at SSI Securities Corp. Credit growth is projected to range between 12% and 14% from 2024 to 2026 to support the government's annual GDP growth target of about 6.5%, Nguyen said.
If Vietnam's banks can maintain their net interest margins and effectively manage risks, the lenders have the potential to achieve annual pre-tax profit growth in the range of 12% to 14%, Nguyen said. "The leaders in the market could enjoy even higher annual growth rate which could come from higher-than-average credit growth, [net interest margin] expansion, income diversification and [operational expense] optimization," Nguyen added.
This growth is expected to materialize through the expansion of retail lending, increased activities in areas such as card services, bancassurance and wealth management, as well as the adoption of digitalization, Nguyen noted.
Credit growth
The State Bank of Vietnam set a 15% target for credit growth in 2023 to meet the capital demand of the economy, according to a July 11 news release. As of June 30, the credit outstanding of the economy reached over 12,400 trillion Vietnamese dong, an increase of 4.73% over 2022, the central bank said.
For Vietnam banks, overseas investors offer a source of capital that they need to boost their capital adequacy ratios, among the lowest in the region. In 2022, the aggregate banking sector's common equity Tier 1 ratio was at 6.71%, according to data compiled by Market Intelligence. By comparison, Indonesia's banking sector had an aggregate common equity Tier 1 ratio of 22.46% in 2022, Malaysia's was at 16.21%, Thailand was at 15.44% and the Philippines was at 14.55%.
The State Bank of Vietnam is seeking to strengthen the banking sector and restructure failing banks. In May, the central bank planned to take over four weak commercial banks. Three of the banks — Vietnam Construction Bank, Ocean Commercial One Member Limited Liability Bank and Global Petro Commercial Joint Stock Bank — were sold to stronger commercial banks.
Still, there are obstacles to more foreign investors in Vietnam's banking sector despite high interest. The Southeast Asian nation restricts foreign ownership to 30% in domestic banks, with the ownership for a single foreign shareholder capped at 20%.
"The difference in regulations, information transparency, the lack of a market for bad debt sales & purchases and difference in accounting standards are some other factors to point out," SSI Securities' Nguyen said.
As of Sept. 18, US$1 was equivalent to 24,373 Vietnamese dong.