Vietnamese State owns five (5) commercial banks in the Vietnamese banking system, four (4) of which are listed in the top-5 banks of the country .
For this reason, the promulgation of Circular no 10/2011/TT-NHNN by the State Bank of Vietnam stipulating the criteria for selecting strategic shareholders to the equitized state-owned commercial banks on April 22, 2011 (Circular 10), which came into effect on June 01, 2011, has attracted special attention of both local and international investors and financial institutions.
According to this circular, foreign strategic shareholders must be a foreign credit institution or foreign financial institution with total assets equivalent to at least USD 20 billion in the preceding year of the year of enrollment to be strategic shareholders. Meanwhile, domestic strategic shareholders must be enterprises with the minimum total asset equivalent to VND 3,000 billion (~USD 1.45 million) in the preceding year of the year of enrollment to be strategic shareholders.
Besides the above regulation on total assets, foreign strategic shareholders must:
- Have over 05 (five) year experience in international activities;
- Be rated by the international independent credit rating organizations (Moody's, Standard & Poor's, Fitch Rating ...) at a level that the ability to implement the financial commitments and normal operation even when the situation, conditions of economy changed to the unfavorable trend;
- Be not a strategic shareholder, major shareholder, founding shareholder of any credit institution in Vietnam;
- Have a long-term close commitment to the equitized state-owned commercial bank and a written commitments on assisting the equitized state-owned commercial bank in the following fields: Improving administration, governance capacity, risk management; Applying modern technology; Developing products, banking services; and in Developing other fields in compliance with development strategy of equitized state-owned commercial banks;
While the above criteria seem very strict, some are not clearly defined and may face difficulties in application. E.g. the request for a long-term written commitment on assisting the equitized state-owned commercial bank does not specify the minimum period of “long-term”; or the required level of credit rating that “the ability to implement the financial commitments and normal operation even when the situation, conditions of economy changed to the unfavorable trend” is a very general explanation without a benchmark with the existing Bank Financial Strength Rating (BFSR) methodologies applied by popular international credit rating agencies.
Having a very low requirement on total assets compared to their foreign competitors, domestic strategic shareholders must be tested against a much larger number of other conditions. Those are:
- Be enterprises with experience, good governance capacity;
- Have sufficient contributed capital resources: equity minus any long-term investment amount by equity and short-term assets minus short-term debts, the minimum remaining equal to the contributed capital upon the registration to be strategic shareholders;
- Have profit rates on equity (ROE) more than 15%, the profit rate on assets (ROA) more than 1% of the preceding year of the year of enrollment to be strategic shareholders, having a positive net profit for three consecutive years before the year of enrollment to become strategic shareholders;
- Have no bad debt in the credit institutions (for credit institutions the bad debt must be lower than 2%);
- Be not a strategic shareholder, major shareholder, the founding shareholder in any credit institution in Vietnam at the time of enrollment to be strategic shareholder;
- Have written commitment on assisting the equitized state-owned commercial bank in the fields specified in the above part;
- Have written commitment that not to transfer the shares to be purchased in minimum period of 5 years from date of purchase of shares, of becoming a strategic shareholder and not conduct any transactions with equitized state-owned commercial banks which lead to conflicts of interest and create a monopoly or unfair competition with customers, other investors of equitized state-owned commercial banks and to other credit institutions;
- For credit institutions, the cash adequacy ratio (CAR) of the preceding year must be higher than 10% (under Circular 13 the requirement is only 9%).
State-owned commercial banks must set up their own criteria for selecting the strategic shareholders based on the above provisions in the Circular 10 and submit them to the Prime Minister for approval and only the approved ones are used to implement the selection of strategic shareholders.
The Circular 10 imposed quite stringent standards for the strategic shareholders of state-owned commercial banks in Vietnam. Those restrictions are designed to improve the quality of the investors in the equitisation process of Vietnamese state-owned commercial banks in particular and ensuring the safety of the banking system in general. However, the success of their equitisation also depends on the interpretation and implementation of those provisions in practice, which are not yet certain.