Bailout will entice investors to Vietnam’s distressed assets

Talk of a possible Vietnam bailout is stirring excitement among foreign investors who predict a cash injection will increase the appeal of investing in the country’s distressed assets.

  • 10 Sep 2012
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A recent proposal suggesting Vietnam should tap international institutions such as the International Monetary Fund (IMF) for financial assistance may create an attractive business opportunity for foreign investors.

In particular distressed debt investors would be more attracted to Vietnam’s non-performing assets as a bailout would help improve the borrower’s ability to pay back debt.

“In such a scenario, the AMC (asset management company) comes in to restructure, and will find foreign investors to buy these assets at a discount depending on price. There will be buyers,” according to an investment strategist based in Ho Chi Minh City. “I’ve spoken to distressed asset investors, and they say this is what they’ve been looking for, an opportunity like this. Some are on the sidelines and there are more to come.”

The suggestion of the bailout came from an independent financial committee headed by former Vietnam central bank governor Nguyen Van Giau. It proposed the country should consider aid from an international organisation such as the IMF to help clean up bad debt or risk prolonged stagnation, according to a September 4 report cited by Bloomberg. The financial system needs an injection of VND250 trillion to VND300 trillion (US$14.4 billion), according to that report.

Purchasing distressed assets, which including banks’ non-performing loans (NPLs), may spell out a decent opportunity for investors since Vietnam’s growth is still intact.

“The growth story of the country is still there,” according to Marc Djandji, Ho Chi Minh City-based vice president of investment analysis at Indochina Capital. “The manufacturing and consumer base is still there. Of course Vietnam had a tough few years but they’ve done a fantastic job reigning in inflation and strengthening the currency.”

The report came as confidence in Vietnam’s banking system has been shaken in recent weeks after the chairman and founder of Vietnam’s Asia Commercial Bank (ACB) were arrested for unspecified charges. The incidents sent shockwaves throughout Vietnam’s financial markets, prompting ACB’ stock prices to tumble more than 10% following the reports. The State Bank of Vietnam (SBV) said it pumped in money to support bank liquidity as ACB depositors switched out their cash into different banks.

The State Bank of Vietnam is trying to rein in its NPLs by limiting the growth of banks’ loan books, which it quoted as comprising 8.9% of the Vietnamese banking system, compared with the official government figure of 4.4%. Mizuho Corporate Bank forecasts the NPL ratio is as high as 20%, according to press reports.

At the end of the first half of this year, VietinBank reported VND2.254 trillion (US$108 million) worth of bad debts. This is up 147% on the VND912.5 billion figure reported at the start of the year. Vietcombank’s figure at the end of the first half was VND3.9 trillion, up 71% from the VND2.3 trillion at the start of the year.

Asia Commercial Bank’s latest NPL figure was VND607 billion, 104% more than the VND297 billion at the end of last year, according to local newspaper the Vietnam Business News.

The government is in the process of consolidating the banking sector and had also announced that it would raise funds to set up an AMC that would buy bad debt from the troubled banks and resell them to a counterparty. But officials have been criticised for not making progress on establishing the AMC more transparent.

Because little is known about how the government will administer the AMC’s duties, such uncertainty may complicate the task of calculating the profitability of such an investment.

“When the assets are sold to a third party investor, that investor will not be paid entirely in cash. A certain percentage will be in form of a performance bond, which will not be guaranteed. [The feasibility of such an investment] will depend on the recoverability of the loan,” said a Singapore-based credit analyst. “I think this is a long shot. Investment decisions like that are not based on fundamentals but are sentiment driven. Fundamental volatility is here to stay; the financial system is not becoming strong any time soon.”

Measuring the feasibility of such an investment may also be tricky because of the different accounting standards that are used in the country. This has created a formidable challenge for credit agencies in their attempts to calculate the amount of bad debt that is mounting in Vietnam’s banking system.

“Right now Vietnam’s banks report by Vietnam Accounting Standards, which makes it hard for us to compare numbers versus a similar-rated bank in another country that uses a different accounting standard, like say the IFRS [International Financing Reporting Standards],” said Christian de Guzman, senior analyst at Moody’s.

“So we don’t have a great degree of confidence when we look at the NPL ratios. We’re not sure if they are applying the same stringent criteria used by other banks to classify a bad asset when a loan is late by 30 or 60 days, for example. Receiving technical assistance [from international bodies] in applying a more stringent set of accounting and disclosure standards will help.”

The independent proposal has also suggested the government cut state spending, after state-run shipbuilder Vietnam Shipbuilding Industry Group (Vinashin) defaulted on US$4.4 billion of its debt. Boosting foreign investment was also cited as another alternative to diversify funding sources, but analysts say this will require some time.

“Between raising medium term debt and equity infusion, I believe that equity injections into the banking system from foreign strategic stakeholders can lead to immediate capital strengthening, and also offers the benefit of transfer of best practices and know-how to the system,” said Ivan Tan, the primary analyst on Vietnam’s banking system for Standard & Poor’s. “Also, having foreign stakeholders representation on the board can improve corporate governance. However, this has been a protracted process and might take some more time to gain traction.”

Another difficulty in attracting foreign investment in Vietnamese banks is the fact that foreign partners will want to enter into a relationship with a stronger bank with enviable branch networks, rather than weaker lenders that are in more of a need for outside help.

“It’s a good idea but the point is whether the foreign bank will be willing to invest in a weaker bank of Vietnam? It will be beneficial for some weak banks in Vietnam but are foreigners ready to come and at which price? There isn’t much incentive to take a weak Vietnamese bank because they would want to pair with a mid to large size bank with a good brand name and reasonable size of branch network," said Duong Pham, a banking analyst at Viet Capital Securities.

  • 10 Sep 2012

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