COVER STORY - Trading crisis exposes banks and brokers in Vietnam

The country is facing economic crisis, with its balance of payments deficit growing fast. Bank lending has been restricted and interest rates raised, while the stock market is in tatters. Bankruptcies and consolidations beckon in the broking and banking industries, but for foreign firms and private equity houses there is a golden opportunity to make money. Elliot Wilson reports.

  • 01 Jul 2008
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"We will see some banks fail," declares Thomas Lanyi, a director at private equity firm Mekong Capital in Hanoi. "Probably the mid-sized public banks, particularly those close to real estate or construction financing. Some of the state banks will be recapitalised and consolidated."

"A good number of Vietnam's brokers will go out of business, even if the markets pick up," adds Andy Ho, the head of investment banking at VinaCapital.

Welcome to Vietnam's scared new financial world.

The country is facing an economic crisis that threatens to leave some of its financial institutions in a hazardous state. Vietnam's balance of payments deficit is growing fast. Its trade deficit by the end of May was US$14.4 billion, more than threefold the US$4.3 billion level it was the year before. According to government figures, imports surged 67% year-on-year in the first quarter of this year, to US$37.8 billion, while exports increased less than 30% to US$23.4 billion. The government has now suspended gold imports to try and cut the growing deficit.

"These signs...impose a real threat to Vietnam's growth outlook," wrote Goldman Sachs economist Hong Qiao in a June 3 research note. "Investors fear that instability risks will translate into a balance of payments crisis or significant currency devaluation."

Add into this mounting inflation, and the situation really does look pretty dire. It has forced the central bank to hike interest rates several times, most recently on June 12 when it raised the base rate to 14%, the highest in Asia. It has also curbed bank liquidity to prevent them lending to companies and consumers keen to buy yet more imports. That's hammered the profit lines of the banks, and steepened the dive of a stock market already in the midst of a marked correction.

One likely outcome of this is bankruptcies and consolidation in the country's broking and banking industries. It spells bad news for domestic institutions, but for foreign firms that are bold enough it represents a good opportunity to make money.

Currency concerns

The current economic problems have left officials in Hanoi with a nasty dilemma. They want to support the domestic dong currency, yet foreign investors are busily selling it short. As of June 20, the offshore non-deliverable forward market had priced in 30% currency depreciation over the next 12 months.

On April 26, the central bank doubled the daily trading band for the dong, giving authorities more flexibility to manage the country's overheating economy. It will now be able to rise or fall 2% around its official daily rate against the US dollar. The move further weakened the dong, but was needed to mop up the excess liquidity that's hurting the economy. Former US Federal Reserve chairman Alan Greenspan told premier Nguyen Tan Dung as much when he visited the US at the end of June. The trading band could yet be widened further.

Raging inflation will also be hard to stem. Food prices, the bulk of the Vietnamese shopping basket, increased 68% year-on-year in May, according to Goldman Sachs. Vietnam's dependence on imported refined oil products and raw materials leaves its foreign exchange reserves of US$20 billion, or three months' worth of import coverage, looking low, the bank points out.

It's worryingly reminiscent of situations in Thailand, Indonesia and Korea in 1997 that led to the Asian financial crisis.

But the fallout from Vietnam's economic malaise will be nowhere near as serious, given that the country's US dollar-denominated borrowings are just a fraction of the levels of the other three countries 11 years ago. Still, Vietnam is struggling, and it has led to strict bank lending restrictions and interest rate hikes.

Brokers under pressure

It has also left a stock market that was already looking stretched in tatters. And that's bad news for its local brokers, many of which are brand new shops set up in the boom times of 2007.

For the country, March 12 last year represented the high-water mark in the brief life of its leading bourse, the Ho Chi Minh Stock Exchange (Hose). Since then, the index has slumped 69% to stand at 366.02 on June 20 this year. Daily trading has fallen from US$100 million in the spring of last year to US$5 million today.

"Stock prices in 2007 were rocket-charged and valuations were unsound. It was a very active investor mentality," says Dominic Scriven, managing director of Dragon Capital, an asset manager with US$1.5 billion under management in Vietnam.

Twelve months ago, the average listed Vietnamese firm was trading at 35 to 40 times price-to-earnings ratio. As of June 20, the ratio was five to 10 times. Energy producer Petrolimex Hanoi, for example, now trades at 5.13 times forward earnings.

The suddenness of this slump has worried Vietnam's stock market regulator. In early June, the State Securities Commission closed the Ho Chi Minh Stock Exchange for several days to stem the market's decline. The ploy failed to work, with the index falling more than 5% in the month to June 27. It did improve a little at the end of June but was still well down on the month, and analysts were dubious that the recovery could last.

Several companies have delayed domestic listings as a result, most notably Vietcombank. It had planned a privatisation IPO last month, but is now targeting the third or fourth quarter of this year.

With primary deal flow non-existent and daily trading on the Ho Chi Minh bourse less than one-tenth of that for smaller emerging economies such as Botswana, one consequence of these troubled times will be broking industry consolidation.

VinaCapital's Ho estimates there to be 100 brokers in Vietnam today, from 15 to 20 at the end of 2005. The best of these are Ho Chi Minh City Securities, Vina Securities and Saigon Securities (SSI). Those three are believed to comprise about 25% of the market.

Like Ho, market watchers expect the total number to fall to 50 or less by the end of the year. Many of the marginal players could be swallowed by larger incumbents.

Buying into trouble

But foreign players will need to pause for thought before they buy into an ailing local broker. For a start, tough economic times are expected to last for some time. And by way of warning, two foreign banks have committed a lot of capital into local securities firms over the past 12 months, but received little in return.

Morgan Stanley paid US$217 million for a 10% stake in PetroVietnam Finance (PVF), the investment-broking arm of dominant local energy firm PetroVietnam, in October last year. Given today's markets, it looks like a bad bet.

Companies take stock

Most of the stock selling in Vietnam has been done by domestic retail and institutional investors.

For retail investors it's because of financial pressure. Vietnam's average mortgage lending rates increased to 16% by the end of May, from around 8% a year previously, and many investors have sold their stock holdings to help pay interest. And with the State Bank of Vietnam forcing banks to rein in lending in recent months, banks have dropped lending for speculative purposes.

Vietnam's partially-privatised firms have been off-loading stock too. These companies are usually privatised through the sale of public concerns to private individuals, before doing a full-scale listing later.

Many speculated wildly on domestically listed stocks last year after the state unwisely encouraged them to extend their horizons financially. Unfortunately few firms employ managers capable of understanding or mitigating risks.

"Many SOEs [state-owned enterprises] have been very aggressive in their investments [in recent years] both in their own areas and outside them," says Dominic Scriven, managing director at Dragon Capital. "Now the government is starting the sensible process of reining them in."

It's hard to pin down how much cash has been lavished by domestic corporations on locally-listed stocks in recent years, but bankers think hundreds of millions, if not billions of US dollars has been lost by Vietnamese firms in these investments.

One broker remembers sitting in on a recent meeting with one of the country's largest listed corporations when it asked about the best way to sell all of its securities immediately. "They were just trying to sell clumps of shares," the broker says. "They didn't know what shares they had, or what they were selling."

Much of the losses will simply be swallowed by the government, just as China did with its failing state-run enterprises. But Hanoi won't be happy about it, and heads will roll.

"A lot of companies will suffer huge financial losses this year," the broker adds. "They've taken a real pounding on their stock investments. Very few big Vietnamese companies won't be touched by that."

"In theory, PVF could do very well. Huge amounts of cash come through PetroVietnam each year, and much could go into [the unlisted] PVF," notes one respected local investor. "But right now, with credit tightening under way and likely to stay for a long time yet, I doubt PVF is getting much action. No-one I know has seen them out there recently."

Morgan Stanley declined to comment on its investment.

ANZ also purchased 10% of Vietnam's largest brokerage, SSI, for US$88 million in July last year. But its stock value has crumbled 85% from D190,000 (US$ 11,260) at the end of October 2007 to VND27,000 at June 20.

"There was some stupendously bad decision-making while Vietnam's stock market was in the ascendancy," says one local investor, "but Morgan [Stanley] and ANZ are the pick of the crop here."

A spokesperson for ANZ admits that conditions have been tough, but defends the bank's investment into SSI. "Vietnam faces a challenging economic environment at present, but ANZ is taking a long-term view of the Vietnam economy," he says. Proof of this can be seen by  ANZ's announcement at the beginning of July to open a 100% incorporated bank in the country, while it has already raised its stake in SSI to 13.9%. "[This] is indicative of the confidence ANZ has in the SSI business model," he says.

Japan's Daiwa Securities Group seems to have been savvier in its acquisition plans. On June 25, SSI announced that Daiwa had raised its 8% stake in the Vietnamese broker by at least 11.68 million shares, to take its total stake to 13% of SSI's charter capital. Given the collapse of the broker's share price, Daiwa will have paid a lot less than ANZ originally did for its shares.

A battle for banks

Brokers won't be the only ones to suffer in this environment. Local lenders will also come under pressure.

Sacombank, Vietcombank and Asia Commercial Bank should be large enough to look after themselves. But Vietnam is believed to have between 60 and 70 banks, and most lack the scale or capital strength of these three.

The country has several private joint-stock banks, referred to as 'A' banks, which tend to be owned by government officials. These are generally newer institutions that were set up with particular industrial or commercial concentrations. Asia Commercial Bank, regarded as one of the top banks in the country, has its roots as an A bank. Others include Dong A (East Asia) Bank, Bac A (North Asia) and Dong Nam A (East Asia).

Some of these businesses will come under the greatest strain. "Some of these A banks have a smaller capital base, less well-known brands and fewer points of contact with the client," says one local financial expert, noting that they tend to lack as many branches or ATMs as the country's big players. It's hard to ascertain the lending practices of these unlisted lenders, but they could be among the most vulnerable in a financial crisis.

Properties show promise

One Vietnamese sector to have retained its lustre is property.

Ho Chi Minh City was Asia's seventh-priciest city in terms of office space rental at the end of March, according to property services firm CB Richard Ellis. Local media outlet reckons that US$5 billion was pumped into property in 2007, twice the previous year's figure.

One estimate that US$20 billion will flow into Vietnamese property in both 2008 and 2009 seems excessive, but Vietnam is a target for property investment funds from South Korea, Taiwan, Singapore, Japan and the Middle East.

In December 2007, Dubai-based urban developer Limitless broke ground on a US$220 million housing and tourism project called Halong Star in the north-east of the country. Other Gulf investors seeking property and infrastructure investments in Vietnam include the Kuwait Investment Authority and the Abu Dhabi Investment Authority, say bankers.

And in May, a delegation of 15 Malaysian property firms visited the country. Berjaya Land alone has received licences to invest more than US$3 billion on a new university town project near the southern city of Cu Chi.

The Ho Chi Minh City planning department estimates that the city gained US$2.5 billion of foreign direct investment in the first 11 months of 2007, 85% of which went into property.

Local property specialists also think that prices are finally falling, which will encourage more foreign investment into property and infrastructure.

"Six or 12 months ago Vietnam developers were able to get finance from banks, or finance from friends of theirs who got finance from banks," says one lawyer based in Vietnam. "Now that liquidity tap is being turned off, and the cost of real estate, and the cost of getting into infrastructure projects, is falling. This is a good time to invest."

Gulf-based conglomerate Dubai World aims to invest more than US$1 billion into Vietnamese infrastructure, say insiders, while VinaCapital's US$400 million Infrastructure Fund is set to increase its investments in the next 18 months.

And that is what the banking sector is facing. "With the tighter liquidity conditions, last year's loose risk-screening is showing scope to breed this year's non-performing loans," Dragon Capital noted in its Vietnam Focus last month. "Our primary suspects are the newer bank entrants that eagerly deployed their newly minted balance sheets and the SOCBs [state-owned commercial banks] that helped to feed corporate sprawl at the SOEs [state-owned enterprises]."

In the same report, Dragon added: 'Risk weighting the [country's] banks based on past performance, we see a max of US$5 billion in truly risky loans." Set against the sub-prime losses of international banks it sounds small, but it's a fair amount in a country with a GDP of just US$80 billion.

Seeing local banks fall, or require state support to survive, would be a damaging outcome. Analysts say that the government has worked hard to wean the nation off its preference for investing hard-earned cash in gold or gemstones. Nguyen Van Giau, the central bank governor, and Tran Xuan Ha, vice-minister of finance, did not respond to emailed questions from Asiamoney about potential bank and brokerage failures.

With both troubled local banks and foreign banks reining in lending that has become much more costly, a funding void has been created. And private equity firms are keen to fill it. Vietnamese firms are trying to get money from the likes of VinaCapital, Mekong Capital and Dragon Capital. It's a golden opportunity for them.

"Private equity is a really good thing to be in at the moment," says Ho of Vina Capital. "I think from now until the end of the year is a great time to buy assets in Vietnam, particularly right at the end of the year when the stock market will pick up again very strongly."

Mekong Capital's Lanyi adds: "More and more companies are coming to see us for capital, mostly private companies, not so much the SOEs. There's a lot of distressed sellers out there. Big chunks of companies are being sold by local corporations, high-net-worth individuals and financial institutions."

Turnaround potential

Despite the rocky times, making calculated investments and lending makes sense. Many of Vietnam's structural problems are due to its own recent industrial success and they won't last forever.

Foreign direct investment (FDI) surged from US$5.8 billion in 2005 to more than US$20 billion in 2007, and the economy is struggling to cope with so much money. Even India attracts barely US$10 billion in FDI each year.

"There's a digestion problem going on," says William Lean, the managing director of VinaCapital. "Companies are building factories across the country. That leads to imports of steel and factory equipment, and higher salaries as more people get hired."

Intel is a good example. The US chip firm is spending US$1 billion on a production facility in Ho Chi Minh City that will use imported products. In the short term it will increase imports and worsen the country's trade deficit. But by 2011, the US firm should produce US$3 billion-worth of chips a year, almost all of it destined for overseas.

In truth, nobody is sure how long the trade deficit will continue to hold the country back. Estimates vary between several months and several quarters, and the problems look set to extend into 2009. The hope is that Vietnam's economy will then start expanding rapidly. Goldman Sachs sees GDP growing at 6.9% a year over the next decade, with Vietnam becoming a US$273 billion economy by 2020.

However, that outcome is far from certain. The government needs to keep a handle on its trade deficit, rising inflation and dropping currency. And it doesn't have forever. "The next few months are critical for the future of Vietnam's economy," says one banker based in the country.

It will also be a critical time for the fortunes of investors in Ho Chi Minh City and Hanoi. Their key challenge is to take advantage of the volatility, while dodging those brokers and banks that will struggle to survive.

  • 01 Jul 2008

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
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1 Citi 8,935.41 24 14.02%
2 HSBC 7,859.72 26 12.33%
3 Deutsche Bank 7,109.78 16 11.15%
4 JPMorgan 4,850.50 14 7.61%
5 Standard Chartered Bank 3,055.20 19 4.79%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
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2 Deutsche Bank 3,977.43 2 16.92%
3 HSBC 3,768.59 4 16.03%
4 JPMorgan 2,812.07 8 11.96%
5 Bank of America Merrill Lynch 1,803.06 7 7.67%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
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2 HSBC 2,253.75 3 14.34%
3 Deutsche Bank 1,703.96 4 10.84%
4 Standard Chartered Bank 1,518.77 3 9.66%
5 JPMorgan 1,341.27 2 8.53%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
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2 Goldman Sachs 162.26 37 8.77%
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5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

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1 ING 3,668.64 29 9.07%
2 UniCredit 3,440.98 25 8.50%
3 Sumitomo Mitsui Financial Group 3,156.55 13 7.80%
4 Credit Suisse 2,801.35 8 6.92%
5 SG Corporate & Investment Banking 2,478.18 21 6.12%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
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1 Standard Chartered Bank 126.67 2 7.81%
2 Sumitomo Mitsui Financial Group 81.25 1 5.01%
2 SG Corporate & Investment Banking 81.25 1 5.01%
2 Morgan Stanley 81.25 1 5.01%
2 JPMorgan 81.25 1 5.01%