Customers and staff at ABBank. From 2011-2015, 19 banks closed in Viet Nam— Photo giaoduc.net.vn

The solution is stated under the project of restructuring the credit institution system in the 2016-20 period, urgently developed by the central bank.

According to the project's goals, by 2020, Viet Nam's banking system must have at least 1-2 commercial banks with scale and capacity equivalent to large banks in the region to gradually meet the requirements of international economic integration.

Nguyen Van Hung, deputy chief inspector of the SBV's Inspection Agency, said M&A is a popular and effective solution to handle weak credit institutions and has many advantages compared with other measures.

In particular, with the support of the central bank, the process of M&A will not disrupt the operations of credit institutions, will continue to protect the rights and interests of shareholders and customers, and save costs, time and human resources.

In the 2011-15 period, the number of banks decreased by 19 through the implementation of M&A, dissolution and by revoking licences. Of these, there were nine banks, two non-bank credit institutions and eight branches of foreign banks.

Currently, in the banking system, there are still 12 banks with charter capital of less than VND4 trillion (US$179.4 million). This source of capital is modest because in the context of fierce competition, banks need a strong financial capacity to boost lending activities and trade support as well as to invest in infrastructure such as information technology system and business-related services.

Therefore, in the near future, banks will have to continue restructuring so as to be able to develop sustainably. In case raising capital from existing shareholders is not feasible, banks will have to find potential M&A partners.

Nguyen Thuy Duong, deputy director of Ernst & Young Vietnam's financial-banking services, told Tin Tuc (News) newspaper that with the increasing openness of the financial market, foreign financial institutions with abundant capital resources will seek to penetrate the market.

Meanwhile, the policy of the central bank is not to increase the number of banks. Therefore, it is quite possible that domestic small- and medium-sized banks will be acquired by foreign partners.

In addition, banks must divest capital in other banks to reduce the cross-ownership rate, Duong said.

At present, there are still a number of banks holding over 5 per cent of the shares of other banks or financial companies. For example, the Bank for Foreign Trade of Viet Nam currently holds 7 per cent stake of the Military Bank, 5.07 per cent stake of the Oriented Commercial Joint Stock Bank and 8 per cent of the Sai Gon Bank.

Viet Nam Commercial Joint Stock Bank for Industry and Trade holds 10.4 per cent stake of the Sai Gon-Cong Thuong Commercial Joint Stock Bank, while An Binh Bank (ABBANK) owns 8.4 per cent stake in the EVN Financial Company.

However, according to SBV's Circular 36, commercial banks are only allowed to purchase and hold less than 5 per cent of voting shares of other banks.

Thus, banks which are holding more than 5 per cent will be required to divest to ensure compliance with the circular's regulation.

For this reason, it is expected that in the near future, the market will witness more cases of M&A among banks, Duong said.

Many banking insiders argued that to boost the practice of M&A, lifting the cap on foreign investors' ownership is worth considering.

According to deputy chief inspector Hung, this issue needs a thorough study and an appropriate roadmap.

Hung said the limit of foreign investors' ownership and shares owned by foreign strategic investors in Vietnamese credit institutions under the current regulations is suitable.

Specifically, a foreign strategic investor can own up to 20 per cent of the charter capital of a credit institution, while the total percentage of shares held by foreign investors is not allowed to exceed 30 per cent.

Hung added that the central bank was studying overall measures to report to the Prime Minister for consideration.

Economic expert Nguyen Tri Hieu said barriers to the restructuring of banks came from their internal resources. Strong banks are generally not interested in merging with smaller and less effective banks.

Even shareholders in these banks, especially strategic ones, are often opposed to the merger with ailing banks, unless they're forced to do so.

Moreover, Viet Nam has yet to permit bank bankruptcy, thus it is difficult to reduce the number of banks.

Hieu said the number of banks is not a matter; the important thing is that banks must have good governance to be able to compete. — VNS