Banks look to purchase finance companies

By Thien Ly

The HDBank is one of the banks participating in the new trend. In August, it announced that it had obtained approval in principle from the central bank to acquire 100 per cent equity in Societe Generale Viet Finance (SGVF), one of the largest foreign-owned consumer finance companies in Viet Nam.— File Photo

A recent trend in the bank-ing and finance industry is that commercial banks are looking to buy finance companies in an attempt to have "special tools" to facilitate their business activities.

In the last few months, the financial market has seen at least five banks express their intention to acquire finance companies, including two that have a majority of their stock owned by the Government.

If the deal is finalised, SGVF will become a subsidiary of HDBank. The transaction, the first one of its kind, will pave the way for other institutions in Viet Nam to make acquisitions to form financial and banking groups that will eventually reduce the number of financial institutions in the market, one of the restructuring targets announced earlier by the central bank.

Banks had shown their desire to purchase finance companies a few years ago, but the need became clearer when several State-owned corporations were urged to withdraw from non-core investments.

Many finance companies are subsidiaries of these corporations.

Meanwhile, many banks have idle capital on hand that is enough to partly or entirely buy the finance companies and push up their activities relating to consumer credit.

Consumer credit is basically borrowings used to purchase non-investment goods or services that are consumed and whose value depreciates quickly.

Analysts note that while consumer loans have interest rates much higher than the banks' normal loans, they also carry higher risks of non-repayment.

An official with a HCM City-based commercial bank which is considering buying a finance company, said that activities relating to consumer credit at banks were not different from that of the finance companies. The interest rate for consumer credit at the banks may climb to 30, 40 and even 50 per cent per year for short-term loans, he said.

"In spite of the fact that the rates for banks' consumer credit do not contravene current regulations and are similar to that of finance companies, it is not easy to publicise these on the banks' lists of interest rates or nosily advertised in promotion campaigns.

"Such actions could cause misunderstandings that affect the lenders' common operations.

"Meanwhile, the finance companies can carry out consumer credit activities without facing a similar situation," he said.

The high interest rates make consumer credit, and the finance companies that offer it, attractive to banks because they can make significant contributions to the banks' profit earnings at a time when credit given to industries is continuously going down.

Having a finance company would also make it easier for banks to carry out several other activities like purchasing stocks in enterprises and other credit institutions, investing in projects under contract, or acting as an agency to issue bonds, stocks and other valuable papers for enterprises.

Aviation still has potential

Huge investment and high input costs have caused several private carriers to close their operations in Viet Nam, and those still operating are failing to make profit.

On March 1 this year, Air Mekong, the carrier belonging to Ha Long Investment and Development, or BIM Group, announced it was grounding all its flights.

Indochina Airlines closed operations in December 2010 after incurring losses of VND400 billion (US$19 million) in less than a year of becoming operational.

In December 2011, the Civil Aviation Administration of Viet Nam withdrew the business licence of Trai Thien Air Cargo. The private airline was established in June 2008 with a registered capital of VND500 billion (about $25 million), but failed to start operations.

It would not be surprising that in such a situation, other private carriers would be wary about venturing into the domestic aviation market.

However, this does not appear to be the case.

The Thien Minh Tourism JSC (TMG) recently announced that it has bought an 89 per cent stake in Hai Au Airlines, a private Vietnamese airline.

TMG said on October 14 that it would start operating the airline next year with a registered capital of VND60 billion ($2.84 million).

TMG leaders said they would buy two seaplanes that would be put into operation in April, 2014.

The 12-seat seaplanes would be used for sightseeing over Ha Long Bay and provide air taxi and other services on demand, they said.

Earlier, on September 25, VietJetAir signed a Memorandum of Understanding with France's Airbus for buying up to 92 A320 aircraft and plans to lease eight more from third party lessors. The total deal is worth about $9.1 billion.

In order to pay for the 100 Airbuses, VietjetAir will have to seek capital from different sources including export credit financing, commercial loans from foreign banks or make IPOs (initial public offering) within 18 to 36 months.

One of the reasons that has encouraged VietjetAir to undertake such an ambitious investment plan is the positive results that the carrier has obtained since it was put into operation in December, 2011.

This year alone, VietjetAir increased its market share from 16 per cent in the second quarter to 20 per cent by late August, behind only the national flag carrier, Vietnam Airlines.

Such moves by private airlines could significantly alter the face of the domestic aviation market currently dominated by Vietnam Airlines.

In fact, in addition to intensifying investment into developing their fleets, private airlines have also outlined strategies to further penetrate the domestic aviation market that is expected to grow by 12 and 15 per cent by the year-end.

One important objective of such strategies is to strengthen and exploit close ties between the aviation industry and the tourism sector. The private carriers plan to set up close co-operative relationships with travel agents and tourism companies.

This makes good business sense, given that between 70 and 80 per cent of people are using flights for tourism purposes, according to the Business Times.

TMG's decision to enter the aviation industry at this time makes even more sense because it is well placed to fully tap the tourism advantage. It has 10 hotel chains in Viet Nam, Laos and Cambodia with 250,000 customers a year.

VietjetAir, meanwhile, has announced more tourism stimulus programmes under which the company has or will sign strategic co-operation agreements with travel enterprises and promote domestic tourism activities while actively cutting the price of its air tickets.

Analysts say that such diverse business strategies are bound to create more opportunities for private carriers to strengthen their market presence and provide competitive services for customers.

Feasibility suspect

It is generally agreed that success of investments is not assured in the current business climate, but many enterprises are planning to increase their registered capital by issuing shares late this year or early next year.

The Domesco Medical Import-Export Joint Stock Company, for instance, is preparing to issue additional shares in January, 2014. The company wants to increase its chartered capital for expanding its production line and distribution network.

Meanwhile, the Rang Dong Plastics Joint Stock Company is collecting shareholders' written opinion on issuing new shares to increase its prescribed capital.

At a recent meeting of the Viet An Joint Stock Company, shareholders agreed with a plan to increase its charter capital from VND279.6 billion to VND433.38 billion. The share issue is expected to take place later this year. The plan is to issue 13.98 million shares with a face value of VND5,000 each.

Many other companies, including the MDF VRG – Quang Tri Joint Stock Company, the Nghe An Petroleum Cement Joint Stock Company and the Tan Phu Plastics Joint Stock Company have announced similar plans to increase their legal capital.

While the companies seem determined to increase their charter capital by issuing shares, analysts are not sure about the feasibility of their plans.

It is not an easy time to sell shares now, given that the share prices of some companies on transaction floors are even lower than their face value.

For instance, the face value of the shares of a company which does not want to be named, is VND10,000 each, but its rate on the transaction floor is less than VND5,000.

In addition, analysts note, the performance of the securities market is not very stable now, and this could affect the companies' capital mobilisation plans. — VNS