The Vietnamese Banking Sector – Putting 2023 in the Rear-View Mirror

There is broad recognition that Vietnam’s banking system is navigating turbulent seas. The State Bank of Vietnam (SBV) announced in early December that credit growth in 2023 stood at 8.21%, which is considerably below the target of 14%. A number of factors are at play, including a spill-over effect from the real estate sector, as well as tightened legal provisions with respect to lending and bond issuance. As Vietnamese banks continue on their path towards full Basel III compliance and seek to rebound from a disappointing 2023, it is crucial to look at what sources of capital are available and the strengths and weaknesses of these funding options.

Despite significant finger pointing in recent weeks, there are no clear answers. Vietnam’s real estate sector has struggled with a number of high-profile defaults, such as the prominent developer Novaland with respect to its USD300 million international convertible bond offering. Moreover, high-profile investigations of fraud and corruption have also come to light. The case of Van Thinh Phat Holdings has been particularly in focus with respect to bond issuances, a large portion of which were purchased by retail investors, and allegations that an SBV official looked the other way in relation to USD12 billion of alleged losses suffered by Saigon Joint Stock Commercial Bank. Vietnam has clearly sent a message that fraud perpetrated on retail investors will not be tolerated. While this has reverberated throughout the banking system, certain banks with close intergroup or historical relationships with real estate developers have been particularly impacted.

On 28 June 2023, the SBV issued Circular No 6/2023/TT-NHNN (“Circular 6”) to amend Circular No 39/2016/TT-NHNN (“Circular 39”) on onshore lending activities of credit institutions. Circular 6 includes a number of provisions that tighten provisions of Circular 39, most notably additional restrictions on lending purposes including acquiring unlisted shares, paying for contributions under BCCs or JVs for projects not qualified for transaction under the laws, offsetting financial obligations, and imposing an obligation on lenders to monitor the use of funds.

The restrictions on lending for share acquisition or making capital contributions under Circular 6 aim to mitigate risks for credit institutions due to not being able to verify the actual use of proceeds and monitor the business operations of the invested companies or projects from which the income for loan repayment is sourced. Two commercial banks were recently specifically named in a report on inspection of the State inspectorate due to lending for payments for M&A transactions and BCCs without assessment of invested companies/projects, including non-qualified projects, resulting in bad debts. Nevertheless, these restrictions were shortly suspended by Circular No 10/2023/TT-NHNN even before taking effect.

On 16 September 2022, the government released the long-awaited Decree No 65/2022/ND-CP amending Decree No 153/2020/ND-CP on private placement of corporate bonds. The amendments to Decree No 153 aim to enhance transparency in the corporate bond market and appear designed to protect investors in several key areas, such as requiring greater specificity in offering documents, setting a floor with respect to bondholder thresholds to approve changes to the terms and conditions of the bonds, and mandating additional information disclosure obligations by issuers, especially regarding the use of bond proceeds. It also imposes additional requirements and responsibilities on issuers and relevant securities intermediaries, and limits the scope of eligible investors. The amended version of Decree No 153 is consistent with the government’s goal of protecting retail investors and enhancing transparency in the bond market. However, the short-term impact has been to reduce investment opportunities for banks, in particular in the real estate sector which has been one of the most active for issuers.

Foreign investors have historically been significant equity (Tier 1) investors in Vietnamese banks as the banking sector provides a window on the economy. However, key impediments remain, namely the persistence of foreign ownership caps and the limited attractiveness of strategic investment partnerships. Foreign ownership remains capped at the following thresholds in Vietnamese banks:

Moreover, investors acquiring a stake greater than 10% are required to meet certain balance sheet and profitability tests which are designed to weed out investors that are not regulated financial institutions in their home jurisdictions.

The historical partnerships between global banks and Vietnamese banks in the context of foreign strategic investors, in which foreign investors were able to acquire a marginally greater stake in the bank (subject to the thresholds above) in exchange for a commitment to provide secondees and know-how have all but disintegrated as each of HSBC, ANZ, and Standard Chartered, amongst others, have exited their strategic investments in the past decade.

That being said, one would expect to see Tier 1 equity raises conducted by Vietnamese banks on account of their insatiable need for capital, though perhaps less focused on targeting strategic investors and more focused on broader private or public placements of shares, given that almost all Vietnamese commercial joint stock banks are now listed on national stock exchanges. This may ultimately enable the banks to raise capital more quickly as the documentation for placements with diffuse ownership is more standardised than documentation for larger strategic investments and the regulatory process may be more efficient.

One key dimension of equity raised through placements that will need to be considered is the level of disclosure with which Vietnamese banks are comfortable. Onshore equity placements have typically been conducted on the basis of limited disclosure documents which often do not include robust risk factors or audited financial statements under international (as opposed to local) accounting standards and auditor comfort letters, while international investors will likely expect at a minimum enhanced Regulation S style disclosure for financial institutions, if not Rule 144 level disclosure.

There will also be foreign investment opportunities in international bond placements, in particular those that would constitute Tier 2 Capital. Since HD Bank raised Tier 2 Capital through a suite of international bond issuances in 2021, Vietnamese banks have generally opted for the domestic bond market to raise Tier 2 Capital. As discussed above, the liquidity of the domestic bond market has been compromised and the issuance process is under increased scrutiny. While Vietnamese banks will still need to address the disclosure challenges noted above in the context of international placements, the benefit of the upsized offerings and larger investor pool may offset this additional work and preparation time.

The Vietnamese banking sector is hoping to put 2023 in the rear-view mirror and look to brighter horizons in 2024. Foreign investment, both in the form of convertible debt instruments (which may constitute Tier 2 Capital) and equity will be important. Given the time-consuming regulatory process and asset tests for larger investments, nimble special situations investors may be best placed to capitalise on investment opportunities.