Rumours on the merger of PetroVietnam Finance Joint Stock Corporation (PVF) and Western Bank continue to create buzz on local financial media and investor circle these days.
Sources familiar to the case said that existing major shareholders of Western Bank, holding 90 percent stake in the lender, have concluded the deal of transferring their shares to new shareholders at par value (VND10,000/share) and they are seeking approval for he share sales from The State Bank of Vietnam (SBV), the country’s central bank.
If the deal is approved, the existing shareholders will use the proceeds of VND2.7 trillion to pay their debts at Western Bank and to add mortgage for their remaining loans, hence, reducing the lender’s outstanding loans.
The story has begun like on the surface of media coverage, but what are behind the move, and how will the merger future will be?
VND2.7 Trillion Cash
Twelve years after the birth, Co Do (Red Flag) bank was renamed as Western Bank in 2004 with then charter capital of VND22.9 billion and 4 years later in 2008 its charter capital was raised to VND1trillion and then 2 years more, Western Bank was under pressure to raise its charter capital to VND3 trillion in 2010 under the regulation.
Also since 2010, the lender faced stronger headwinds and leaders were under pressure with management and profit-making targets. The bank not only rushed to boost credit but also had some risky loans to customers who were close to its leaders, the loans were in forms of corporate bonds and entrusted investments.
Western Bank’s financial statements showed the lender’s non-performing ratio at 1.2 percent in 2011, however, the SBV’ investigation found much higher figure (but again the finding results were unclear to the public) and Western Bank’s equity deficit of 20 percent.
This is the reason why Western Bank is in the list of forced restructuring banks, and the first step to do so is making changes in shareholders’ structure to maintain charter capital of VND3 trillion and improving its asset quality. New comers should have sound finance and have cash to buy shares to reduce Western Bank’s outstanding loans.
With VND2.7 trillion cash from share sales, Western Bank will clean up its non-performing loans and improve asset quality, making it cash-rich and clean small bank.
It is rumoured that small banks are good targets for M&As in this sector as new comers can quickly and easily develop the new entity with their new money, new management and technology.
No Acquisition, But Is it An Unstoppable Marriage?
For a while, the local financial world has been speculating over possibility that PVF will acquire Western Bank. The acquisition is unlikely as a financial company is not allowed to buy a commercial bank under the law. However, it is easier for regulator to approve a merger between the two under the Law of Credit Institutions.
What do they need from each other in the marriage?
PVF currently has assets of VND91.085 trillion and charter capital of VND6 trillion with Morgan Stanley, holding 10 percent stake, as a strategic partner. However, PVF cannot raise funds, and provides payment services which limited its own development. More importantly, seeking for a new bank business license amid current conditions is an impossible mission for PVF.
Meanwhile, Western Bank, with limited financial capacity, can give PVF all the business activities it wishes. Western Bank cannot provide big credit limit to customers, and not finance big and efficient projects and afford high-end technology, all of these can be reached with PVF as an insider.
What if the Merger Comes True?
Supposed Western Bank and PVF merged at 1-for-1 ratio, meaning 1 Western Bank share will be converted into 1 PVF share, the new entity will have a charter capital of VND9 trillion and total assets of VND105 trillion, a medium-size bank in Vietnam. This, clearly, is an optimal choice for both.
The merger will have to be approved by the central bank and restructuring of the bank will be put under SBV’s supervision. If the central bank gives them a green light, the two sides will have to evaluate their assets by a third independent party.
The merger between PVF and Western Bank will speed up the restructuring process in Vietnam’s banking system.
After the merger PVF and Western Bank will likely follow compulsory reserve of 50 percent cash, 50 percent valuable papers and may enjoy corporate income tax exemption or reduction for several years as regulated for newly merged credit institutions.
However, the first real challenge for the new couple would be the likelihood of PetroVietnam (PVN) divestment. PVN, holding 78 percent stake in PVF, is scheduled to cut its holding in PVF by 2015 under regulation.
PVN is also a strategic partner of Ocean Bank and they have to choose either PVF-Western Bank or Ocean Bank or they have to merge again.
http://stoxplus.com/News/88241/1/179/pvf- percentE2 percent80 percent93-western-bank-merger-buzz.stox