The Joint Stock Commercial Bank for Foreign Trade of Vietnam, better known as Vietcombank, has completed the sale of new shares to Singapore’s sovereign wealth fund GIC and Japanese megabank Mizuho for Vnd6.2 trillion ($265 million).
The capital raised on Wednesday is roughly a third of what it had been targeting less than a year ago but still helps Vietcombank to meet Basel II requirements before these come into effect in Vietnam in 2020.
In a statement, Vietnam’s largest bank by market value said GIC had purchased a 2.55% stake, while Mizuho has bought an additional 16,666,431 new shares to maintain its existing 15% stake and remain the bank's largest foreign shareholder.
Hanoi-headquartered Vietcombank has a slimmer capital buffer than its peers, in part because it took longer than expected to execute the GIC/Mizuho equity placement. In recent years, its capital has been stretched by high loan growth and large cash dividend payments to its shareholders, principally the Vietnamese government, which owned 77.1% of the bank as of June 30.
The bank’s tangible common equity/risk-weighted assets, adjusted for government securities, shrunk from 8% in 2016 to 7.5% at the end of June, lower than an average of 10.8% for its Vietnamese peers, according to credit rating agency Moody’s. It may continue to slip.
“Because Vietcombank is majority controlled by the government and is a profitable state-owned bank, we expect dividend payouts to its majority shareholder to continue to exert pressure on capital retention,” Rebaca Tan, a Moody’s analyst, said in a note to investors on November 2.
LONG TIME COMING
In the wake of the share placement, Vietcombank's tier-1 capital has risen to a Basell II-compliant Vnd37.1 trillion.
But it's been a long time coming.
GIC has been in talks with Vietcombank since 2016 about a potential investment and was initially looking to buy roughly 7% to 8% of its equity, a person familiar with the negotiations said.
After taking Mizuho’s top-up investment into account as well, the bank had originally hoped to sell a 10% stake. It also had hoped to net about $700 million to $800 million from the trade back in the spring of 2018 when the Vietnamese stock market was firing on all cylinders.
That was among the main sticking points, given Vietcombank not only trades at a premium to its peers in Vietnam but also traded at one to those elsewhere in Asia, according to two people familiar with the negotiations. In Vietnam, its valuation was double the banking sector average.
Part of the premium can be attributed to how well regarded the bank is. But local fund managers also told FinanceAsia that retail investors had driven the share price up in anticipation of making a quick profit off the back of GIC’s potential investment.
As a result, Vietcombank was trading at 4.2 times forward book value in April 2018 when the stock market peaked, higher than other well-run regional banks including Indonesia’s Bank Central Asia and India’s HDFC Bank.
Vietcombank’s valuation became a lot more palatable to GIC once the Vietnamese stock market lost a quarter of its value between April and July 2018.
But that was to create a second challenge since, under Vietnamese law, equity placements must be based on average market prices over extended periods. As a result, brokers like SSI did not expect the deal to materialise until early 2019 when the bank could use a lower average.
Based on a closing share price on Wednesday of Vnd55,800, the equity placement was executed at 3.12 times Vietcombank’s 2018 book value and 2.65 times its 2019 book value. SSI believes fair value for the stock should be at around 3 times 2019 book.
On this basis, GIC appears to have struck a good deal. Vietcombank is now also trading below both Bank Central Asia and HDFC.
A further complication for the deal was the requirement of a one-year lockup, which meant more due diligence was needed to get it through investment committees.
As a result, the transaction was downsized. But this means there is still plenty of headroom to introduce more foreign capital either from GIC or other new investors, given Vietnam has a 30% foreign ownership limit.
The bank has a very limited free-float of just 7.9% but even if these shares were all fully owned by foreign investors, Vietcombank would still be 4.55% shy of the foreign ownership cap.
Specialists said that GIC likes Vietcombank because of its profitability and falling problem-loan ratio -- already one of the lowest among Vietnamese banks.
Vietcombank's adjusted problem-loan ratio dropped to 1.9% at the end of June, from a high of 11.4% in 2013, after the bank fully wrote down its stock of bonds issued by the Vietnam Asset Management Company in 2016.
Asset quality should continue to improve given Vietnam’s strong economic growth, boosting borrowers’ ability to repay loans and enable banks to accelerate write-offs of legacy problem assets.
One area of concern is its shift toward a more retail-oriented loan portfolio, which could pose downside risks to asset quality if executed poorly.
To that end, it has a target ratio of 50% by 2020 and appointed the first foreigner to a senior leadership position in 2017, hiring former HSBC banker Thomas William Tobin to lead its retail banking operations.
Vietcombank has also been undergoing a strategic review with Oliver Wyman to look at its operating processes and credit checks. This is leading it to centralise its credit operations.
Credit Suisse acted as the sole placement agent and financial advisor to Vietcombank on the equity placement. The Swiss bank also advised Vietcombank on its previous share sale to Mizuho.
YKVN, Vilaf and Allen & Overy acted as the legal advisors on the transaction.
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