Warburg Pincus steps into Vietnam banks as others exit

The private equity firm is set to invest over $370 million in Techcombank to tap into growing middle-class demand for banking services, just as foreign banks sell out of local peers.

Committing further to Vietnam just as some banks pull out, Warburg Pincus is set to make the largest-ever private equity bet on Vietnam by investing more than $370 million in Techcombank. 

Known formally as the Vietnam Technological and Commercial Joint Stock Bank, Techcombank is one of the country's biggest private-sector joint-stock commercial banks based on last year's pre-tax profits.

The move, announced in a joint statement on Monday, comes as foreign banks exit some of their local banking partners, partly due to punitative capital rules under Basel III for minority investments, deteriorating capital levels at Vietnamese banks, and concerns about non-performing loans (NPLs).

That includes HSBC, which sold its 20% stake in Techcombank last year, but also Standard Chartered, which sold its stake in Asia Commercial Bank in January, and BNP Paribas, which sold its stake in Orient Commercial Bank in December. 

Foreign banks have also become frustrated with the ownership cap in Vietnam, which limits their stakes to a maximum one fifth of a local bank.

The broader business backdrop remains compelling, though, given growing middle-class demand for modern banking services. Vietnam’s economy growth has motored along at an annual rate of 6% for the past decade, underpinned by the country's young workforce, with over 60% of its near-100 million population under the age of 40 in 2017, according to World Bank figures. 

Foreign direct and indirect investments into Vietnam hit a record high in 2017 of $36 billion, which is more than 40% up on the previous year.

“The demand for banking services is sharply accelerating with increasing spending power in our population,” Ho Hung Anh, chairman of the 25-year old Techcombank, said in the statement.

Vietnam's banking penetration ratio remains very low at just over 30%, according to 2017 figures. That compares poorly with nearby Indonesia, Thailand, and Malaysia, where it is 56%, 71%, and 77%, respectively. But it also highlights the untapped potential.

While nascent, the Vietnamese consumer lending sector has tripled between 2013 to 2016 as the newly minted affluent and mass affluent classes seek products such as mortgages, auto loans, and credit cards.

NPL ISSUE

To be sure, the country's credit-fuelled economic growth has swollen the banking sector's NPLs. Although accurate NPL data are hard to come by, the figures are thought to have spiked sharply after a crisis in 2012, which in turn followed a massive extension of credit to poorly state-owned enterprises in the wake of the global financial crisis and Vietnam’s own earlier 2007 bust.

Last year, the State Bank of Vietnam admitted that NPLs were higher than reported and put the figure at 8.86%.

Booming asset growth has also led to a fall in the capitalisation of the sector.

The backdrop, though, is becoming more supportive. "For 2018, we expect that the banks will continue to improve their asset quality and profitability, while capitalization will weaken," Eugene Tarzimanov, a senior credit officer at Moody's, said in a report dated March 6.

Warburg Pincus also believes that the asset quality of Vietnamese banks, especially Techcombank, has improved siginificantly since the financial crisis, according to a person familiar with the firm’s thinking, who put Techcombank’s 2017 NPL ratio at 1.6%. 

The private equity firm is likely to support Techcombank on any future fundraising initiatives, cross-border opportunities, and operational efficiency improvements such as IT systems upgrade.

Techcombank was planning a roughly $800 million IPO, it was not immediately clear if Warburg Pincus's investment would delay its plans.

Credit rating agency Standard & Poor’s pegs Techcombank at the same B1 level as the sovereign. The shares Warburg Pincus has bought in Techcombank are treasury stock, not new shares.

Elsewhere in Vietnam, Warburg Pincus has invested in Vincom Retail, whose $740 million listing on the Ho Chi Minh Stock Exchange last November was the largest-ever initial public offering in Vietnam. It also invested in hospitality firm Lodgis, to capture the rapid growth of tourism to Vietnam and BWID, a developer of institutional-grade industrial and logistics properties across Vietnam.

The private equity firm’s minority investment in Techcombank is still subject to regulatory approvals.

Warburg Pincus has committed over $11 billion in the financial services sector since 1971. In December 2017, it closed a dedicated sector fund called Warburg Pincus Financial Sector, L.P. at $2.3 billion.

Warburg Pincus’s equity for the Techcombank investment will come from Warburg Pincus Private Equity XII and Warburg Pincus Financial Sector, L.P., the person familiar with the company's thinking said.

It has backed ICICI Lombard, Kotak Mahindra Bank and AU Small Finance Bank in India, as well as China Huarong, Hwabao WP Fund (formerly Fortune SG), Cango and Wacai in China.

¬ Haymarket Media Limited. All rights reserved.

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