A statistical report from Vietnam’s Central Institute for Economic Management (CIEM) in late 2021 reveals that the majority of both state-owned and private banks have a foreign ownership ratio of lower than 30%. However, despite the government’s restriction on ownership rates, many domestic banking institutes keep looking for investments from foreign sources. This can be explained by the mounting capital needs for banks to meet Basel 2 & 3 international standards and to enhance their governance capacity and market access. 

Capital Ownership of foreign investors at credit institutions 

The current Vietnamese legal system has enforced strict regulations on the foreign ownership of credit institution shares in congruence with each type of investor. 

Article 7 of Decree 01/2014/ND-CP stated that foreign investors shall not hold over 5% ( for individuals) and 15% (for organizations) of the charter capital of a Vietnamese credit institution, except for certain special cases regulated by the law. 

If a foreign strategic investor decided to enter the Vietnamese credit industry, the ownership of shares is restricted at 20%, though total foreign share ownership can go up to 30% of the whole credit institution’s charter capital. 

Conditions for foreign investors to own capital at Vietnamese credit institutions (Article 9, 10 Decree 01)

Conditions for a foreign organization to purchase shares that lead the shareholding level to be 10% or more of the charter capital of a Vietnamese credit institution 

• Ranked at a stable or higher level by reputable international credit rating agencies
• Having sufficient financial resources to purchase shares as determined by the independently audited financial statement of the year preceding the dossier submission year and a lawful capital source for share purchase as prescribed by law.
• The share purchase must not pose any negative impact on the safety and the stability of the Vietnamese credit institution system; nor does it create a monopoly or impede the competition among banks in the market.
• Not involved in any serious violations of the laws on currency, banking, and securities market of Vietnam and the country where the foreign investor is headquartered within 12 months from the time of share purchase application submission.
• Having total assets of at least $10 billion for foreign investors who are banks, financial companies, and finance-leasing firms or having the minimum charter capital equivalent to $1 billion for foreign investors being other organizations in the year preceding the year of the share purchase dossier submission.

Conditions for foreign organizations to purchase shares and become foreign strategic investors 

• Conditions specified in clause (1) above, excluding the condition of having total assets.
• Foreign banks, foreign financial companies, and foreign finance-leasing companies are allowed to perform banking activities as prescribed by the law of the countries where they are headquartered. Foreign financial companies are only permitted to be strategic investors in Vietnamese financial and finance-leasing companies. 
• Having at least 5-year experience in international operations of banking and finance.
• Having minimum total assets of $20 billion in the year preceding the year of share purchase dossier submission.
• Having a commitment and an explicit plan on building long-term relationships with Vietnamese credit institutions and assisting them in modern technologies application, banking products & service development as well as financial, administrative, and executive capacity enhancement.
• Not owning 10% or more of charter capital at any other credit institution in Vietnam.
• Committed to or already owning 10% or more of the charter capital of Vietnamese credit institutions where foreign organizations proposed to purchase shares and became a foreign strategic investor. 

Current status of ownership of foreign enterprises in Vietnamese credit institutions

The report "Study on the necessity of expanding the limit of ownership for foreign investors in Vietnamese credit institutions" published by CIEM on December 15th, 2021 reveals that many domestic banks have already raised their foreign share ownership up to approximately 30%.

Specifically, as of June 30, 2021, there are a total of 19 credit institutions (3 state-owned and 16 joint stock commercial banks) with foreign institutional shareholders owning more than 1% of the credit institution's charter capital. In addition, 11 credit institutions are reported to have a foreign ownership rate of over 15%, out of which 5 institutions have a foreign share ownership rate going up to 25%. 

According to the CIEM’s 2021 Economic Financial report, from 2018 to June 2021, a number of banks have announced high ownership of foreign investors such as BIDV with KEB Hana owing 15%; MSB with the participation of 8 foreign investors whose total ownership accounts for up to 28.22%; VPB with 9 foreign investors owning 13.33%; LVB (1 foreign organization owning 2.1%) and SCB (1 foreign organization owning 4.94%).

In an interview with Vietnam Economic Times in December 2021, Dr. Can Van Luc - Chief economist of BIDV Research and Training Institute commented: “As of now, 3 out of 4 major state-owned banks including Vietcombank, Vietinbank, and BIDV are reported to have foreign ownership rates of between 16.7% and 25.5%, while Agribank is still in the process of equitization preparation. Thus, the average rate of foreign ownership in these 4 biggest banking institutes only accounts for 16–17%, leaving 13% of shares untouched.” 

Private commercial banks, on the other hand, have used up most of the room available for foreign investors at the rate of 27-28%, but are still looking for more capital resources from both domestic and foreign investors. However, finding suitable strategic investors is exceedingly challenging since the hard cap remains at 30%.

This 30% cap will limit the options for the local lenders, said Amit Pandey, a banking analyst at Ratings. "Domestic capital sources may not be sufficient, as local markets will have limited capacity. Meanwhile, foreign capital is constrained by regulations. Low capital levels are one of the key risks associated with the banking sector”, he added.

Government’s intention of increasing equity for foreign investors

Over the past few years, many nations in the area, including China, Thailand, and Indonesia, have made significant improvements in the ownership threshold for foreign investors. 

Given such a shift in the global market, the CIEM representative suggests that it is the right time for Vietnamese policymakers to open up new room for foreign investors. In addition to enhancing executive management and the adoption of cutting-edge digital technology, this will generate countless opportunities for banks to attract valuable foreign capital and support a more successful banking restructuring.

Recently, on June 8th, 2022, the Prime Minister of Vietnam released Decision 689/QĐ-TTG demonstrates the government’s aims to reduce the number of credit institutions, settle legacy bad debts, and push for banks to achieve higher capital adequacy ratios of 10- 11% by 2023, and at least 11-12% by 2025. This action marked the Vietnamese government’s effort to further enhance the quality of its credit institutions and by doing so, draw a wider pool of foreign investors from both the domestic and global markets to jump in and spice up the game. 

Furthermore, Vietnamese banks' plans to raise at least $2.8 billion of capital at the end of 2022 to foster growth can be seen as an excellent opportunity for foreign investors to expand their business scope and carve a slice of economic activity in this emerging manufacturing hub.

In order to achieve that goal, Vietnamese banks will need to tap into both domestic and foreign investors to meet their capital ambitions. "If banks want to raise this amount of money and have a good valuation, they also need to reach out to the participation of foreign investors…" shared Quan Trong Thanh, Head of Research at Maybank Securities Vietnam in an interview with S&P Global Market Intelligence. 

In conclusion 

Given the bumpy road ahead, Vietnam is displaying significant potential to grow its credit market as the government is constantly working towards lifting the restriction on the ownership cap for foreign investors.

In fact, Vietnamese legal regulations on foreign ownership in credit institutions have been loosened over the past few years and thus, opened a wider room for overseas investors. As of now, the Commonwealth Bank of Australia (CBA) is reported to be the largest foreign shareholder, holding around 20% of VIB's shares. In addition to that, VPBank also sold an estimated 49% of FE Credit shares to SMBC and consequently lifted the maximum foreign ownership cap from 15% to 17.60% of charter capital. The rise in the foreign ownership ratio will give domestic banks the opportunity to seek better global collaboration and learn from the world’s top prestigious financial institutions on how to apply international governance standards and improve their current business models. 

At the same time, lenders can reap great benefits investing in the country’s credit institutions and carve a slice of their name into the development process of Vietnam’s credit industry. They should consider this as an excellent opportunity to arm themselves with the best strategies and practices of Vietnam’s domestic credit industry so that, once the door’s wide open, they will be the first to dive in and take hold of the market. 

If you’re still looking for a safe set of hands to assist you with your first steps into Vietnam’s credit market, connect with Viettonkin for more in-depth, up-to-date, and personal investment advice. Here, with a community of reputable consultants, and highly developed communication channels along with a network of diverse connections of domestic and international businesses, we are well positioned to offer M&A advisory services to provide assistance for foreign investors to enter the banking sectors. Contact us now to enhance your chance of business success!