New Bank Set up - Not Easy

Many enterprises are eager to replicate impressive profits announced by Vietnamese banks, and all capable entities want to set up banks now when the Vietnamese financial market is in the process of quick integration.

The State Bank of Vietnam (SBV) said it had admitted 23 applications for formation of new joint stock banks. Among the applicants, 10 came from provinces which wanted to set up local banks. Other applicants were some of the country’s leading corporations and groups like Bao Viet, FPT, Posts Savings and PetroVietnam.

 

Currently, Vietnam has five state-run commercial banks, over 30 commercial joint stock banks, four joint venture banks and nearly 30 foreign bank branches operating in Vietnam. However, this figure will be soon be surpassed. Many other organizations have plans to apply for the formation of banks. SBV will receive more applications for bank setups from now until the year’s end.

 

Mr Le Duc Thuy, Governor of SBV, said the Monetary Policy Advisory Council neither encourages nor prevents big enterprises from setting up banks, but it will provide clear, transparent and tight regulations to ensure the common safety of the entire system. “Any enterprises meeting the requirements can set up banks. SBV will not accept or reject due to pressure or partiality,” Thuy affirmed.

 

Under the regulations on establishing and operating joint stock banks alongside Decision No 24/2007/QD-NHNN by the State Bank of Vietnam on licensing new commercial joint stock banks, to be licensed for establishment a new bank must have at least 100 founding members, including at least three institutional shareholders, with minimum capital of VND500 billion (US$31.75 million). Besides, the new bank must also satisfy the chartered capital level set by the government. In 2007, minimum chartered capital for a joint stock bank is VND1,000 billion (US$62.5 million), and VND3,000 billion (US$187.5 million) in 2008. Especially, this money cannot be loans in any form. Moreover, founding shareholders are forbidden to transfer shares within the first five years, and common shares cannot be transferred to outsiders within three years from the licensing date. The regulations aim to more closely link shareholder responsibilities to their banks. The formation of banks is for effective bank operations, not for transferring shares.

 

Mr Thuy warned that commercial joint stock banks always release information when they bag heavy profits and their shares increase sharply, but it is necessary to note that many banks haven’t paid a single penny of dividends to shareholders for dozens of years. The banking business will not always bring in immediate big profits. They had to pay a dear price. If their profits were calculated back to their founding days, earnings were even lower than the VND deposit interest rate. No one can be sure that current prosperous banking operations will continue in the future, because they may encounter shocks that even excellent leaders cannot tackle, Thuy said. Especially, enterprises are banned from setting up banks simply to raise capital. This is an independent business field. The Central Bank will strictly punish violators.

Since late 2006, bids for options to buy shares in banks not yet established mushroomed on the over-the-counter (OTC) market. Such buying options are widely posted at online OTC floor’s websites. The purchasing options of PetroVietnam Bank (PVB) shares are popularly posted on websites. Several prospective banks like VT and TN also have their shares offered for sale.

 

According to an SBV official, the buying and selling of purchasing options for shares of banks still under the process of application is legally unfounded. The establishment of joint stock banks is not simple, as the new mechanism provides many detailed and stringent regulations, especially conditions on capital, founding composition, personnel, technology and operational feasibility requirements. At present, it is not certain that all 23 applications will be ratified by the State Bank. Certainly, under the new mechanism, these applications will be sent back to applicants for modification to match new regulations.

 

In short, regardless of the success or failure of the bank establishment application, people buying options still encounter risks in keeping them for three years. This period of time is too long for speculation purposes and no one can be sure what will happen during this time. Investors must be very careful in buying options of banks not yet established because the legal risks are very high.