INTERNATIONAL BANKING Tutorial 1

PhD. Pham Thi Hoang Anh

Assignments
Part A: Critically discuss the recent trend of cross-border

mergers and acquisitions (M&As) carried out by the banks from emerging markets.

Part B: Critically analyse the potential risks international

banks may pose to the banking sector as well the economy in emerging markets.

Foreign direct investment (FDI)

IMF/OECD: The term describes a category of international

investment made by a resident entity in one economy (direct investor) with the objective of establishing a lasting interest in an enterprise resident in an economy other than that of the investor (direct investment enterprise).
Lasting interest implies the existence of a long-term relationship

between the direct investor and the enterprise and a significant degree of influence by the direct investor on the management of the direct investment enterprise.
A foreign investor owns more than 10 percent of the ordinary

shares or voting power (49% in Vietnam)

FDI in Vietnam
Registered FDI includes (i) licensed number including charter

capital, of which contributed by foreign and domestic sides, (ii) and borrowings from domestic and foreign banks. This means that this number is the commitments of both sides in the licensed projects that may be not implemented because of some unexpected reasons.
Implemented FDI: volume of FDI implemented by both foreign and

domestic entities.
Disbursed FDI: investment implemented by only foreign partner,

not include investment by domestic joint-venture partners.

FDI flows into Vietnam,1988-2008

Entry modes of FDI

Greenfields

Foreign investor establish a wholly owned subsidiary by building a subsidiary from the ground up a new entity is established
Merger and acquisitions Cross-border M&A

- Foreign investor acquires an existing local firm in a target market no new entity is established - Transfer of existing assets from local firms to foreign entity

Greenfield vs. M&A

Criteria Intensity of market competition Macroeconomic effect Greenfields Adding a new supply to the market Increasing physical investment can affect economic growth M&A Gaining market share and production capacity, reducing cost Enhancing productivity growth

Banking in Vietnam
A two-tier banking system was established in 1988 under which

the State Bank of Vietnam was separated from four state-owned commercial banks (Big-four) Vietcombank, Vietinbank, BIDV, Agribank (specialized in industries)
The State Bank of Vietnam Law and the Credit Institutions Law

were approved in December 1997 (effective in October 1998)

The SBV is defined as one of the ministries of the government

and pursues objectives assigned by the government highly depends on the government.

Similar to banking system of China

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Weaknesses
The capital adequacy of Vietnamese commercial banks meets the

international standard of 8 percent, it is still low (Asia and Pacific: 13.1; East Asia: 12.3%)
A large difference in equity size between state-owned banks

(with an average of US$600 million) and joint-stock banks (US$100 million)

Financial services are not well diversified, with provision of

credit remaining the main activity of commercial banks

Management skills, especially liabilities and risk management

skills, are still weak

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Banking system in Vietnam

- 4 state-owned commercial banks (2 were privatized in 2009 with

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majority shares held by the government), A social policy bank, 37 joint-stock commercial banks, 48 branches of foreign banks, 5 joint-venture banks, 5 wholly foreign-owned banks, 17 finance companies, 13 financial leasing companies, 48 representative offices of foreign banks, A microfinance institution, 1057 credit funds.

Summary of banking sectors

High US, China Vietnam???

Degree of Government supervision/control

Low

Germany

UK

Low
Market concentration

High

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Restructuring Vietnamese banking system

Vulnerability of Vietnams banking system

- Increasing risk of bad debt high ratio of non-performing loan (10%8.28%) - Poor quality of governance, technology and human resources - Weak risk management skills (liquidity risk, credit risk, market risk) Not really effective performance (of the banking system and its impact to the whole economy) Requirement of global integrity: - Higher CAR, high competitiveness environment, reactions to external shocks Requirements of new stage of Vietnams socio-economic development (high quality, effectiveness, socio-economic and environmental sustainable development)
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M&A in Vietnams banking industry

First Bank, TinNghia Bank, and Saigon Commercial Bank Post savings (Tit kim Bu in) and Lienviet Bank into

Post Bank
SHB and Habubank
HD Bank and DaiA Bank (coming next ???)

Domestic M&A not cross-border M&A

M&A in Vietnams banking industry (Cont.)

Foreign ownership in banking sector: no more than 30 percent,

with maximum for a single individual, institutional and a single strategic institutional entity is 5 percent, 10 percent, 15 percent
Increasing foreign ownership of commercial banks is a solution

proposed in the scheme to restructure the credit institution system. However, if the task is not carried out thoroughly, it will harm the interests of the nation.
Foreign investors are interested in the Vietnamese banking

industry since they perceive an opportunity to take over a leading lender. But they may be reluctant if the restructure of the banking system is too tardy and implemented ineffectively.

M&A in US banking system (Cont.)

The merger of Chase Manhattan Corp. with J.P. Morgan & Company.

The name of the new company formed as a result of the merger is J.P. Morgan Chase & Company. The merger of Firstar Corp. with U.S. Bancorp. The name of the resultant entity is U.S. Bancorp. The merger of First Union Corp. with Wachovia Corp.The name of the newly formed company is Wachovia Corporation. The merger of Fifth Third Bancorp with Old Kent Financial Corporation. The name of the merged company is Fifth Third Bancorp. The merger of Summit Bancorp with FleetBoston Financial Corp. The new company is named FleetBoston Financial Corporation. The merger of Golden State Bancorp, Inc. with Citigroup Inc. The name of the newly formed company is Citigroup Inc. The merger of Dime Bancorp, Inc. with Washington Mutual and the name of the merged entity is Washington Mutual.

M&A in US banking system

The merger of FleetBoston Financial Corp. with Bank of America

Corp. The newly formed entity is Bank of America Corp. The merger of Bank One with J.P. Morgan Chase & Company. Name of the new company is J.P. Morgan Chase & Company. The merger of SunTrust with National Commerce Financial and the newly formed entity is also named SunTrust. The merger of Hibernia National Bank with Capital One Financial Corp. and the merged entity is known as Capital One Financial Corp. The merger of MBNA Corp. with Bank of America and the resultant entity is known as Bank of America Card Services. The merger of AmSouth Bancorporation with Regions Financial Corp. and the name of the newly formed entity is Regions Financial Corp. The merger of LaSalle Bank with Bank of America and the new entity formed is called as Bank of America. The merger of Mellon Financial Corp. with Bank of New York Company, Inc. and the newly merged entity is known as Bank of New York Mellon.

Trends in cross-border M&A in emerging market

Investment taking the form of acquisition of existing assets

(M&A) grew much more rapidly than investment in mainly new assets (greenfield FDI) in Latin American countries Caldern, C., Loayza N., and Servn, L. (2002).
- Extensive privatization of public firms - Macroeconomic conditions: E.g. during economic

crisis/recession, foreign investor prefers M&A rather than greenfields because acquisiting an existing firm can take advantage of existing customers, suppliers, .

Sources for materials and data

- Text book International banking - Websites:

+ www.sciencedirect.com + www.imf.org + www.unctadstat.unctad.org - World investment report 2000 (pp.127/99-; Box IV.10 pp.157/129), - World investment report 2008-12