Banks look to purchase finance companies
Over the last few months,
the financial market has seen at least five banks express their
intention to acquire finance companies, including two that have a
majority of their stock owned by the Government.
The
HDBank is one of the banks participating in the new trend. In August,
it announced that it had obtained approval in principle from the central
bank to acquire 100 percent equity in Societe Generale Viet Finance
(SGVF), one of the largest foreign-owned consumer finance companies in
Vietnam.
If the deal is finalised, SGVF will become a
subsidiary of HDBank. The transaction, the first one of its kind, will
pave the way for other institutions in Vietnam to make acquisitions to
form financial and banking groups that will eventually reduce the number
of financial institutions in the market, one of the restructuring
targets announced earlier by the central bank.
Banks
had shown their desire to purchase finance companies a few years ago,
but the need became clearer when several State-owned corporations were
urged to withdraw from non-core investments. Many finance companies are
subsidiaries of these corporations.
Meanwhile, many
banks have idle capital on hand that is enough to partly or entirely buy
the finance companies and push up their activities relating to consumer
credit.
Consumer credit is basically borrowings
used to purchase non-investment goods or services that are consumed and
whose value depreciates quickly.
Analysts note that
while consumer loans have interest rates much higher than the banks'
normal loans, they also carry higher risks of non-repayment.
An official with a Ho Chi Minh City-based commercial bank which is
considering buying a finance company, said that activities relating to
consumer credit at banks were not different from that of the finance
companies. The interest rate for consumer credit at the banks may climb
to 30, 40 and even 50 percent per year for short-term loans, he said.
"In spite of the fact that the rates for banks'
consumer credit do not contravene current regulations and are similar to
that of finance companies, it is not easy to publicise these on the
banks' lists of interest rates or nosily advertised in promotion
campaigns. Such actions could cause misunderstandings that affect the
lenders' common operations. Meanwhile, the finance companies can carry
out consumer credit activities without facing a similar situation," he
said.
The high interest rates make consumer credit,
and the finance companies that offer it, attractive to banks because
they can make significant contributions to the banks' profit earnings at
a time when credit given to industries is continuously going down.
Having a finance company would also make it easier for banks to carry
out several other activities like purchasing stocks in enterprises and
other credit institutions, investing in projects under contract, or
acting as an agency to issue bonds, stocks and other valuable papers for
enterprises.
Aviation still has potential
Huge investment and high input costs have caused several private
carriers to close their operations in Vietnam, and those still operating
are failing to make profit.
On March 1 this year,
Air Mekong, the carrier belonging to Ha Long Investment and Development,
or BIM Group, announced it was grounding all its flights.
Indochina Airlines closed operations in December 2010 after incurring
losses of 400 billion VND (19 million USD) in less than a year of
becoming operational.
In December 2011, the Civil
Aviation Administration of Vietnam withdrew the business licence of Trai
Thien Air Cargo. The private airline was established in June 2008 with a
registered capital of 500 billion VND (about 25 million USD), but
failed to start operations.
It would not be
surprising that in such a situation, other private carriers would be
wary about venturing into the domestic aviation market. However, this
does not appear to be the case.
The Thien Minh
Tourism JSC (TMG) recently announced that it has bought an 89 percent
stake in Hai Au Airlines, a private Vietnamese airline. TMG said on
October 14 that it would start operating the airline next year with a
registered capital of 60 billion VND (2.84 million USD).
TMG leaders said they would buy two seaplanes that would be put into
operation in April 2014. The 12-seat seaplanes would be used for
sightseeing over Ha Long Bay and provide air taxi and other services on
demand, they said.
Earlier, on September 25,
VietJetAir signed a Memorandum of Understanding with France's Airbus for
buying up to 92 A320 aircraft and plans to lease eight more from third
party lessors. The total deal is worth about 9.1 billion USD.
In order to pay for the 100 Airbuses, VietJetAir will have to seek
capital from different sources including export credit financing,
commercial loans from foreign banks or make IPOs (initial public
offering) within 18 to 36 months.
One of the reasons
that has encouraged VietJetAir to undertake such an ambitious
investment plan is the positive results that the carrier has obtained
since it was put into operation in December, 2011.
This year alone, VietjetAir increased its market share from 16 percent
in the second quarter to 20 percent by late August, behind only the
national flag carrier Vietnam Airlines.
Such moves
by private airlines could significantly alter the face of the domestic
aviation market currently dominated by Vietnam Airlines.
In fact, in addition to intensifying investment into developing their
fleets, private airlines have also outlined strategies to further
penetrate the domestic aviation market that is expected to grow by 12
and 15 percent by the year-end.
One important
objective of such strategies is to strengthen and exploit close ties
between the aviation industry and the tourism sector. The private
carriers plan to set up close co-operative relationships with travel
agents and tourism companies. This makes good business sense, given that
between 70 and 80 percent of people are using flights for tourism
purposes, according to the Business Times.
TMG's
decision to enter the aviation industry at this time makes even more
sense because it is well placed to fully tap the tourism advantage. It
has 10 hotel chains in Vietnam, Laos and Cambodia with 250,000 customers
a year.
VietJetAir, meanwhile, has announced more
tourism stimulus programmes under which the company has or will sign
strategic co-operation agreements with travel enterprises and promote
domestic tourism activities while actively cutting the price of its air
tickets.
Analysts say that such diverse business
strategies are bound to create more opportunities for private carriers
to strengthen their market presence and provide competitive services for
customers.
Feasibility suspect
It is generally agreed that success of investments is not assured in
the current business climate, but many enterprises are planning to
increase their registered capital by issuing shares late this year or
early next year.
The Domesco Medical Import-Export
Joint Stock Company, for instance, is preparing to issue additional
shares in January, 2014. The company wants to increase its chartered
capital for expanding its production line and distribution network.
Meanwhile, the Rang Dong Plastics Joint Stock Company is collecting
shareholders' written opinion on issuing new shares to increase its
prescribed capital.
At a recent meeting of the Viet
An Joint Stock Company, shareholders agreed with a plan to increase its
charter capital from 279.6 billion VND to 433.38 billion VND. The share
issue is expected to take place later this year. The plan is to issue
13.98 million shares with a face value of 5,000 VND each.
Many other companies, including the MDF VRG - Quang Tri Joint Stock
Company, the Nghe An Petroleum Cement Joint Stock Company and the Tan
Phu Plastics Joint Stock Company have announced similar plans to
increase their legal capital.
While the companies
seem determined to increase their charter capital by issuing shares,
analysts are not sure about the feasibility of their plans.
It is not an easy time to sell shares now, given that the share prices
of some companies on transaction floors are even lower than their face
value. For instance, the face value of the shares of a company which
does not want to be named, is 10,000 VND each, but its rate on the
transaction floor is less than 5,000 VND.
In
addition, analysts note, the performance of the securities market is not
very stable now, and this could affect the companies' capital
mobilisation plans.-VNA