Vietnam is preparing for a revival of the 2018 golden period of IPOs

VIETNAM is launching a new wave of market reforms whose centrepiece is to stage a cluster of initial public offerings (IPOs) of its most profitable state-owned banks. An ambitious listing programme began in early 2018 with spectacularly successful IPOs of a few commercial banks, but it was then plagued by liquidity crises at some banks that eventually delayed their listing.

The Vietnamese government wants the IPO process completed soon. Its bullishness stems from the triumph of the IPO of the largest private sector lender, Techcombank.

In April 2018, Techcombank raised US$922 million from global investors who were impressed with its plans to expand aggressively into retail banking, cashing in on buoyant demand for financial services such as credit cards and auto loans. Techcombank is Vietnam's second biggest listed bank after state-controlled Vietcombank.

Shares in Techcombank were purchased by the Singapore sovereign wealth fund GIC Pte Ltd, Fidelity Management & Research, and the Dragon Capital fund. The bank had strong appeal as it rides a niche in financial services. The banking sector posted strong profit growth as it registered annual credit expansion of about 18 per cent for the past two years.

Under government instructions, the banks were supposed to have started listing last year, but they could not do so because market conditions turned gloomy.

Now, the Vietnamese authorities are urging the nation's commercial banks to list on domestic stock exchanges by the end of this year. But the listings may get delayed because market conditions have not improved, and there are other constraints as well.

The commercial banks also face the challenge of raising funds to meet the capital adequacy ratio (CAR) under Basel II rules. The banks must raise US$10 billion to ensure compliance with CAR requirements by 2020, but they may take much longer because they lack funds.

Here lies the conundrum of the commercial banks: they are looking to foreign investors to inject the necessary equity capital to meet the CAR standards, prior to listing, but foreign investors prefer to commit their funds to banks that already are CAR-compliant as they are less risky.

The listings were supposed to happen under a vision 2025 restructuring programme for the financial markets under the guidance of the prime minister's office.

Currently, out of the 31 commercial banks in the country, 17 banks are listed on the stock exchanges in Hanoi, Ho Chi Minh City, and on the Unlisted Public Company Market (UPCoM) on the Hanoi Stock Exchange, which serves as a mezzanine exchange to encourage unlisted firms to participate in the securities market, with the expectation that the UPCoM companies would later move to the main market.

To push the process forward, Prime Minister Nguyen Xuan Phuc has instructed the State Bank of Vietnam (the central bank) to allow commercial banks to use their portfolio of government bonds to build their compulsory reserves. Commercial banks were the biggest issuers of government bonds in the first nine months of last year, issuing 49 per cent of all bonds, followed by real estate firms with 26.4 per cent.

Going forward, the proceeds from the IPOs (as well as equity sales of state-owned enterprises) are expected to reach US$26.3 billion over the next two years, 2.75 times higher than the funds raised in 2011-2017 period. Of the total, the value of IPOs is expected to be US$9.7 billion.

These expectations may lead to disappointment, again, due to the depressed market.

Some unlisted banks, such as Nam A Bank, Orient Commercial Joint Stock Bank, and Vietbank have spent a few years preparing for their IPOs. But they have sought to defer their debut because of a mood of pessimism in the market since late 2018.

The banks lining up for their IPOs are targeting the young and wealthy working population with disposable income. Techcombank, for example, provides a variety of products and services to more than 5.4 million customers through its 315 branches, and expects mortgages to fuel its loan growth. Techcombank timed its IPO perfectly, but soon afterwards the market sentiment dampened.

At present, however, the banks mulling an IPO are facing other challenges such as low return on equity and low return on assets that are below the industry average, and their enormous burden of non-performing loans.

There is much hope riding on the stock exchanges of Vietnam, which became South-east Asia's top markets for IPOs in 2018. Vietnam raised US$2.6 billion from just five IPOs in that year when the government accelerated its privatisation of state-owned enterprises, such as PetroVietnam Power, Viet Nam Rubber Group and Viet Nam Southern Food Corp. The Stock Exchange of Thailand came a close second with US$2.5 billion from 20 listings.

Part of Vietnam's stellar IPO performance in 2018 was based on the country's robust economic growth of 7 percent in that year, as Vietnam attracted substantial foreign direct- and portfolio-investments.

Till late-2018, it was widely expected that Vietnam would remain at the top of the region's IPO league table as more state-owned companies were ready to list. But the mood darkened in 2019 when the IPO market in Vietnam dried up. After one of its busiest IPO seasons in 2018, there were no IPOs by private Vietnamese companies the following year. A falling market has kept companies away from listing.

The government aims to revive the so-called golden period of 2018 for IPOs. There is hope because the capitalisation of the Vietnamese stock markets is almost 80 per cent of the country's GDP and is expected to expand further to 100 per cent of GDP by 2020.

The depressed mood in Vietnam mirrored a similar sentiment across South-east Asia's weakening IPO market in the first half of 2019, which saw a total of 48 IPOs raising US$2 billion across the region, representing a plunge of 55 per cent in proceeds.

In the third quarter of last year, South-east Asian IPOs again began reviving, with 40 issues worth US$2.9 billion. But there were still no IPOs in Vietnam in that quarter. For now the Vietnamese banks, waiting to make their debut on the market, are hoping that their bourses can replicate the mini-resurgence in IPO activity in the region's other bourses.

It is only a matter of time before foreign capital returns to Vietnam this year and helps revive all three Vietnamese bourses that plunged 28 per cent in value and almost 16 per cent in volume in 2019. The country's stable economy and the low valuations of stocks is expected to bring in more foreign capital.