Vietnam Prosperity Joint Stock Bank (VPBank) has begun marketing one of the largest initial public offering in Vietnam's history, with a $200 million to $250 million issue that is scheduled to price at the end of June.
The transaction is an important one for Vietnam, as equity issuance starts to pick up and foreign funds take a closer look at the market.
As such, it will not only prove another test of investors' willingness to absorb extended settlement and trading risk, but also the stock market’s ability to help recapitalise the country's banking sector as it moves towards the delayed implementation of Basel II in 2020.
VPBank is hoping to capitalise on the success of VietJet’s $167 million IPO in mid-December. The stock has performed extremely well since the company listed on the Ho Chi Minh Stock Exchange (HOSE) at the end of February, rising 53.6% to Monday’s VND130,000 close.
What it will not be hoping to do is follow the example set by the Joint Stock Bank For Foreign Trade of Vietnam (Vietcombank) almost one decade earlier.
The country’s third largest bank by assets holds the record for the largest IPO in Vietnamese history after raising $652 million equivalent in December 2007 at VND107,860 per share.
However, the offering came shortly before the bursting of Vietnam’s first stock market bubble on the back of an overheated economy and the global financial crisis.
Banking sector valuations
At Monday’s close, Vietcombank was trading at VND36,300. The stock has never re-bounded anywhere close to its IPO price, although it has risen fairly consistently from an all-time low of VND13,010 in January 2012.
It is also waiting in the wings with a large equity deal of its own. Earlier this month, shareholders approved a 359 million share offering, which should raise about $575 million and equates to roughly 10% of the bank’s existing share capital.
Given Mizuho already holds a 15% stake, the bank will need to secure government approval to breach the country’s 30% foreign shareholding cap (strategic investors are allowed to hold 20%), although bankers believe this is imminent.
At currently trading levels, Vietcombank is valued at 2.45 times 2017 price to book: a big premium to the rest of the sector.
Second is Asia Commercial Bank (ACB), the country’s largest private sector bank by assets, which is trading around 1.56 times on a 2017 price to book basis.
Further down the pack is Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) at 1.1 times and Military Commercial Bank around book value.
Fund managers said VPBank, the country’s eighth largest private bank by assets, is being pitched at around three times price to 2017 book value on a pre-money basis and about 1.8 times at the bottom end of the pre-marketing range on a post-money basis.
Management are currently on roadshows in London and Paris.
Fund managers say they have been arguing for a premium valuation on the grounds that VPBank is the best in class. This is based on the bank’s sizeable number of senior foreign managers who, alongside McKinsey, have introduced tight risk management procedures and re-focused the bank towards the fast-growing consumer finance sector.
Non-syndicate bankers tend to agree. “This bank is growing by leaps and bounds,” said one frontier markets investment banker. “A successful deal will provide the right launch pad for all the other Vietnamese banks, which need to raise capital.”
VPBank is majority owned by three Vietnamese families who took control in 2010 and plan to offer 10% of its issued share capital. On listing, bankers estimate the bank will have a free float of around 20% to 30% given the large number of small shareholders and employees on the register.
They also said that, contrary to local speculation, the bank is not planning a second sizeable equity offering once it is listed to boost the free float further.
Back to front IPO rules
VPBank’s IPO has a similar structure to VietJet and will be executed via a book building exercise based around a price range.
Bankers estimate there will be a 75%/25% split between foreign and domestic investors with no retail tranche.
It is technically designated a pre-IPO offering with a top-up placement type structure to get around Vietnam’s arcane regulatory requirements.
These mean that lead manager Viet Capital Securities can only file for an IPO once pricing has been fixed at the end of June, with regulatory approval expected to take about two months.
Settlement is provisionally scheduled for mid-July, exposing investors to at least six weeks of market risk ahead of a likely listing date in September.
This back-to-front IPO process prevents a large number of international funds from participating in the primary market, but should underpin secondary market trading.
Trading volumes aligned to free floats
Ensuring the deal has a reasonable free float is also important in a market where nominal market capitalisation is a deceptive indicator of how well the stock market is functioning.
In 2016, for example, the market capitalization of HOSE, the Hanoi Stock Exchange (HNX) and UPCoM combined, rose from $58.9 billion to $74.4 billion. This was largely due to the listing by introduction of a number of state-owned companies such as national brewers Sabeco and Habeco, plus Vietnam Aviation Corp.
But they all have tiny free floats similar to Vietcombank, which trades about $1.7 million a day on a 7.9% free float and $5.78 billion market capitalization.
VPBank should offer investors a far more liquid stock to play the banking sector. In this respect, it will be more like ACB, which has a 75.9% free float and averages $2 million a day despite a market capitalisation one-fifth the size of Vietcombank.
Raising capital
One of the driving forces behind the push to get more state-owned companies on the stock market is the government's burning ambition to achieve MSCI emerging market status. However, local experts believe this will remain off the cards until its IPO rules adhere to international norms.
The government is also transitioning the banking system from Basel I to Basel II, a process that has been pushed back from 2017 to 2020. Analysts say the sector needs billions of dollars of capital if it is to continue underwriting the kind of 17.99% credit growth level reported during the first quarter.
Over the past few years, there have been consistent reports the government will facilitate this by allowing foreign entities to take full control of local bank. The State Bank of Vietnam recently confirmed it planned to do so on a case-by-case basis.
The share price of Saigon Commercial Bank, for example, has risen about 70% since December following reports that Bank of China is negotiations for a 30% stake.
Kevin Snowball CEO of Ho Chi Minh-based PXP Vietnam Asset Management told FinanceAsia: “Raising the foreign shareholding limit will be very positive for the market. There isn’t enough money to meet the banks’ capital needs onshore. It will need to come from offshore.”
The State Bank of Vietnam also recently admitted that non-performing loans are higher than reported levels, accounting for 8.86% of all loans. This includes loans held by the Vietnam Asset Management Company (VAMC) since impairment risk lies with the individual banks.
However, bankers say the sector is in the process of clearing out NPLs from the last industry cycle, giving investors some confidence the ratio has peaked.
VPBank fundamentals
The bank has one of the sector’s better capitalisation ratios, with an overall capital adequacy ratio of 13.2% at the end of 2016 and NPLs of 2.9% according to banks.
At the end of 2016, assets stood at $10.17 billion, while the bank reported revenues of $510.4 million and net profit of $179.2 million according to S&P Global Market Intelligence data.
Bankers also said the bank’s net interest margin finished the year just shy of 8%, almost four times higher than the industry average.
This is because it has concentrated on the high margin consumer finance sector, which currently contributes about 50% of revenues.
This is expected to fall to about 40% as other high-growth sectors kick in such as household finance. In Vietnamese parlance, this is a form or microfinance or unsecured lending to kiosk holders and contributes about 10% of revenues.
The bank has previously said it is in the process of selling a 49% stake in its consumer finance arm, FE Credit, reportedly to a Japanese investor.
However, bankers said this plan has now been shelved.
Between 2011 and 2015, FE Credit’s loan book grew by a compound annual growth rate of 165% to $1 billion and covers 1.48 million clients across 64 provinces.
It has given VPBank a 53% market share and is one of the deal’s greatest selling points in a country with a high GDP growth rated, but an under-banked and young population.
