Merger of VietinBank and PG Bank comes a sad ending

After nearly three years of negotiation, the Vietnam Joint Stock Commercial Bank for Industry and Trade, also known as VietinBank, and Petrolimex Group Commercial Joint Stock Bank have decided to cancel their merger deal.This outcome is not so unexpected as it has been anticipated by several investors.

According to Vietinbank financial statement,VietinBank and PG Bank will report to the competent authorities for consent to officially cease the merger deal.

Of all the reasons, price is one of the key factor preventing the merger of VietinBank and PG Bank. With the swap rate of 1 PG Bank share for 0.9 VietinBank share (stock code CTG), it is disadvantageous for the shareholders, especially to a bank with sharp rise in stock price like VietinBank.

Bad debt and net interest margin (NIM) after the merger are other factors leading to the collapse of the agreement. Currently, VietinBank has a high net interest margin but in a declining trend. If VietinBank was to merge with PG Bank, the NIM of VietinBank will fall even further while net interest income will grow more slowly.

In terms of bad debt, by the end of third quarter in 2017, PG Bank reached $23 million of bad debt, leveling at 2.69 percent and by the end of 2017, the total bad debt of VietinBank was $396 million, accounting for 1.14 percent of total outstanding loans. 

Additionally, PG Bank also has a VACM bond worth of $98.1 million, currently is provisioning of $25 million. Hence, if PG Bank merged with VietinBank, the cost of provisioning of VietinBank will definitely increase.

Another risk of bad debt that VietinBank needs to take into account is the potential debt in the case of Huynh Thi Huyen Nhu. Although according to the first instance criminal judgment on last February 9th, VietinBank is not liable for any joint liability and financial losses, but this judgment is not yet in effect due to the appeal, which is currently being processed by legal bodies.

Even though, the merger plan of VietinBank and PG Bank has collapsed, it was fairly reasonable back when VietinBank decided to merge with PG Bank. If VietinBank merged with PG Bank, the size of VietinBank operations will surely increase and its retail network will expand through thousands of petrol stations owned by Petrolimex - shareholders which owned 40 percent of PG Bank, creating a competitive advantage. The merger will also allow VietinBank to have access to large projects of Petrolimex, a benefit that few banks have.

In addition, since PG Bank is much smaller than VietinBank, the outstanding loans that VietinBank has to take from PG Bank will only account for a small part, thus PG Bank will not have much influence on VietinBank.

Considering all aspects, VietinBank seems to lose more than gain, which explains the collapse of the merger with PG Bank. Without this merger the future of PG Bank is now obscure.

In the recent shareholders meeting, Military Bank has discussed the scenario of buying PG Bank. However, both are still in the process of negotiation and have not finalise an agreement.

PG Bank will hold a shareholders meeting on March 21st to discuss the bank restructuring plan, where more new information will be expected to reveal about the future of PG Bank.