The story of East Asia Bank and Citigroup

The Memorandum of Understanding (MOU) on cooperation between Eas Asia Bank (EAB) and the US-based Citigroup was signed in September 2006. A source said that just before the MOU was signed, Citigroup asked EAB about the prices of shares EAB would sell to Citigroup. EAB answered: six fold the nominal value at least. At that time, Citigroup hurried EAB to make the deal as the US-based group wanted the contract on share transfer to be inked on the occasion of the APEC Summit 2006 so it could invite US President G. Bush to attend the signing ceremony.

However, EAB was not hasty. At the end of 2006, the total chartered capital of the bank was only 880billion VND (55mio US$). EAB’s management board has drawn up a roadmap for raising capital to 2trillion VND(125mio US$) in 2007, under which the bonus shares and the shares to be sold to the existing shareholders (at the preferential price, equal to the face value) will account for 60% of the newly issued shares. The sum of 416billion VND (26mio US$) accumulated in the last few years will also be added to the chartered capital. Meanwhile, 30% of the chartered capital, or 600billion VND (37.5mio US$), will be sold to Citigroup. The extraordinary shareholders’ meeting held two weeks ago saw the approval of the roadmap.

EAB has made a move which can bring the maximum benefit to its shareholders. It did not sell shares to foreign investors when its chartered capital was low. While other banks decided to sell 10% of their shares to foreign banks at the cost of several tens of millions of dollars (HSBC successfully purchased 10% of Techcombank’s shares for 27mio US$), 10% of EAB would cost at least 1,200billion VND, or 75mio US$ When EAB said that the selling price would be at least six times higher than the shares’ face value, it means the floor price, while in fact, the actual value of the shares would be much higher than the floor price.

Citigroup is planning to buy 10% of EAB shares right in the first quarter of this year, while the remaining 20% will be collected later. As such, in order to possess 3/10 of EAB, Citigroup will have to spend not less than 225mio US$.

“EAB will finish the selling of 30% of its stakes to Citigroup in 2007. By September 30, 2007, Citigroup will have to complete the capital contribution to EAB,” Tran Phuong Binh, Director General of EAB, said during the shareholders’ meeting. “If Citigroup buys 20% of shares after the date, the other 10% of shares will be sold to other foreign partners”.

While Bank of America, a rival of Citigroup, focuses on China, Citigroup considers Vietnam a key market in Asia. Through EAB, Citigroup wants to penetrate Vietnam’s financial market and improve its position among operational foreign banks in Vietnam. HSBC was first in Vietnam in 2006 with the profit growth rate of 300%, leaving other rivals far behind, including Citibank, Standard Chartered Bank, ANZ, Calyon, BNP Paribas, and Deutsche Bank.

Mr Binh has affirmed that EAB will become the joint stock bank with the highest chartered capital in Vietnam by 2008. With the support of Citigroup, EAB will follow new strategies in order to get higher profit. In the immediate time, the bank will implement the project on providing credit packages to medium- and small-size enterprises. It will also join the three-party joint venture specialising in producing and exporting ATMs, ABCs (auto banking centre) which permit deposits, withdrawals and transfers in VND and foreign currencies. The joint venture has three partners, the US-based Indochina Capital, EAB and China-based GRG. Meanwhile, EAB is planning to kick start the construction of its new headquarters in Ho Chi Minh City.

Seventeen months have gone since the first meeting between EAB and Citigroup. The final negotiation will take place in mid January before the two sides sign the investment contract. One of the topics of the upcoming meeting will be the compulsory time for Citigroup to hold shares.

Mr Binh said: “We want Citigroup to hold the shares they purchase for at least 10 years. The 10 year duration proves to be reasonable. If the duration is less than 10 years, Citigroup may sell shares when it feels it can make profit, which would be unbeneficial to EAB. If the duration is more than 10 years, the share purchasing price will not be high."

Source: VNE