It had the right strategy, the right management and the right customers, so why couldn’t Techcombank and its advisers get the right price on its recent IPO?
The listing of Techcombank in June was one of the most closely watched events in Vietnam’s recent history.
It seemed to show the whole country taking a step forward in market sophistication. Here was a bank with a management team full of international expertise, with ex-Morgan Stanley, McKinsey and Wells Fargo staff throughout the ranks. It is also one that has attracted world-class anchor investors, including GIC, Warburg Pincus and Fidelity.
And then the deal dropped 20% on its first day of trading.
Why? Global markets didn’t help. But at the heart of it is a gap between how institutional investors – entranced by the bank and the exposure to Vietnam’s demographic story – and retail investors see the markets, as well as some lingering weirdness in Vietnam capital markets regulation.
The bank’s management – which has suffered far more pressing crises than this – says it is not concerned and that true value will eventually be reflected, not only in the bank but in the country’s markets. But it is also a salutary lesson in how Vietnam has perhaps the region’s most unpredictable markets.
True differentiator
At first glance, there is nothing particularly special about Techcombank. It is another big joint stock (private rather than state-owned) bank with a retail strategy.
Chief financial officer Bang Trinh, who returned to his native Vietnam 10 years ago with Morgan Stanley, recalls looking at the bank from the outside: “What’s different? Nothing’s different. It’s the same retail strategy – everyone wants to build out a retail strategy – just a different name on the cover of the report. But the question then was: ‘Who’s going to follow through with execution over time?’”
This, Bang says, is the true differentiator.
Bang Trinh, Techcombank
Techcombank was one of the earliest institutions in Vietnam to work with outside consultants, in this case McKinsey, and it has implemented all of the steps the consultant recommended. By the time Techcombank was ready to come to market, with Bang on board as CFO: “We were able to be out in front of investors and say: ‘This is not a story that’s just happening now. It’s work that has been put in place over a period of years, learning the lessons of the last crisis, evolving to reflect the realities of learning through a cycle.’”
Bang was one of many executives hired by chief executive Nguyen Le Quoc Anh, himself a McKinsey alumnus who also worked at Wells Fargo and T-Mobile in the US. Anh filled the bank with international expertise. Ashish Sharma, the director of transformation, is ex-Standard Chartered and Goldman Sachs. Vishal Shah, head of the business banking division, is also ex-StanChart. Others came from GE Capital.
“When people look across the team and the people we have been able to attract, they have confidence that this is the right strategy and the right team to execute it,” says Anh.
For Anh, the appeal to investors is straightforward.
“The commercial bank is effectively a proxy for the consumer class,” he says. “And then our strategy is focused largely on the affluent, the middle and upper-middle class.”
So the bank appeals to two groups of investors: those focused on the financial sector and those who want exposure to Vietnam as a growth economy.
“The reason we are attractive is because Techcombank represents both of those,” he says. “On one hand it represents what the financial sector should be and on the other, the growing consumer class in Vietnam.”
It looks the part. A visit to a priority banking lounge in the bank’s southern headquarters in Ho Chi Minh City (its formal HQ is in Hanoi) feels a lot like a priority banking lounge at HSBC – no surprise, perhaps, because HSBC was a big shareholder before selling out last year. Its retail branches are well-ordered and efficient. Adverts for i-bonds and funds show a broad product range for investors, who otherwise are limited to unpredictable retail and stock markets.
Simplicity
Plenty of banks in Vietnam do retail, but they tend to be complex with lots of bolt-on sidelines and quirks. Is the appeal of Techcombank actually its simplicity – retail and nothing else?
“Absolutely. And I would take the blame for that,” says Anh, who has a dry wit and a strong line in self-deprecation. “Unfortunately, I don’t think of myself as being very creative. I have a few things I do again and again and again.
“So when people ask me why I keep repeating myself, it’s because I don’t have anything else to say. I just keep saying it until we actually do it.”
This reflects a mindset that is as much GE as Mckinsey. “The key for me – and this is what you learn about GE – is to be number one or two in each of the sectors you are in,” says Anh. “If you’re not number one or two, just get out of the way.
“It’s the same idea here. When you are number one or two in a sector, you enjoy a certain price premium – what I’ll call a reputation premium. That being in place helps a lot of other things. It creates a halo effect. So the simplicity of strategy and the focus on execution is key.”
Bang also points out that the bank has one of the strongest balance sheets in the country.
“The bank was the most aggressive of all of them during the last crisis when it came to cleaning up the balance sheet,” he says. “They wrote off bad debts, retained dividends, rebuilt the capital structure, whereas a lot of the state banks were under pressure to give dividends. It puts us in a much stronger capital position today.”
Bang says that, from a positioning standpoint, Techcombank wanted to aspire to what he calls “the regional leaders, the BCAs, the HDFCs, the Kotaks”, all three of which are known for balance-sheet strength. It is perhaps no coincidence that Warburg Pincus was also an early stage investor in the last two of those examples.
None of this would draw investors in were it not for a sense that now is the right time to be buying in to the country.
False dawns
Nowhere in southeast Asia has had as many false dawns as Vietnam. Its demographics have always been beyond doubt – a young population and growing individual wealth – but time and again it has disappointed investors with a combination of state involvement, difficult regulation and a dark credit cycle, which worsened in 2012 when much of the rest of the region was doing fine.
Now, however, “we’re at an inflexion point in what’s happening to the economy,” says Bang. “The affluent and mass-affluent segments of the economy are going to grow 300% to 400% over the next decade. That segment of the economy needs some very basic financial services as they continue to increase their wealth, buying their first home, their first automobile, using credit cards, buying insurance.”
Bang says that when he returned to Vietnam 10 years ago, GDP per capita was below $1,000 and financial penetration below 10%. Now per capita GDP is around $2,500 – and double that amount in Ho Chi Minh City – while financial penetration has crossed 30%.
He recalls the same moment in Indonesia in the 1990s.
“At some point the headline GDP per capita doesn’t matter anymore, as the wealth starts to increase and certain segments of the economy start experiencing growth that didn’t exist before,” such as car leasing in Indonesia.
As the consumer gains true spending power, the knock-on benefits are widespread and foreign direct investment is attracted. Bang cites Samsung, which has so far invested $17 billion in the country, creating over 100,000 jobs.
Investors clearly see this too.
“For a bank, it’s important to have the macro right,” says Saurabh Agarwal, a managing director at Warburg Pincus. “The country is going through one of the defining phases of its economic evolution: it has the fastest GDP growth of all its peers in southeast Asia and it is real GDP growth, fuelled by consumption and an expanding middle class.”
The IPO appears to have bombed, but that is less because of Vietnam and more because of the world as a whole.
– Dominic Scriven, Dragon Capital
Banking is a strong way for private equity to play this theme.
“On the back of that GDP growth we are seeing loans and deposits growing in double digits,” says Agarwal. “As people consume more, they spend more and they borrow more.” Yet we are at the earliest stage of bank penetration: credit card penetration is 4% and there are only 100,000 mortgages in the whole country.
“Banks as a whole are at that nice curve in the recovery cycle,” says Dominic Scriven, founder of Dragon Capital, another investor in Techcombank. “After a very slow, painful workout by banks from 2012, they are coming into an area of profitability for the next few years.”
Scriven, an optimist whose fund has been investing in Vietnam for 25 years and is essentially long-only on the country’s story, thinks growth this time is sustainable.
“The cynics will say that even a stopped clock is right twice a day,” he says. “But since 2012 we have had a steady year-on-year improvement in fiscal spending, foreign investment, a consumer recovery and domestic investment, which is now affecting the asset markets.
“There is a robust story behind the economic reforms going on here and, as long as that political energy remains, I have a high degree of confidence in the sustainability of this performance.”
Better still, it creates capital markets investment opportunity.
“One of the big learnings of the last crisis was that the banking sector, which is obviously a principal source of capital, was funded extremely short term and so not well positioned to be providing medium- and long-term capital,” says Scriven. “The government has got behind the idea that the private sector should be encouraged and that other funding mechanisms should be encouraged. The key to this is the capital markets.”
Strong relationships
The names that have bought in to Techcombank are among the most astute in the country.
Warburg Pincus has the most skin in the game, having come in before the IPO and with the right to have a seat on the board. Warburg Pincus has more than $1 billion invested in the country. It partnered with conglomerate Vingroup to invest in and build out Vincom Retail from 2013, which was responsible for another of the country’s capital markets landmarks in 2017.
Techcombank also has a strong relationship with Vingroup and some similarities in terms of consumer exposure, ecosystems and value chains helped the private equity house get comfortable with the bank.
Nguyen Le Quoc Anh, Techcombank
“As we’ve seen the country is growing, there is a lot of potential,” says Agarwal. “If you find good people doing the right things, like Quoc Anh and his team, there are a lot of opportunities to create value.
“Our investment strategy has a strong emphasis on partnering with the right people and providing them long-term patient capital,” he adds. “Techcombank has a strong management team with a vision and a track record of continuing to create value.”
Success leads to success.
“Having Warburg Pincus on board gave a lot of confidence to a lot of other investors,” says Bang. “They understand Vietnam, they have been in a lot of investments here; they understand financial services.”
But Anh and his team did not want to settle for just one name.
“We went out and said: ‘It would be great to get a couple of names who would be investing in Vietnam for the first time, Capital or Fidelity,’” recalls Bang. “What’s it going to take to convince those guys? Part of it is market maturity, but they still need a story they can buy into over a long period of time.
“We wanted the best names in Asia, the best names in the US, the best names in Europe. Let’s go and focus on convincing them on our story.”
In the end they got plenty. GIC, Singapore’s sovereign wealth fund, made its second large investment in a Vietnamese bank (although the first, in Vietcombank, was through its private markets division, whereas this one was public markets, so a different team). Capital and Fidelity joined, as did Dragon Capital. Dragon’s commitment to the IPO is thought to be partly in its own name and partly on behalf of Norges Bank, the Norwegian sovereign wealth fund, although Scriven declines to confirm this.
These are big, impressive names but also tough ones. What expectations will come with that?
“It comes with the territory,” says Anh. “If you want the best, you have to perform the best. If you are not on top of your game, you are not part of the conversation.”
In practice only Warburg Pincus is entitled to join the board, but Anh says he will be seeking assistance from his big-name shareholders.
“Last I checked, my expertise was not in Asia, it was the US, so I need Warburg Pincus to help me,” he says. “It’s the same with GIC. We said: ‘We know how to run a bank, but we need a portfolio company to tell us what else is going on in the region.’ We told Capital: ‘You have so many investments in banks across the world, tell us what you see, what we can do better.’”
Bang speaks of “a culture of learning and having these partners facilitates that learning.”
Unfortunate turn
So why did the deal tank upon launch?
The deal priced a sale of 164.1 million shares at D128,000 ($5.56) per share, the top end of the range, on April 23. However, in Vietnam there is typically a gap of six to eight weeks between pricing and the start of trading. Shares are not crossed on the exchange immediately after pricing. Instead the company and its bookrunners must go to their depositary in order to close the book, after which they seek special approval for listing from the stock exchange.
By the time Techcombank completed this process and trading started on June 3, the market had taken an unfortunate turn. Between July 2017 and March 2018, the VN market index had risen by 63%; by the day of pricing it was already falling; and between pricing and trading it fell further, although only about 8%, nothing like the 20% first-day drop in the stock. Clearly, the gap between pricing and trading had exposed the stock and its investors to a change in sentiment on Vietnam.
Dominic Scriven. Dragon Capital
“The IPO appears to have bombed,” says Scriven. “But that is less because of Vietnam and more because of the world as a whole. One might say Vietnam got a little bit ahead of itself with forward-looking multiples, but it’s more a function of the global scene.”
Bang believes it was also about a difference between the way international institutional and domestic retail investors look at the stock. Speaking one day after trading began, he noted that: “This whole process for the listing was very focused on the institutions and giving them the information they need to make well-informed decisions… the local market didn’t have quite the same information as the institutional market did and the sophistication of retail investors is very limited.”
Bang says that the early trading was “obviously down but on little volume, and what we didn’t see was any buying and selling activity between the foreign investors.”
Techcombank was already a public company, so it couldn’t use the initial equity offering model used by Vincom Retail and Vinhomes, which creates a much shorter gap between pricing and trading. As a new listing, it was permitted only to sell to qualified institutional buyers not retail, for whom there was effectively a news blackout on the bank in Vietnam.
“People say: ‘Look at that, doesn’t it bother you?’” says Anh about the performance. “The short answer is it should bother the one who sells now.”
So did the underwriters – Morgan Stanley, Deutsche Bank and Viet Capital Securities – misprice the deal?
“Not at all,” says Anh. “Not even close.”
Scriven says it was a “keenly priced issue” but believes it will come back.
Investors are, for the moment, saying supportive things.
“We are long-term investors, so to some extent what happens in the short term is less relevant for us,” says Agarwal at Warburg Pincus – although as a pre-IPO investor, it would have probably come in at a lower level than those who took part in the IPO. “The story is intact and very attractive. Obviously the stock performance shows the company is undervalued and impacted by the overall market sentiment, but we believe the long-term story is intact and very attractive.”
Scriven is keen to point out that his own fund’s investment in the deal was not out of step with its allocations elsewhere.
“We like banks generally,” he says. “It’s not that we love Techcombank above all others – in fact our two major bank holdings are ACB and Military Bank.
“We participated in Techcombank because, number one, we are a large investor; and two, it is a good opportunity in the sector. But we were not overweight.”
Even a competing investment bank does not take the opportunity to knock the deal, saying that had they been on it, they would have expected to price at the same level; sentiment towards Vietnam at the time of pricing made it a logical figure even if it did represent about four times book value. This competitor thinks the performance was partly due to people who were already invested in the bank domestically cashing out at a profit.
“We’re not stressed about it. We have a roster of long-term funds,” adds Bang. At the time of writing those long-term funds are sitting on a loss of 30% from the launch price.
Sense of perspective
Still, Techcombank’s leaders have a sense of perspective about these things. Later the interview turns to history and specifically where Bang and Anh were in 1975 during the fall of Saigon. They were both there, Bang aged three, Anh a teenager; both fled as refugees on boats, Anh making his way by learning to fix engines. Neither saw their fathers again for more than a decade – both the parents were held in re-education camps. Anh talks of “eating humble pie” every step of the way through his career.
The return to Vietnam, particularly for Anh for whom it is more recent, has considerable resonance. Both thrived away from their homeland. Anh, among his many other achievements, has a PhD in nuclear engineering from Purdue University. But there is clearly some hope that their reinvention of Techcombank brings with it some sort of social function too, a contribution to a country retrieved.
Both men are runners. Bang has been a triathlete for over 20 years, and they sponsor local events, including marathons. It is not entirely altruistic. Bang points out that ironman competitors tend to be in exactly the growing middle-class mass-affluent segment that the bank is targeting.
“They’re focusing on improving their lives in many different areas, including health and wellness,” he says.
Bang can point out the course of the marathon from the 20th floor of Techcombank’s tower in Ho Chi Minh City, snaking through the bustle of the city centre on the western side of the Saigon River, crossing a bridge and passing through the Thu Thiem Urban Area on the eastern side. Last time they ran the marathon Bang was wondering where Anh, an accomplished runner, had got to. He had been waiting around on the course making sure nobody on the staff got left behind.
“That whole idea of running a marathon and what that means in terms of the discipline and commitment that’s required, the changing mindset, the focus on process, it’s all something we focus on internally,” says Bang. “So it ties in with the whole direction. We really need to think about this long journey and keep it simple.”
By Chris Wright
Source: Euromoney