Vietnam braced for retail ramp-up

The retail banking and consumer finance sector in Vietnam has historically been extremely limited, with the majority of earnings derived in recent years from the thumping corporate lending business. But low margins are tempting the majority of banks in Vietnam, local and foreign, to venture into the high-yield consumer finance and retail banking market.

The extremely underdeveloped Vietnamese retail banking business is unusually well-positioned for exceptional growth. In an 85 million-strong population, just 15% of individuals are believed to have bank accounts - and even this figure is disputed by local bankers. Although the Vietnamese government has mandated that all state employees must have their salary deposited into a bank account, bankers believe that the number of active bank account holders who use the service on a regular basis may still be as low as 10%. The 'banked' population in nearby Thailand by contrast is more than 75%. Indeed, so under-saturated is the Vietnamese market that in 2006 the country had just 46 ATMs for every 1 million people, according to the Nomura Research Institute.

Expansion of the consumer-facing business should reduce sector earnings volatility and widen interest margins. As deposits account for more than 70% of total funding in the Vietnam banking sector, developing the retail business will boost the stable, low-cost funding base. For this reason alone, competition in this sector is expected to heat up, according to Moody's, with most banks planning to build market shares in the fast-growing retail and consumer finance segments. But demand for products is also predicted to surge in the wake of rampant economic growth, rising income levels and an ever-younger population, for the most part, under the age of 30. As such, there is everything to play for, say bankers. "We see it as a big potential market for all the banks," says Tom Tobin, CEO of HSBC Vietnam, which became the country's first wholly foreign-owned bank in 2009.

Tom Tobin, CEO of HSBC Vietnam

A stumbling block

Despite the enormous potential, retail banking and consumer finance in Vietnam has been stymied by a single piece of legislation found in Vietnam's Civil Code, which stipulates that lenders may not lend at an interest rate that exceeds 150% of the central bank base rate. Although the rule was devised to criminalise predatory lending, the Vietnamese government has, in recent years, applied the rule to the banking sector in a bid to constrain lending and rein in runaway inflation, which reached a 17-year high of 28.3% in August 2008. In the latter respect, says Brett Krause, CEO of Citi Vietnam, the rate cap proved successful, but in the process it became a major constraint on the entire consumer segment by making it economically unviable to lend. "There was no way to risk-adjust the price and it meant that the whole consumer segment was completely stifled. You could not legitimately build a business model around consumer lending," he says.

With a little help from the International Monetary Fund, the banks vigorously lobbied for the removal of the rate cap on consumer loans. In the first half of 2009, the State Bank of Vietnam agreed to allow banks to negotiate interest rates on consumer loans, effectively removing the cap. "That has allowed the business to start moving again," says Mr Tobin. "Regulations come and go to fight short and medium-term macroeconomic issues, but the strategy has to be longer term and to allow retail banking to develop," he adds.

For the country's top foreign banks such as HSBC, Standard Chartered and Citi, which have major ambitions in the retail sector, 2009 brought a further critical development: as part of Vietnam's entry into the World Trade Organisation in 2007, the Vietnamese government has allowed foreign players to incorporate locally - which both HSBC and Standard Chartered moved to do in 2009. The newly acquired status allows foreign players to take on dong-denominated savings and, more importantly, to open more branches. HSBC has not wasted much time on this front. Last year the bank opened eight new outlets and Mr Tobin expects to open five or six more in 2010. "But we are not talking about hundreds," he cautions. "The market is not ready for that kind of growth and our competitive advantage is not suited to a huge, mass-market entry."

Having launched its consumer banking business in 2007, Standard Chartered has two branches with stated plans to roll out many more, including connectivity to more than 300 ATMs over the next three to four years. According to Ashok Sud, CEO at Standard Chartered Vietnam, the bank has more than doubled its manpower during the past three years, with most new hires made in its consumer business. Meanwhile, Citi Vietnam, which trails slightly behind its peers, rolled out its first branch in 2009 and plans to locally incorporate in due course. "We are in the process of opening another branch in Hanoi and the next step will be local incorporation," says Mr Krause. "The market is right at the starting line. We're going to roll out the consumer business in a very big way."

Eyes on the prize

Foreign banks have long eyed the untapped potential in Vietnam's consumer market and onlookers believe that they will play an important role in advancing consumer finance and retail banking services in the country. But local banks are also investing in their consumer business infrastructure and networks. Sacombank, one of the country's top privately owned or so-called joint stock banks, is in the process of upgrading its IT systems to support the growth of its retail business, says Tran Thi Binh, the bank's deputy manager of external affairs. "We are also doing research to make sure we focus each product to each customer segment," she adds. The bank is in the process of expanding its countrywide coverage and expects its investment to begin to pay off in 2011, she adds.

At Asia Commercial Bank (ACB), Vietnam's largest privately owned lender, the board's ambitions for the retail space are quite explicit. According to Dam Van Tuan, first executive vice-president at ACB, the bank plans to develop retail banking as one of two major strategic business lines. "We want to be the strongest player in investment banking and retail," he says. ACB offers a number of unsecured if restricted loans along with players such as Lien Viet Joint Stock Bank, while credit card usage is also growing: according to payment network provider Visa, card issuance in Vietnam grew by a whopping 900% between 2005 and 2010.

Mortgages, on the other hand, are growing at a slower pace due to the cultural preference to buy property outright, says Mr Tobin. And other infrastructure obstacles remain. At least 70% of Vietnam remains rural, meaning that reaching the majority of the population in the countryside will be a major challenge, particularly for the foreign players. According to Karolyn Seet, an analyst at Moody's, the private local banks' operations are largely concentrated on Hanoi and Ho Chi Minh City and do not have the franchise to compete outside this vicinity. This means the state-owned banks will monopolise the rural areas where they have extensive networks. "A lot of potential could be tapped in the country, but in the short term the state-owned banks have such a big franchise and so many branches, they would be the ones to watch out for," says Ms Seet.

However, Mr Tobin believes that the foreign banks can compete convincingly for the rising, young middle-class Vietnamese people whose lifestyles demand international services and more sophisticated products. "There is a growing affluent middle class who travel abroad and who look to a progressive bank such as HSBC for new products, service and the convenience of modern banking. So we see this strategically as an important sector for us," he says.

Many major private local banks, meanwhile, have entered into so-called foreign strategic partnerships that will assist them in modernising their IT infrastructures and retail product suites, says Ms Seet. Habubank, for example, in which Deutsche Bank bought a 10% stake in 2007, has rolled out a risk-management programme using the German bank's risk-management system, says Nguyen Tuan Minh, deputy CEO of Habubank. "We are working with Deutsche Bank to build further high-end products," including a current account, he adds.

But Mr Minh questions how profitable the consumer finance and retail business will prove in the short term and sounds a general note of caution. "The environment is not mature enough in terms of the legal framework. Enforcement of liabilities is a big issue and a borrower can quit the debt easily," he says. In the absence of a retail credit bureau, risk-assessing consumers and properly pricing products is problematic, says Mr Krause, but it is possible to credit score customers against their pay statement and employer, he adds. Human resources are also a bottleneck and many banks' operating costs are being driven up by competition for skilled staff.

Despite these difficulties, however, it is clear that the fundamentals are now in place for a surge in the retail business.