A stroll down Lang Xang Avenue in the heart of Vientiane, Laos’s once-sleepy capital, might persuade a visitor that the landlocked communist country is on the cusp of a financial takeoff.
The six-lane boulevard is lined with banks. Between the headquarters of the Asian Development Bank (ADB) and World Bank at opposite ends of Lang Xang, there are a dozen commercial banks, ranging from the internationally recognised ANZ to locally incorporated joint-venture banks (Bank Maybank Lao, Banque France Lao, Lao Viet Bank) and a handful of Thai banks such as Siam Commercial, Krung Thai and Krungsri. Siam Commercial boasts one of the city’s most attractive branches in a beautifully renovated French colonial-era building with a spacious car park. It is often empty.
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There are at least 37 fully fledged banks operating in Laos, a country half the size of France, with a population of 6.7 million and a gross domestic product (GDP) of between $11bn and $12bn. The banks have proliferated in recent years as the Lao economy, seemingly immune to financial crises and recessions in the US and the eurozone, took off between 2008 and 2013. During that time, the World Bank suggests it averaged 8% GDP growth.
Credit shrinkage
Boosted by government spending, primarily on roads and other infrastructure, domestic banks’ credit grew by about 30% annually during this five-year period. Overspending led to a budget shortfall in late 2013 and early 2014, however, meaning the government experienced difficulties in paying salaries and funding state enterprises. “Cuts in public infrastructure projects have allowed credit growth [in 2014] to decline to 16% year on year, from 35% at end of 2013,” said a recent International Monetary Fund (IMF) report.
Because of a decline in earnings from gold and copper exports and a curtailing of budget spending, Laos achieved a more modest GDP growth of 7.6% in 2014, and anticipates 7.5% growth this year, says Vathana Dalaloy, deputy governor of the Bank of Lao PDR, the country's central bank. The banking system’s non-performing loan (NPL) ratio reportedly doubled in the first half of 2014, according to the IMF, but Ms Dalaloy says the situation is under control. “The NPLs are still manageable, at about 3% for the state-owned banks, and for the whole system it was 2.16% in the second quarter of 2014,” she says.
Soulinthone Leuangkhamsing, senior economics officer at the ADB Laos office, adds: “Two years ago we thought the Lao banks might experience some difficulties, but so far we haven’t seen any problems because most of them are dependent on the government budget." The Lao banking sector's four largest banks are majority state owned. “The budget is there [for them] because they have not introduced any new projects,” says Mr Leuangkhamsing.
Regulation under scrutiny
Ms Dalaloy, who was secretary-general of the Lao Securities Exchange Commission from 2010 to 2014 before joining the central bank in November, has been tasked with implementing some of the central bank’s more onerous regulatory work, such as making sure the recently legislated anti-money laundering (AML) bill and counter financing for terrorism (CFT) bill are diligently enforced.
“The central bank is going to further improve prudential regulations, based on Basel I and Basel II principles, in order to be aligned with the Association of South-East Asian Nations [Asean] community,” she says. Laos has been a member of Asean since 1997, and is committed to standardising its banking practices, such as its national payments system, as part of the Asean Economic Community, which comes into effect in 2016. The country joined the World Trade Organisation in late 2013.
The central bank still faces some challenges in tightening up the existing laws and by-laws on AML and CFT bills, according to the inter-governmental Financial Action Task Force (FATF). “Since October, 2014, Laos has taken steps towards improving its AML/CFT regime. However, the FATF has determined that certain structural AML/CFT deficiencies remain,” the FATF said in a statement issued in February.
The FATF, which can call for sanctions on a country, has given Laos until June to iron out the legislative “deficiencies”, mainly by doing away with the dollar thresholds on illegal activities and increasing penalties for offenders, industry sources say. “The law is just the first step. Afterwards a number of other reforms are to come, such as how the police will work with the banks,” says ADB’s Mr Leuangkhamsing.
The AML/CFT laws are already in force at some Lao banks. “Every transaction has to go through the AML filtering system for their blacklist,” says Lachay Khanpravong, deputy managing director of the Banque Pour Le Commerce Exterieur Lao (BCEL), Laos’s largest commercial bank and the only one listed on the Lao Securities Exchange. BCEL is 70% state owned, with another 10% owned by strategic partner Cofibred, a subsidiary of BRED Banque Populaire of France. The remaining 20% is owned publicly. The bank is now screening depositors to make sure they are not on the blacklist of the UN, EU, Office of Foreign Assets Control, Bank of England or Anti-Money Laundering Intelligence Unit. “It is mostly foreigners who are the suspects,” says Mr Khanpravong.
Corporate lending
One benefit for the BCEL of being listed is the enforced scrutiny from the stock market, albeit a small one (there are presently only four listed firms on the Lao exchange). “We have to comply with disclosure regulations, which require us to reveal every significant update on our bank on a regular and irregular basis,” says Mr Khanpravong. “Apart from that, our management system has become properly structured, with the shareholders’ meeting as the supreme management body.”
Although the largest commercial bank in Laos, BCEL is still small by international standards, with assets of K23,000bn ($2.8bn), up from K17,000bn in 2013. In 2014, its assets accounted for 28% of the country's entire banking system, 35% of its deposits and 27% of credits, according to figures from BCEL. The bank has 19 branches, 65 sub-branches, about 55% of the Lao credit/debit card market (it provides Visa and China Union Pay cards, and will soon offer MasterCard and JCB) and has the use of 280 ATMs, out of the 400 ATMs nationwide.
“Our policy is to keep looking after our corporate lending, while expanding our credit to small and medium-sized enterprises and retail clients,” says Mr Khanpravong. Corporate lending, accounting for 60% of the bank’s credit portfolio, slowed last year. While keen to expand its retail banking through ebanking, ATMs and mobile phone apps, BCEL faces obstacles unique to Laos. “Retail is a difficult market because usually if a Lao person buys a house, land or a car, they will use cash,” says Mr Khanpravong. And usually they will use US dollars or Thai baht, which still account for about half of the money in circulation in Laos.
Among BCEL’s clients are expatriates working in Laos. Recently, the bank signed an agreement with the Thailand-based Krungsri Bank, owned by Bank of Tokyo-Mitsubishi, to allow cross-border use of one another’s ATM networks, allowing withdrawals on either side of the border.
Japanese firms have started to invest in Laos: the number of projects doubled from only 60 in 2012 to 123 in 2014, thanks to the country's lower wage levels when compared with Thailand and China, and tax incentives from special economic zones (SEZs). The Savan-Seno SEZ in Savannakhet province, southern Laos, with road links to a port in Danang, Vietnam, and a bridge across the Mekong River to Thailand, has proven particularly popular. Spotting the increase in reputable foreign direct investment in the province, Australian lender ANZ opened a corporate office in Savannakhet in March.
The Australian connection
The province is also the site of the Sepon gold and copper mine, Laos’s largest, which originally belonged to Australia’s Oxiana Limited but was sold to China’s MMG. PanAust, another Australian-based mineral extraction firm that is now partly owned by China’s Guangdong Rising Assets, operates another huge gold mine in Phu Kham district, near Vientiane. Both are ANZ clients.
“Australia is what brought us here, but what keeps us here are the multinational corporations that are still expanding,” says Tammy Medard, chief executive officer of ANZ in Laos. ANZ, which has branches in Vientiane and Pakse, east of Vientiane, and now a corporate office in Savannakhet, is the only 100% foreign-owned international bank with a full commercial licence to operate in Laos. It entered the market in 2007 by buying up shares in the former Vientiane Bank. The Lao operation is now a 100%-owned subsidiary of ANZ, which has been expanding its banking network aggressively in Asia, particularly the Asean region.
“[Our Laos operations are] never going to be a cash-printing machine for the ANZ Group here but we do make a respectable profit,” says Ms Medard. “The way we look at it is not just how much each individual country is making, but what kind of connectivity we are providing our customers.” For instance, ANZ customer PanAust has just expanded into Papua New Guinea. “We have a presence in Papua New Guinea, so we are able to provide connectivity,” says Ms Medard. “When [a customer comes] to Papua New Guinea, there is a familiar face for them who knows them back from Laos or Australia.”
