Positive sentiment towards Vietnam and its prospects shows no sign of abating in 2006, and the banking sector continues to grow in tandem with the wider economy. Vietnam’s GDP has increased by 50% in the past four years, and there has been a commensurate rise in local demand for ever-more complex banking and financial services.
The spotlight will be firmly fixed on Vietnam this year, thanks in large part to its current role as chair of APEC (Asia-Pacific Economic Co-operation). Hanoi will host the next APEC summit, in November, with US president George W Bush scheduled to attend. Prior to the summit, however, both the Vietnam and US governments hope that Vietnam will formally and finally gain entry into the World Trade Organization (WTO), 11 years after it first expressed its desire to become a member.
A major step towards gaining WTO entry was achieved in mid-May, when the Vietnam and US governments announced that their negotiators had reached a bilateral trade agreement. Being the final bilateral agreement needed before Vietnam can accede to the WTO, the US negotiations were critical. The race is now on for US Congress to approve the trade agreement before the summer recess next month and the distractions of the US mid-term elections in the autumn.
Liberalisation likely
Under the conditions set for WTO membership – precise details of which are not yet known – Vietnam will almost certainly be expected to liberalise the banking and financial services sector further, and a number of constraints on foreign banks’ activities should be partially or wholly lifted. These are likely to include changes to: the limits placed on the capitalisation of individual foreign bank branches (currently $15m); the cap on the proportion of shares that foreign banks may hold in local banks (currently 10%); and the range of products and services that foreign banks may provide in the local market.
Although no bank has yet listed on the local stock exchange (Asia Commercial Bank and Sacombank are both expected to do so later this year, upon completing the listing procedures), trading of bank shares on the informal over-the-counter (OTC) market has been extremely vigorous. Strategic acquisitions made by a number of foreign banks in local joint stock banks, often at substantial premiums, have helped to stimulate local investors’ appetites. The latest strategic investment of this kind has been Singapore’s OCBC Bank taking a stake in VP Bank (see below).
Foreigners buy in
Although foreign banks might be expected to wait and see whether WTO conditions allow them to expand their business in Vietnam through internal growth, many are opting to buy into local private banks instead. This reflects in part the good job that some of the more far-sighted local banks have done in recent years to build up their capital base, franchise and branch networks in anticipation of a post-WTO environment. It also probably reflects foreign banks’ recognition that, to understand the particular dynamics of Vietnam’s rather opaque business and financial environment, the market knowledge held by some of the better local banks does have real value.
At present, no single foreign investor may hold more than 10% of a domestic bank, and the aggregate foreign holdings in a bank may not exceed 30%. However, it is anticipated that at least the 10% cap may be raised to 20% under an impending government decree. Also, under current regulations, 49% of shares in companies listed on the stock market may be held by foreign investors, raising at least the possibility that the 30% cap may also be raised for banks that elect to list on the formal stock exchange.
Notwithstanding the WTO-driven trend towards a more liberal regulatory regime, however, it is widely speculated that the State Bank of Vietnam (SBV) is poised to introduce a ruling that will only allow the world’s leading 500 foreign banks – and/or those with assets exceeding $20bn – to be eligible to take strategic stakes in local banks. The rationale for this may be a desire to ensure that foreign investors bring technical and other assistance to local banks, and may also reflect a general sense of disappointment in the role played by some non-bank foreign investors in the sector.
A number of other developments in the banking sector have not been particularly headline grabbing but are nonetheless important. “The most positive development in the past year has been the issuance of new regulations by the SBV requiring proper classification and reporting of loans, and the establishment of provisioning requirements against non-performing loans (NPLs) consistent with international standards”, says Lawrence Wolfe, Deutsche Bank’s chief country officer. “In addition, SBV issued a new regulation on prudential ratios to be applied to banks, which sets the minimum capital adequacy ratio, minimum liquidity ratios according to time buckets, and maximum single borrower exposure limits for loans and other obligations. Although it may take some banks a few years to comply with these new requirements, once the limits are fully implemented and enforced, it will go a long way toward ensuring the development of a sound banking system in Vietnam.”
Slow divestment
Perhaps the only disappointment in Vietnam’s banking sector of late has been the continued slow pace of partial divestment at the two state-owned commercial banks lined up for ‘equitisation’. An initial plan to partially divest the mighty Bank for Foreign Trade of Vietnam (Vietcombank) mutated into a VND1370bn ($86m) convertible bond issue last December. The precise date when these bonds can be converted into equity is not yet clear, nor are the terms of conversion, although Vietcombank officials claim that the bank will enact a public share issue in 2007. There has been no news from the other state-owned bank slated for partial divestment, the much smaller Mekong Housing Bank.
In May, the state-owned Bank for Investment & Development (BIDV) went ahead with a VND2200bn bond issue, with a maturity of 10 and 15 years, and a coupon of 9.8% and 10.8% respectively. This followed a credit rating appraisal of BIDV by Moody’s. The bonds of both BIDV and Vietcombank are expected to be traded on the Ho Chi Minh City stock market shortly.
The local media has reported that a new state-owned bank is to be established, possibly replacing the Development Assistance Fund, arguably Vietnam’s biggest financial institution. It has been suggested that the new ‘Vietnam Development Bank’ will, among other things, provide export finance to companies operating in specific sectors identified by the government. If it does so, care will have to be taken to ensure that the products and services of the new bank are in conformity with Vietnam’s impending WTO commitments. THE FALL AND RISE OF VP BANK The experience of Vietnam Joint-Stock Commercial Bank for Private Enterprises (VP Bank) exemplifies the extent to which Vietnam’s banking sector as a whole has matured in the past decade. Established in Hanoi in 1993 by a group of individual investors, VP Bank was soon regarded as a star performer and was one of just two local banks that gained SBV approval in 1995 to sell a stake to foreign investors. Two years later, however, VP Bank was in deep crisis. A fairly toxic combination of excessive related-party lending to board members, unsecured loans, unrestrained issuance of letters of credit (mostly to South Korean banks) and an aggressive acquisition of treasury bills (which it then used as collateral to borrow from other banks) cumulatively served to render VP Bank insolvent. By the end of 2001, the bank had bad loans of VND315bn ($19.7m) and owed a further $34m in overdue letters of credit. Its total debts of VND838bn were five times greater than its registered capital. The bank president subsequently went to jail. Controversially perhaps, SBV did not force the bank to close its business, but rather brought it under close supervision, and the elements of a recovery plan were gradually pieced together.
| Lam Hoang Loc: OCBC’s track record is attractive to VP Bank |
A new board was put in place, culminating in the appointment of Lam Hoang Loc (a former CEO of Asia Commercial Bank) as the bank’s new chairman in 2002. Ultimately, VP Bank came to an agreement with the Korean banks to pay a lump sum equivalent to 20% of the overdue letters of credit. It also sought to restructure and secure its bad loans, working closely with the police to pressure defaulting borrowers. On loans issued since 2002, NPLs are reported to be less than 1%, markedly lower than the official 5% industry average figure. New corporate governance practices and internal controls were introduced at VP Bank, including a complete ban on related-party lending activity. In addition to the five-person board of directors, a supervisory board was introduced, directly elected by and reporting to shareholders. A properly functioning credit committee was instituted to appraise all loan decisions, free from influence by board members or branch managers. A new, more formalised credit and collateral appraisal system was introduced and an asset management liability committee has also been introduced. By 2002, VP Bank reported a small profit before provisions, but it was not until 2004 that SBV lifted its supervisory watch over the bank and its share price returned to par value. In 2005, the bank recorded its first profit after provisions and issued its first dividends since 1997. It also set out a strategy that focused on its key strengths: lending to private small and medium-sized enterprises (SMEs), and consumer banking. To assist in executing this strategy, it started looking for a strategic partner that had the right combination of banking skills and experience, and made the enlightened decision to join forces with OCBC Bank of Singapore. In late March, OCBC Bank announced that it had agreed to take a 10% stake in VP Bank, for VND250bn. Under the agreement, OCBC Bank also has an option to increase its stake in VP Bank to 20% as and when the SBV raises the 10% cap on foreign investment in local banks. The attraction of OCBC Bank, Mr Loc told The Banker in an interview, was its experience in SME and retail banking in Asia and a good track record of other such strategic investments in the region. Having had a presence in southern Vietnam for some years (inheriting a branch from Keppel Bank, initially opened in the coastal town of Vung Tau but later relocated to Ho Chi Minh City), Mr Loc also senses that OCBC Bank has a good appreciation of the local business culture in Vietnam. An investment in VP Bank gives OCBC Bank a new avenue into the high-growth Vietnam economy and should allow it make further developments of what has recently become a relatively robust franchise.
