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Asia-PacificJune 1 2004

Vietnam moves into top gear

A trade boom coupled with WTO aspirations are prompting a more open market, writes Nick J Freeman.
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The past year has been eventful for the Vietnamese economy as a whole, and for the banking sector in particular. Looking ahead, economic growth is expected to be about 7.5% this year and next, according to the latest forecast from the Asian Development Bank.

Buoyed by the strong performance of the economy, currently the fastest growing in south-east Asia, the economic reform and business liberalisation process has gone into what is – by Vietnamese standards at least – top gear. This has meant regulatory changes for local and foreign banks, driven partly by a realisation that the banking sector must open up further.

Such changes include lifting the obligatory conversion of foreign proceeds, for both local and foreign companies. Previously, companies operating in Vietnam had been obliged to convert a (gradually declining) proportion of their foreign exchange earnings into Vietnamese Dong, and banks were expected to enforce this rule. The end of this conversion “removes a big headache for banks”, says one foreign banker. And since October 2003, banks have been able to provide interest rate swaps of up to five years and conduct foreign exchange options, albeit in third currencies and not in Dong.

US and EU access

Under the terms of recent trade agreements with the US and EU, European and US banks are gaining improved access to the local market and posing a greater competitive threat to the local banks. Vietnam needs large markets like the US and EU to export its considerable and increasing output of commodities and manufactured items. From crude oil to coffee, peppercorns to footwear, catfish to garments and rice to shrimps, it has become a major producer in the past decade.

But in return, Vietnam is being obliged to open up its domestic market in areas like financial services. And with Hanoi firmly committed to gaining World Trade Organization entry by end-2005, this trend seems set to increase. This was illustrated by the partial lifting of the ceiling for Dong deposits at foreign banks. Prior to a bilateral trade agreement with the US, all foreign bank branches had been limited to taking Dong deposits up to 50% of their onshore capital (25% from retail customers, 25% from corporates). Under the terms of the deal, however, US banks can gradually lift this Dong deposit ceiling in annual increments, until its complete removal after nine years.

This became an issue during the negotiations between Hanoi and Brussels on increasing the quota for Vietnamese garments imported into the EU. Under the agreement, signed in April this year, EU-based banks can enjoy the same Dong deposit ceiling as US banks (although not as part of a schedule of annual increases, resulting in a complete lifting). The Vietnamese branches of foreign banks that are not headquartered in the US or EU remain capped at 50%.

The future of banking

Although the big four state-owned commercial banks dominate the banking sector, the smaller joint stock banks are “the future of banking in Vietnam”, says one foreign banker. With one eye on the date when foreign banks will have equal access to the local market, some of the leading joint stock banks are “racing to build up their capital” and depositor base as quickly as possible. Sacombank appears to have been particularly active, having overtaken Asia Commercial Bank as the largest joint stock bank in Vietnam.

As Nguyen Duc Vinh, CEO of Techcombank, sees it: “The biggest challenge that our bank and other joint stock banks face is to manage properly the expansion and development of our customer base, branch network, technology and corporate governance in particular.

“There is a one time-window of opportunity for joint stock banks to develop in the next few years. The ones that utilise it well will mature and have a great chance to survive the fierce competition envisaged five years from now,” he says.

Susan Adams, chief representative of the IMF in Vietnam, concurs. When asked what the banking sector in Vietnam will look like in five years, she envisages the big state-owned commercial banks “will still exist, but as joint ventures between domestic and foreign owners. The best joint stock banks will be taken over by foreign banks, while others will have liquidated or merged into niche sector banks”.

That vision entails a very different banking landscape than today’s. One fund manager notes that a number of foreign banks and financial institutions have sent delegations to Vietnam in recent months, specifically to look at the prospects for acquisitions in the local banking sector.

Growth an imperative

For many joint stock banks, “growth is not an option but an imperative to achieve critical mass and build profitability, if they are to remain independent”, says Tony Jennings of the Bank Training Centre in Ho Chi Minh City. “With around 35 joint stock banks at present, more consolidation is inevitable.” He believes joint stock banks must improve their risk management systems quickly. “But perhaps the biggest risk remains the dearth of experienced management and staff which will be stretched by the growth plans under way in many joint stock banks. Hence a move by the more ambitious local banks to recruit from the foreign banks,” he notes.

Some of the more adept joint stock banks are already focusing on market niches that they hope will allow them to compete with the large state-owned commercial banks and foreign bank branches. Techcombank, for example, is targeting small and medium-sized enterprises, and the growing number of affluent individuals in urban areas.

“Within these segments we can be competitive in terms of service quality when compared to the larger local banks, and in terms of price when compared to foreign banks”, says Mr Vinh. “As long as our target customer segments grow at 20% or so per year, we can’t complain.” Techcombank plans to list on the local stock market eventually – “when conditions permit”, he says.

Another challenge facing the joint stock banks is better “balancing risk with reward”, says Mr Jennings. “Removing the credit interest rate ceilings provided an opportunity for the banks to review their credit portfolios and their pricing policies. However, all indications are that the sector has been slow to adopt a more aggressive approach in pricing for risk.” The IMF’s Dr Adams says there is “still a need to price credit more effectively, so as to allocate it better”.

But Mr Jennings is broadly optimistic. “The move towards international accounting standards and the treatment of non-performing loans (NPLs) will place greater pressure on the banks to price for risk or face deteriorating loan quality.”

Central bank inspectors are poised to audit all local banks for overdue loans – an official estimate puts them at $1.5bn at end-2003 (6.4% of the total outstanding). Observers, such as the World Bank, put NPLs higher, at about 20% of total loans, many of which are carried by the state-owned commercial banks and are a legacy from the days of policy lending to the state enterprise sector. (Credit growth in Vietnam in 2003 was estimated to be more than 30%.)

Securities surge

The local securities market for bonds and equities has sprung into life in the past six months. Although just two companies listed on the stock market in 2003, bringing the total to 22, the index has been the best performing in Asia so far this year. The rise can be attributed mainly to some new investment funds being established in late 2003, along with a large rights issue by one existing fund. The maiden local fund, VF1, is managed by a joint venture between local Sacombank and foreign Dragon Capital.

Managers of these funds are optimistic that the pace of ‘equitisation’ (the Vietnamese term for state enterprise divestment) is about to accelerate markedly and will include some major corporate and banking names, such as the mighty Vietcombank.

It was previously thought that if a state-owned commercial bank were to be equitised, the relatively small Mekong Housing Bank would be the most likely candidate. But the notion of Vietcombank partially divesting is seen as an indicator that the government is serious about pushing ahead with the equitisation programme. The IMF’s Dr Adams views the decision to equitise Vietcombank in the next two years as “the most important move forward in the banking sector in recent months”.

In the near term, however, it is likely that Vietcombank will attempt to part-privatise one or more of its subsidiaries (such as its leasing firm or stockbroking arm) before moving ahead with a pilot share issue for part of the bank itself. Dr Adams warns that a key issue in the equitisation of state-owned commercial banks such as Vietcombank will be the ceiling on the number of shares that investors may hold. Should this be too low, “attractive foreign investors who can change the operations of the banks will not be enticed into the market”, she says. One foreign banker doubts that more than 20% of the shares in Vietcombank will be issued to the public.

Bond issues

The bond market has become more active both in terms of primary issues and secondary trading. Lawrence Wolfe, chief country officer for Vietnam at Deutsche Bank, argues that the “issuance of bonds with a broad range of maturities – spanning from one to 15 years – has helped establish a yield benchmark for the first time in Vietnam. This should support the development of the bond market for corporates”. He envisages local and foreign banks playing a greater role in the local bond market.

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