Vietnam’s banking community is facing its most challenging year since the Asian financial crisis of the late 1990s. Although relatively immune from the global credit crunch, Vietnamese banks have not been insulated from some home-made macroeconomic difficulties.
Annual inflation in Vietnam has been more than 25% in recent months, and a doubling of the import bill had prompted legitimate concern about the country’s balance of payments. These worries peaked at the beginning of summer, and there are now signs that Hanoi’s policymakers are pulling the right monetary and administrative levers necessary to apply the brakes to what was becoming a runaway economy.
The thesis pertaining to Vietnam’s long-term growth potential remains broadly intact. Nonetheless, Vietnam’s hard-earned image as an economically benign, stable and relatively cheap place to do business has taken a few knocks recently.
More importantly, the corporate sector is struggling to adjust to the notion of economic cycles, having become complacent in thinking that a sustained straight-line economic growth trajectory was Vietnam’s birthright. This had led to some ill-advised business ventures.
State-owned enterprises in particular have been aggressively diversifying into all kinds of peripheral businesses – including financial services – well away from their core competencies, funded by ample access to credit. Annual loan growth has been in excess of 40% in recent years. That is now coming back to haunt some of the more zealous lenders as their corporate clients struggle to service loans taken out to finance investment projects that are now looking fragile. The government has, somewhat belatedly, responded by asking state-owned firms to reduce their non-core business interests to 30% or less of total assets.
Non-performing loan levels seem destined to rise in late-2008, necessitating that banks’ provision more this year. But that too is problematic as profits are being squeezed. The maximum interest rate at which loans can be extended is 21%, some 1.5 times the State Bank of Vietnam’s prime rate, currently at 14%. With inflation running well in excess of 20% recently, banks have been offering rates of interest on deposits in the high teens (currently about 18.5%), still below the rate of inflation.
Nonetheless, this leaves little margin for profits after operating costs are deducted. Raising new equity capital is also more difficult as the stock market indices have fallen markedly in 2008, taking most bank shares – both listed and unlisted – down with them. The days of annual rights issues are a fading memory.
Welcome news
Against this rather grim backdrop has come some welcome news, with the State Bank of Vietnam formally issuing three new banking licences to HSBC, Standard Chartered Bank and ANZ. In accordance with Vietnam’s World Trade Organization (WTO) accession commitment to liberalise the financial services sector, the central bank is finally permitting wholly foreign-owned banks to incorporate onshore – and effectively compete on a level playing field with their local counterparts – for the first time.
HSBC’s new venture will be headquartered in the southern economic hub of Ho Chi Minh City, and Standard Chartered Bank’s and ANZ’s will be based in the capital, Hanoi.
Changing times: the issuance of licences for foreign-owned banks such as Standard Chartered (above) signal Vietnam’s willingness to liberalise its banking sector
Significant step
“The issuance of the first two banking licences for wholly foreign-owned banks incorporated in Vietnam is a significant step forward,” says Milton Lawson, the general manager of Freshfields Bruckhaus Deringer in Ho Chi Minh City. “It indicates that Vietnam is honouring its WTO accession commitments to liberalise the financial services sector. We expect more foreign banks to follow suit.”
The trigger for this development dates back to a governmental decree, issued in February 2006, which referred to a new kind of banking form: a 100% foreign-owned bank, to be established in the form of a limited liability company with a head office in Vietnam and a 99-year maximum lifespan. The decree outlines how this new banking entity should conduct its operations, including a board of directors and a ‘board of controllers’.
Then in April this year, the State Bank of Vietnam issued an implementing ‘decision’, updating regulations pertaining to the operations of commercial banks. Both the decree and the decision are pursuant to Vietnam’s somewhat dated commercial banking law of 1997. (A new iteration of this law is likely during the next year or so.)
All three banks given full licences already operate branch offices in both Hanoi and Ho Chi Minh City; two branches to every foreign bank seeming to be the maximum permitted by the State Bank of Vietnam.
All three banks also have strategic equity stakes in a local joint stock bank. ANZ Bank has a 10% stake in Sacombank, HSBC has a 14% stake in Techcombank, and Standard Chartered Bank has a 9% stake in Asia Commercial Bank. No divestments are anticipated.
Strategic stakes
HSBC also holds a 10% stake in the state-owned insurance behemoth Bao Viet Holdings, and ANZ has a 10% stake in Saigon Securities, a private brokerage firm. Other foreign banks with a strategic stake in a local Vietnamese bank include both OCBC and UOB of Singapore, Deutsche Bank and BNP Paribas.
Under existing laws, these wholly foreign-owned banks will, like all locally incorporated banks, have to have a minimum capitalisation of VND3000bn ($180m) by 2010. Theoretically at least, the new banks will be able to open as many branches as they wish, although in practice the number will probably be no more than 10. Importantly, each new branch opening requires prior regulatory approval from the State Bank of Vietnam. This is true of all banks, both foreign and locally owned, in Vietnam.
Nonetheless, the new licences are principally seen as a means to substantially extend the holders’ distribution networks in the retail banking sphere. To date, virtually all of the foreign bank branches in Vietnam – each with a capital base of at least $15m – have been located in the hubs of Hanoi and Ho Chi Minh City. But it is likely banks will open branches in the second-tier cities of Can Tho, Danang, Haiphong and possibly some of the more dynamic provinces, such as Dong Nai and Binh Duong.
This will pose a competitive challenge to local banks, which have been able to dominate Vietnam’s hinterland with almost no direct foreign competition. Even so, a sudden and dramatic change in the retail banking market is unlikely.
As Ashok Sud, Standard Chartered Bank’s chief executive for Vietnam, Cambodia and Laos, says: “The local incorporation of some foreign banks will not result in a major structural change in Vietnam’s banking sector.
“At present, the combined presence of 34 foreign bank branches represents less than 10% of total banking assets in Vietnam. Even with several local incorporations, I do not think the foreign banking community will represent more than 13% to 14% of total banking assets in a decade’s time. Our prior experience in numerous similar countries tells us this.”
Exciting prospect
Vietnam remains an exciting prospect for retail-oriented banks. Less than 10% of the country’s 87 million people have a bank account so there is ample room for market expansion.
Furthermore, the economy is at that exciting point in its development when an increasing number of urbanites have sufficient disposable income to consume luxury goods, and need the financial products and services to attain them. Car ownership, for example, is rising steeply in Vietnam – as evidenced by increasing road congestion.
With some other south-east Asian markets becoming increasingly mature and congested, Vietnam still provides an enticing opportunity to participate in a rapidly growing and youthful banking sector.
