The Vietnamese banking market and economy are so hot that when Charly Madan, country officer for Citi, found out that The Banker was organising a lunch with Vietnamese alumni from the London School of Economics (LSE), he quickly exclaimed, “Tell them we’re recruiting!”
But the six young women at the lunch in London did not bite. At least not that day. All of them are in finance, ranging from local banks to foreign banks and private equity houses. The foreign banks may have a clearer career path and offer higher salaries, but the local operators offer share options – a precious commodity when banks are doubling profits and the stock market is booming – and practical experience over a wider range of businesses.
Foreign banks are restricted in the business they are allowed to do, although this is changing and will be transformed as the country’s World Trade Organization (WTO) obligations for the financial sector kick in.
Queuing suitors
Those share options also look good because – as foreign banks and Vietnamese companies pile into the market, and owning a bank is like owning this season’s fashionable hand bag – local banks command huge premia. There are not many good banks to buy, so the State Bank of Vietnam, the country’s central bank, is deluged with a record 46 applications for new banking licences, according to governor Nguyen Van Giau (see The Banker December 2007 issue).
The domestic entities applying include organisations as diverse as the state-owned Hanoi Brewery Corporation and the province of Binh Duong, which has a population well under one million. Just as peculiar are some of the foreign banks which, according to local professionals, have been looking at buying a bank in Vietnam: Austrian bank Raiffeisen International, Dutch bank ING, UK bank Barclays and Bank of America. None of these has any local expertise or significant regional presence.
Experienced Vietnam hands such as Tony Foster, a Hanoi resident for 13 years and managing partner of the Vietnamese offices of Freshfields Bruckhaus Deringer, the international law firm, is sceptical about all the furore.
“Today there is not enough business. There is no basis for the short term, while when you start talking about the long term [as some banks are doing] it is a cop-out,” he says. “Only 10% of the population have bank accounts – is this going to grow fast enough? There is still a great deal of scepticism about banks in your average Vietnamese.”
What he calls “the herd at work” means that some banks are trading at a very expensive 15 times book value and at price/earnings ratios of 30 times, which are difficult to justify on fundamentals.
Banking resurgence
The banking boom does, however, have some solid bases: gross domestic product (GDP) growth of more than 8% in 2005 and 2006 and forecast at a similar rate for 2007, allied to credit growth of up to three digits a year and record levels of foreign direct investment (FDI) of about $13bn in 2007.
There are concerns about inflation, which has accelerated to an estimated 8.5% in 2007 and a budget deficit estimated at 6.9% of GDP in 2007, albeit falling to 4.4% in 2008, notes Moody’s and other rating agencies.
Ajay Chhibber, the World Bank’s country director, believes that a slowdown in the US and/or global economy would affect Vietnam much less than five years ago due to its diversification both in export markets (US 21%, EU 18%, Association of Southeast Asian Nations 17%, among others) and in products (18% oil, 18% agriculture, 52% manufacturing and 11% services).
“Vietnam is also emerging as an important regional economy in south east Asia and its stable political system, broadly sound macroeconomic policies, entry into the WTO and on-going reforms make it a very desirable trading partner and investment location,” he says.
The government is aware that corruption is an issue that needs to be addressed, as is a slow-moving bureaucracy and a lack of legal certainty. Some 20% to 40% of state investment was lost to corruption or wasted in 2006, notes the Vietnamese government’s Central Institute for Economic Management. Although cases of corruption are given coverage in the local media, prosecutions are few and tend not to capture the higher echelons of administration officials.
Ben Bingham, the International Monetary Fund’s representative in Vietnam, believes the government has not lost its reform momentum and is aware of the need to modernise institutions such as the central bank to deal with challenges including large capital inflows and safeguarding financial sector stability. He notes that rapid credit growth is of concern. Some foreign bankers say that, under international accounting rules, official statistics showing non-performing loans (NPLs) of only 2.1% in the financial system in the year to date would more likely be as high as 25%.
Mr Bingham also points to looming bottlenecks in infrastructure and skilled labour.
Staff shortages
The latter is what makes the LSE graduates at the lunch such a skilled commodity and staff poaching a constant in the banking industry. About 60% of Vietnam’s population of 85 million is under 30 years old but is lacking in the skills needed for the country’s continued economic development, including the development of the financial sector in order for capital to be used more efficiently.
Competition in banking services is limited, but increasing. Although the big four state banks have about 60% of the market, there are 36 private banks, known as joint stock banks. About 20 of these are very small and the central bank has raised the minimum capital requirement in a bid to boost consolidation, but bankers complain it has given them too much time to conform to the new strictures. Additionally, there are 39 foreign banks. Many of them are in Vietnam solely to service companies from their home countries which have invested in the vibrant economy.
But a handful of the foreign banks, including ANZ, HSBC and Standard Chartered, expect to incorporate locally in 2008, which would mean the lifting of restrictions on the number of branches they could open and the ability to gather deposits, as well as being encumbered by fewer restrictions on the types of business they could do.
Foreign banks are, additionally, allowed to bid for strategic stakes of up to 15% in the big state banks as the government sells shares in them. That is what the regulations say, but the reality appears to be that stakes of between 7% and 10% are the maximum the government will allow each foreign investor to buy – the 15% stake rule is, however, being applied to the private banks.
Mr Madan of Citi argues that such a small stake in the state-owned banks means the investment is financial rather than strategic.
Vietcombank, the most international of the big four and the first to be “equitised”, as the government calls it, has seen major delays amid rumours that US investment bank Goldman Sachs, General Electric’s financial services arm and Japanese bank Nomura are baulking at the high price demanded by the government.
Central bank governor Mr Giau told The Banker in November 2007 that he “stood at Vietcombank’s back and tried to push it. But for its benefit we need to let it make its decision. There are no problems there.”
Citi’s main focus is currently corporate and investment banking, including custody services and cash management. Australian bank ANZ, which opened its first branch in Hanoi in 1993, has taken a different route, offering the full range of commercial banking from retail to corporate and taking a 10% stake in Sacombank, a joint stock bank and another 10% stake in its securities arm.
Sacombank says its 11-month gross profits soared 18% from a year ago to VND1350bn ($83.8m) thanks to a rise of 125% in lending.
With such astronomical credit growth in the banks, risk management controls, which are in their infancy in many local financial institutions, say analysts, may need to be tightened. But for Sacombank, the sixth largest lender in the country, the presence of the International Finance Corporation as a shareholder with a 10% stake as well as ANZ’s stake provide management expertise.
Still, ANZ’s general manager for Vietnam, Thuy Dam, is concerned about the banking system as a whole.
“Everyone in Vietnam believes banking is a highly profitable business. In Vietnam, banking gives you the highest return. When the economy is doing that well, banks run their business like a cash flow business – deposits in and then lent out. But they pay little attention to risk,” she says.
“If the economy keeps doing very well the flaws won’t show. But if we have a downturn...” she adds. ANZ expects to have up to 12 branches by the end of 2008, up from its current two, assuming its application to incorporate locally comes through quickly.
That assumption is not a given. Foreign bankers complain privately that Vietnam is delaying its approvals beyond the deadlines set by its WTO commitments.
Other partnerships
Competitor HSBC, which has just over 14.5% of joint stock bank Techcombank’s capital, for which it reportedly paid $71.5m, has asked to increase its stake to 20%. This requires the approval of the prime minister and the State Bank of Vietnam, notes HSBC’s president and CEO for Vietnam, Thomas Tobin. He is unconcerned with the bank’s credit growth.
“The growth in its loan book has been impressive and HSBC has been giving Techcombank advice on how to cope with the risks associated with this growth,” he says. This includes seconding executives to the personal credit risk area and placing a former HSBC executive with the bank for 18 months as a consultant to provide guidance on risk management and corporate governance.
Techcombank, Vietnam’s number three bank by profits of the joint stock banks, is looking to expand its retail banking offering, while continuing its focus on small and medium-sized enterprises (SMEs) and building on its 2006 venture into consumer banking. How this tallies with HSBC’s own consumer banking operations, plus the competition issues this and other overlapping business areas throw up, is not a problem, says Techcombank’s CEO Nguyen Duc Vinh.
But competition in the market has certainly had an effect on banking profits.
“The problem now is the competition. Banks are lowering fees and credit conditions [to gain market share]. For six months now we have seen a reduction in our spread. Our net interest margin was 3.9%: it is now 3.6%,” says Mr Nguyen.
The bank, which is planning an initial public offering (IPO) at the end of 2008, saw loan growth of about 70% in 2007 and is planning to add another 50 branches to its current 120 in 2008.
Consolidation looms
Mergers and acquisitions (M&A) will be a growth area going forward as the central bank further tightens the criteria for minimum banking capital and liberalisation under the WTO regime continues.
“On a five- to seven-year horizon, there will be half the number of banks,” says Standard Chartered’s CEO in Vietnam, Ashok Sud. He believes Vietnam is in “the first five kilometres of a marathon” in terms of the development of its financial sector and that there “could be some accident along the way”, such as a bank failure.
The State Bank of Vietnam is currently drafting or amending four laws to do with the central bank, credit institutions, banking supervision and deposit insurance. The laws will be submitted to the government and then to the National Assembly in 2008-09.
Standard Chartered’s main business is corporate banking but four months ago it launched into consumer banking, along with many of its competitors. It has an 8.5% stake in Asia Commercial Bank, one of the private banks, where it has trained more than 200 staff in areas ranging from consumer banking and risk to human resources. Standard Chartered has also applied to incorporate locally.
M&A – a different take Habubank, one of only two of the joint stock banks founded in 1989 that survived the Asian financial crisis, has a different view of M&A activity.
“Boom time is not the right time to consolidate as there is too much euphoria,” says managing director Bui Thi Mai. She says the perception that banking is easy was prevalent 10 years ago, when every state-owned entity wanted to own a bank, until the crisis hit. She expects a repeat of that experience at some unspecified point in the future.
Deutsche Bank bought a 10% stake in Habubank, 80% of whose profits come from SMEs, in October. The Vietnamese bank is looking to add another 10 branches to its 30 by the end of 2008 to help increase its retail presence and to use the experience of its German shareholder to develop its securities arm, along with credit cards and wealth management.
Habubank also talks about the serious shortage of bankers, a perennial complaint from all the banks. Techcombank’s CEO Mr Nguyen at least has a more positive spin, noting that entrepreneurialism is strong in Vietnam, while the children of Vietnamese émigrés to countries such as the US and Australia are returning home. Still, the LSE graduates at lunch look set to enjoy an enviable status in the job market for quite a few more years.
