Despite the troubled global economic backdrop, sentiment in Vietnam’s banking sector is sanguine, with good reason. Most local banks reported commendable (if not stellar) profits for 2008, despite various hurdles faced during the year. These hurdles included an erratic interest rate environment – the base rate rising from 8.25% to 14% in the first half of the year, before dropping by about the same amount in the latter half – and the imposition of a cap (in May 2008) by the State Bank of Vietnam on lending interest rates, at 1.5 times the base rate. And with inflation in excess of 20% for much of the year, this meant that interest offered on deposits was negative in real terms during some months.
This, in turn, cut into core margins, but most Vietnamese banks seem to have been quite adept at creating income from other areas of business, such as gold trading, real estate and other non-lending activities. For those banks that were thought to be struggling, a short-term funding window provided by the country’s central bank helped them to weather the storm. The State Bank of Vietnam also reported that the smaller banks which had to raise additional capital to meet a new VND1000bn ($57m) minimum legal capital limit, effective from January, had successfully done so. That limit rises to VND3000bn in 2010.
In recent months, five international banks have gained approval from the State Bank of Vietnam to convert their branch presence into wholly owned, locally incorporated entities. This was prompted by Vietnam’s entry into the World Trade Organization in early 2007, and a pledge made by Hanoi to open up the local banking and financial services sector to greater foreign competition. But it has taken almost two years for this to become a reality as the central bank took its time in issuing the relevant implementation regulations and appraising the first licence applications.
The first to complete the local incorporation process has been HSBC, opening the doors of its new entity on January 1 this year. The other four licence recipients, expected to follow shortly, are: Standard Chartered Bank, ANZ Bank, Shinhan Bank of South Korea and Hong Leong Bank of Malaysia.
Local advantages
The main attraction of incorporating locally is the opportunity to establish a more extensive branch and distribution network, albeit at a conservative incremental pace set by the central bank’s regulators. In the first year, a new bank may have two branches, in addition to a head office, potentially allowing it to be present in three provincial or municipal locations. HSBC Vietnam has opted to make Ho Chi Minh City its base, with a branch in the capital Hanoi, and a new branch to open in the industrial province of Binh Duong, just north of Ho Chi Minh City.
These new foreign-owned entities will be up against a local banking community that has had time to prepare for the debut of these more competitive rivals. A number of local banks have taken major strides to developing more extensive ATM and branch networks, as well as robust internet banking platforms. Furthermore, the state-owned commercial banks – which continue to dominate the banking sector – boast a national network of branches that give them a reach well beyond the major urban centres.
One can envisage a clash between the well-established customer base of the state-owned commercial banks versus the international savvy and marketing expertise of the new foreign-owned banks, with some of the better local private banks seeking out niche opportunities. But having operated branches in Vietnam for a decade or more, the new foreign banks are not new to the market and so will have an advantage. All of this bodes well for customers in Vietnam.
Operational scope
Local incorporation also permits foreign banks greater scope of operations – notably in terms of products and services offered – than is the case as a foreign bank branch. The principal competitive battleground is likely to be consumer banking, where there is seen to be considerable growth potential, given that just one in 10 of Vietnam’s 87 million or so people has a bank account. In many ways, Vietnam remains a cash economy, although this is gradually changing. The use of debit and credit cards is becoming more common, certainly among the more affluent of the 30% of Vietnamese people that reside in urban areas. The new banks are likely to step further outside their traditional ‘comfort zone’ of servicing established corporate clients, to focus greater attention on Vietnamese individuals and smaller local firms.
Despite the relatively small market, the country has about 40 private banks, five large state-owned commercial banks, about 40 foreign bank branches, six joint-venture banks, 12 leasing companies, and innumerable funds of various kinds. And the numbers keep getting bigger. After a long hiatus, the central bank has approved a number of new banks during the past year or so.
The latest is Bao Viet Bank, a subsidiary of the largely state-owned insurance conglomerate, in which HSBC has a 10% strategic stake. HSBC also has a 20% stake in private Techcombank. Little surprise then, that “HSBC strongly believes that Vietnam's long-term economic potential is considerable,” says Tom Tobin, president and CEO, Vietnam.
One of Vietnam’s leading private banks, Sacombank, also recognises opportunities in neighbouring countries. It recently inaugurated a branch office in the Lao capital of Vientiane, and has received approval from the National Bank of Cambodia to open a branch in Phnom Penh.
This echoes a trend among some Vietnamese companies to establish themselves in Cambodia and Laos, where land and other natural resources are more plentiful. It is unclear yet whether Lao and Cambodian people will be attracted to bank with a Vietnamese entity, but the expatriate Vietnamese communities in these two countries may well be enticed.
Much will depend on the quality of service provided because Cambodia’s banking sector, in particular, has seen a marked improvement in customer service standards since ANZ Royal Bank entered the market a few years ago. A similar trend is likely in Laos, following ANZ’s investment in Vientiane Commercial Bank, which should raise the bar for the local banking industry.
Inward remittances
In Vietnam, another important retail service is that of inward remittances by Vietnamese people residing overseas, estimated at $8bn in 2008. The aggregate size of remittances may contract marginally in 2009 as a consequence of the global downturn. Tellingly, fewer Vietnamese relocated overseas as labourers in 2008 compared with a year earlier, and fewer Vietnamese migrants (in US, France, Australia, Russia and elsewhere) travelled home for the lunar new year festival in January as their budgets were tightened. Nonetheless, inward remittances will remain a healthy source of business for banks in the foreseeable future.
In late December, the state-owned VietinBank enacted a hesitant initial public offering (IPO) by auction. Some 4% of the bank’s shares were sold, mostly to domestic investors, raising VND1100bn. The choice of date for the auction may explain why only three foreign institutional investors participated in the bidding. The bank has still to place 10% of its shares with a foreign strategic investor. The partial divestment of VietinBank is part of the government’s long-drawn-out ‘equitisation’ programme, which has persistently failed to impress. (In late 2007, Vietcombank enacted a similar IPO.) Matters have not been helped by a sombre and illiquid stockmarket; in 2008 the VNI index fell by 66%, making it the worst performing equity market in Asia last year.
Starting to bite
The global economic downturn is starting to bite in Vietnam. Most observers expect the country’s export performance to struggle in 2009 as foreign demand for manufactured items (such as garments and footwear) contracts, and the global price of various commodities (such as seafood, pepper, coffee, oil and coal) declines. Foreign investment inflows will also probably shrivel to a mere shadow of the bumper figures (about $60bn pledged) in 2008. As an export-oriented and investment-driven economy, Vietnam will be adversely affected, of that there is no doubt.
Hence, Hanoi’s policymakers have announced that they will enact an economic and fiscal stimulus package valued at VND100,000bn, equivalent to about 7% of Vietnam’s gross domestic product, or a quarter of its foreign exchange reserves.
Details of the package remain unclear, although most banks are likely to be involved in some of the initiatives proposed. One is to establish a VND30,000bn national credit guarantee scheme for small and medium-sized enterprises seeking bank loans, even though past attempts at such schemes in Vietnam have been disappointing.
More controversially, perhaps, is a proposal by the central bank to subsidise select short-term loans (of eight months or less) to eligible businesses, by up to VND17,000bn, by shaving 4% of the interest rate charged by banks. The mandatory scheme will require banks to offer the loans at the reduced rate of interest, and be reimbursed by the State Bank of Vietnam at a later date.
