Having narrowly survived a financial crisis in 2011, Vietnam is rolling out reforms to tackle low capitalisation and high numbers of NPLs. But given that the country has yet to implement Basel II, will these reforms still leave the country's lenders playing catch-up? Stefania Palma reports.

Vietnam’s banking sector is still recovering from the national banking crisis of 2011, when a combination of poor risk management and soaring levels of non-performing loans (NPLs) led to the collapse of some institutions and the capital erosion of many local banks. 

Ten Banks to comply with Basel

The State Bank of Vietnam (SBV), the country’s central bank, is rolling out reforms to clean up banks’ balance sheets. But although this policy is generating a positive mentality shift, the path to strengthening the banking market remains difficult. Capitalisation across the sector is low and the NPL question is far from resolved. 

Pundits blame poor risk management, excessive credit growth and lax bank regulation for low capitalisation. Indeed, Vietnam is still operating under Basel I rules. Only this year, the SBV launched a pilot scheme whereby a mere 10 of Vietnam’s strongest banks need to meet Basel II capital requirements by the end of 2018 (see table).

Basel II doubts

Meeting this deadline will be no easy task, according to market participants and credit rating agencies. “We believe [the 10 banks’] capital adequacy ratios will be pushed lower by the shift to a more conservative regime. Those banks with capital-to-asset ratios close to the 9% regulatory minimum will need more capital,” says rating agency Fitch in a statement.

Eugene Tarzimanov, senior credit officer at rating agency Moody’s, adds: “We understand that [the] Basel II rollout is still not certain in 2018.”

Moreover, banks will need to deal with deteriorating Tier 1 capital under Basel II, according to Mr Tarzimanov. “We expect banks’ Tier 1 ratios to decrease by about 50 to 100 basis points if and when Basel II is implemented. The capital ratios of Vietnamese banks are under negative pressure because of rapid growth. The average Tier 1 ratio dropped to 7.3% in 2015 from 8.1% in 2014,” he says.

Vietnam capital adequacy ratios

For Pham Hong Hai, CEO of HSBC Bank (Vietnam), poor capitalisation is one of the biggest risks to Vietnam’s banking sector in light of accelerating annual credit growth, which has doubled since 2012 (see graph).

Vietnamese credit growth accelerating too fast?

Vietnam’s domestic credit to the private sector is also significant compared with the size of the economy. According to the World Bank, it accounted for 112% of gross domestic product at the end of 2015, up from 105% in 2012.

State-owned banks are under additional capital strain because they must continue paying dividends to the government, their shareholder, despite low capitalisations. “There is not much money left to build a buffer,” says Mr Hai.

Foreign help

With unfavourable domestic market conditions limiting capital raising at home and the government unable to afford capital injections into the banking system, banks have resorted to selling shares to foreign investors to boost their capital levels. “Let the private sector come in, let it fix the issue and make the sector more transparent,” says Mr Hai. 

Vietcombank, the third biggest Vietnamese bank by Tier 1 capital, according to The Banker Database, will need to raise between $1.5bn and $2bn to meet Basel II capital requirements by 2018. With this goal in mind, it sold a 15% stake to Japanese megabank Mizuho back in 2011. Today, it is in talks with Singapore’s sovereign wealth fund GIC regarding the sale of 7.7% of its shares.

But Vietcombank chairman Nghiem Xuan Thanh is unsure whether the deal will go ahead. “GIC has made a good offer, but it is below today’s market share price,” he says. “We submitted the [deal] proposal to the government and SBV, but this price differential might be an impediment. If GIC is not approved, it will be quite challenging to find another candidate that offers a higher price.” 

When foreign investors buy Vietnamese bank stocks, they cannot trade them for a year. And in GIC’s case, it is looking to buy a chunky volume of shares, so asking for a higher offer price might be hard, says Mr Thanh. “If we just rely on the stock market price [to pick a candidate] then it is hard to find investors. Our stock price has appreciated recently. It has almost doubled versus comparable banks in the market,” he adds. 

Foreign ownership caps

The GIC case is one example of how the government’s involvement might be hindering market efficiency. Caps on foreign ownership in local banks might also be dampening international investor appetite at a time when local lenders are desperate for capital. Overall foreign ownership of a Vietnamese bank is capped at 30%. International strategic investors have a 20% ownership limit and international individual investors face a 5% limit. 

Limiting foreign ownership to a minority stake constrains investors’ influence on the bank they buy into. “I would like to invest in local banks but I can’t just have a 5% stake. I’d want to have more rights. Increasing these limits would bring in overseas Vietnamese investors, for instance,” says Andy Ho, managing director at investment management firm VinaCapital. A minority stake also limits the ability to make the management and structural changes some Vietnamese banks need. “Banks need to have good managers, and not all local banks do,” adds Mr Ho.

Ceilings on foreign ownership also make investors uncomfortable when buying shares in poorly capitalised banks. “Many [potential strategic investors] have to follow Basel III, and if you only have a minority stake [in a bank that still has not complied with Basel II] it will impact negatively on your capital,” says HSBC’s Mr Hai.

The SBV is suggesting it is considering relaxing the cap on foreign ownership of Vietnam’s smaller banks. But global buyers might still shy away because these are the weakest lenders in the country with the lowest capitalisations.

Tackling NPLs

In addition to poor capitalisation, Vietnamese banks’ NPL ratios are a further cause for concern. The banking sector’s NPL ratio has fallen since the 2011 crisis, from a high of 17% in 2012 to 2.58% as of the second quarter of 2016, according to the SBV. However, some market participants argue that today’s true ratio is higher than official statistics, potentially as high as 10%, according to Standard & Poor’s.

“Reported NPLs understate the extent of problem and stressed loans in Vietnam,” says S&P. In addition, according to Wee Siang Ng, senior director, financial institutions, at Fitch, identifying the true state of NPLs could be tricky because “data transparency is less than ideal in Vietnam, so select industry data is unavailable”.

According to Mr Hai, some banks under-report NPLs or book them as receivables instead to avoid provisioning costs. Under-reporting NPLs also means banks’ accrued income is inflated. “But you still need to pay deposit interest to depositors. So banks’ losses are growing but they’re not reporting the right number,” he adds.

One of the main reasons for this behaviour, he argues, is that the SBV still has not addressed the core of the NPL issue. The government set up the Vietnam Asset Management Company (VAMC) in 2013 to tackle the problem. But instead of buying NPLs from banks, the VAMC gives banks five- or 10-year 0% coupon bonds in exchange for a bundle of NPLs. During the life of the bonds, NPLs sit on the VAMC’s balance sheet rather than the banks’ own. Banks can create annual provisions for only 20%, rather than 100%, of the exchanged NPL bundle. But if banks do not resolve the NPLs before the VAMC bonds mature, the VAMC transfers the stressed assets back to the bank.

The problem with this system is that NPLs are only temporarily moved off banks’ balance sheets. Resolving NPLs is difficult if the VAMC pays for the stressed assets with bonds instead of cash. 

“This [system] helps delay the problem. But the concern is that at the end of the day the NPLs go back to the bank,” says Mr Hai. “NPLs need to be resolved by money either from the state budget or from the private sector. It is difficult to clean this up otherwise. The longer we delay the problem, the bigger the issue will be.”

Real estate, SOE stress

But in June, Bloomberg reported the VAMC will make its first cash purchase of NPLs from banks in 2016. According to Moody’s, this is good news. However, VAMC’s success depends largely on its capacity to purchase NPLs from banks, which only totals VND2000bn ($88bn), according to Moody’s. But reported NPLs of Vietnamese banks rated by the agency are 15 times higher, at VND30,000bn. “Greater financial support from the Vietnamese government is crucial,” says Moody’s.

The largest banks in the country, however, are moving in the right direction. In Vietcombank’s case, NPLs have dropped from a high of 4% in 2012 to 1.7% today. So far, the lender has passed on NPLs worth VND6000bn to the VAMC and has provisioned for VND2000bn of the stressed assets. “[Provisioning] was completed ahead of our two-year deadline,” says Mr Thanh.

Vietcombank’s strategy to reduce its NPL ratio included dropping exposure to the real estate sector and state-owned enterprises (SOEs), the main factors behind ballooning NPLs during the crisis. Regulatory reform is also pushing banks in this direction. By the end of 2016, the SBV will have increased the risk weights for real estate loans from 150% to 200%.

“We introduced a policy to limit the maximum amount of outstanding real estate loans. We are trying to set a limit below the cap set by the SBV. We also set a high risk weight [for real estate loans],” says Mr Thanh. 

In terms of SOE clients, Vietcombank is monitoring those with high debt versus equity and may decrease credit lines and increase collateral requirements for those that are struggling. “Even though our volume of outstanding loans to SOEs is quite high, the credit quality of the SOE book is controlled,” says Mr Thanh. However, he stresses that it is not fair to say that all SOEs performed badly during the crisis. 

Retail potential 

Despite the low capitalisations and overhanging NPLs dating back to the 2011 crisis, lenders can take solace in the fact that the economy is thriving and Vietnam’s young population is heavily underbanked. According to the SBV, only 20% of Vietnam’s population has a bank account and only 3% have credit cards. “There is a huge untapped market in Vietnam,” says Mr Ho.

The biggest opportunity appears to be in retail. Real estate transactions involving mortgages account for less than 10% of total transactions, says Mr Ho. And with 87% of the population under the age of 54, there is a great opportunity for retail development, he adds. 

Indeed, local lender Vietcombank aims to become the country’s top retail bank. In addition, banks’ historically high exposure to the corporate sector means competition is fierce and margins low. “We want to diversify into retail to increase our net interest margins,” says Mr Thanh. 

FDI hub 

Banks also benefit from Vietnam’s strong economic performance: large foreign direct investment (FDI) flows make it one of the fastest growing countries in Asia. Manufacturing companies have started relocating from China to south-east Asian countries such as Vietnam, where labour costs are lower.

Indeed, HSBC’s FDI-related business is thriving. The lender mostly caters to multi-national corporations or foreign firms investing in Vietnam. “[They] don’t just invest because of Vietnam’s large consumer market; they invest also because Vietnam is a manufacturing hub you can use to then export to other Association of South-east Asian Nations countries,” says Mr Hai. 

Vietnam was also involved in the Trans-Pacific Partnership (TPP) championed by US president Barack Obama but whose future has been cast into doubt by president-elect Donald Trump. However, in mid-November, Vietnam’s prime minister, Nguyen Xuan Phuc, stated that Vietnam will not ratify TPP at its 14th National Assembly after the US announced the suspension of the deal. HSBC’s Mr Hai, however, is not worried. “FDI flows into Vietnam will not be disrupted [by the TPP falling through] thanks to its low labour costs,” he says.

Vietnamese corporate champions have become a further source of business for banks. Firms such as low-cost airline VietJet Air, dairy company Vinamilk or mobile network Viettel have now grown to the point where they are expanding across Asia. Mr Hai hopes to offer them support though HSBC’s Asian network as well as the bank’s mergers and acquisitions, cash management, working capital financing, trade finance and advisory services. 

After avoiding banking sector collapse in 2011, Vietnamese regulators are showing more commitment to tackling banks’ poor capitalisations and high NPLs. But now that most of the world has moved on to Basel III and with Basel IV to be finalised soon, Vietnam has a lot of catching up to do and not much time. Banks will be able to fully take advantage of a thriving local economy only when regulators leave behind a historically lax and reactive approach to policy.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter