Vietnam has seen a period of growth that has made its banks stronger than ever. Driven by digital and retail trends, they are now planning for a new kind of future. Peter Janssen reports.


Vietnam’s leading banks have experienced rapid growth over the past three years, riding high on an explosion of retail lending. This points, perhaps, to an economy that is primed for take-off, with much of the growth now driven by domestic demand. 

This is arguably the beginning of a new era for socialist Vietnam, where state-owned enterprises (SOEs) and foreign direct investment have traditionally been the main engines of growth, and a new era for the Vietnamese banking industry, fraught with risks and challenges and destined to leave losers in its wake.

Vietnam’s gross domestic product (GDP) grew by 7.1% in 2018, driven mainly by an increase in consumption (65% of GDP) of 9% year on year and manufacturing (20% of GDP) of 13% year on year. GDP per capita per annum is now close to $2500 nationwide, and closer to $6000 in the two largest cities, Hanoi (the capital) and Ho Chi Minh City (the commercial centre). The level of $3000 per capita per annum is the threshold at which economists say emerging markets tend to take off, driven by booms in consumer spending.

Vietnam’s banking system has been cashing in on domestic demand. Consumer credit grew by 65% in 2017 and 30% in 2018, and is expected to reach 20% growth in 2019, according to VinaCapital, a Vietnam-based private equity fund. That kind of credit expansion raises both hopes and fears. “When you have been giving credit at the pace Vietnamese banks have for quite some time, especially to the household sector, inevitably there is some sort of an asset quality correction,” says Jonathan Cornish, head of banks ratings, Asia-Pacific, at Fitch Ratings. “Whether it turns into a crisis is another matter.”

Been there, seen that

Vietnam has been here before, but this time the buzz seems different. Its banks’ lending grew at an average of 33% per year between 2004 and 2011, before and after Vietnam entering the World Trade Organisation in 2007. During the global crash and recession of 2008-09, Vietnam’s stock market fell by 80%, followed by a plunge in property prices and a ballooning of non-performing loans (NPLs) in 2011-12. Much of the NPLs were to SOEs in property deals that raised a few eyebrows.

In retrospect, the NPL crisis was a positive development for the soundness of Vietnam's banking system, in that it boosted the independence and regulatory clout of the State Bank of Vietnam (SBV), the country's central bank. “What the SBV did at the time was lend to the distressed banks directly via its refinancing window and essentially took control,” says Michael Kokalari, chief economist at VinaCapital. “Before that it really didn’t have control of the banking system.”

The SBV also set up the Vietnam Asset Management Company (VAMC) to park the banks’ NPLs, allowing them to get on with business. VAMC, which had no capital of its own, has proven a surprise success story. “It was not something that had been tried elsewhere before but actually it worked, whether we liked it or not,” says Alwaleed Alatabani, lead financial sector specialist at the World Bank’s Vietnam office. Asset management companies are a common vehicle for cleaning up NPL crises, but usually they include public auctions of distressed assets. The auction never happened in Vietnam, at least not publicly.

“Some of the real estate companies have fulfilled the role that a distressed assets auction [by the VAMC] should have filled normally,” says Mr Kokalari. Vietnam’s private sector property developers have had access to these distressed assets over the past few years and have gone on a construction spree, building office towers, resorts and residential units for a growing market. The banks have also been buying back their NPLs from the VAMC as their value improved with the market. 

“Property prices didn’t start to recover until about a year-and-a-half ago, and 92% to 95% of these NPLs are collateralised by land,” says Mr Alatabani. “So whatever happens in the property market has an impact on NPLs.”

Also helpful was Regulation 42, passed in 2017, which allowed the banks to foreclose on property.

Complying with Basel II

Vietnamese banks are having to clean up their old bad debts before they can apply for Basel II compliance from the SBV, one of the big pushes for the central bank in 2019 and 2020. “We don’t have any debt with the VAMC as of two years ago,” says Dam Van Tuan, executive vice-president of Ho Chi Minh City-based Asia Commercial Bank (ACB). “That is one of the conditions for you to be eligible for Basel II.”

Eight of Vietnam’s 42 banks have already qualified for Basel II compliance, including the state-owned Vietcombank, and joint-stock (private or semi-private-owned) Military Bank, ACB, Vietnam Property Bank, Technology & Commercial Bank (Techcombank), Vietnam International Bank, Overseas Commercial Bank and Tien Phong Bank.

“Vietcombank was the first bank in Vietnam certified by the SBV as compliant with Basel II capital requirements in November 2018, one year ahead of schedule,” says Nghiem Xuan Thanh, chairman of the board of directors at Vietcombank, one of the so-called 'Big Four' state-owned banks in Vietnam. Basel II is essentially about raising banks’ capital adequacy ratio (CAR) to provide buffers against future shocks. Vietcombank’s CAR was 9.86% as of the first quarter of 2019, well above the SBV’s requirement of 8%. The state-owned bank is also well respected for its risk management framework. “At the end of 2018, Vietcombank’s NPL ratio was only 0.98%, the lowest among Vietnamese banks of similar size. Our plans for 2019 onwards include keeping NPLs below 1%,” says Mr Thanh.

The SBV originally targeted the top 10 banks to be Basel II-compliant by 2020, but later changed tack to target 70% of the banks. The shift might have been due to the difficulty of getting the other three large state-owned banks – Vietinbank, BIDV and Agribank – on board. The Big Four account for at least 45% of the assets in the banking system.

Attracting foreign capital

One way to boost capital is for state-owned banks to sell equity to foreign banks, something that has been going on for some time in Vietnam. Japan’s Mizuho Corporate Bank has had a 15% stake in Vietcombank since 2011 and in January 2019 bought more shares to maintain the equity level alongside GIC Private (Singapore’s sovereign wealth fund). The deal, which followed Vietcombank’s Basel II certification, was worth $265m. “Following the sale Vietcombank now has the highest charter capital among our peers,” says Mr Thanh. 

The other big state-owned banks are following similar paths to capitalisation. Vietinbank is 19.73% owned by Japan’s Mitsubishi UFJ, which may inject more money into the institution. Keb Hana Bank of South Korea is reportedly negotiating an equity purchase in BIDV, and Nonghyup, a South Korean co-operative bank, is reportedly interested in Agribank.

A possible obstacle comes from the SBV, which has limited foreign equity in banks to 30%, with no single investor allowed more than 15%. This prohibition may need to be relaxed if the SBV is serious about getting most of the system up to Basel II standards. Another challenge in attracting foreign banks to buy into the big state-owned banks is rooted in the lack of transparency and accounting for NPLs, not only those still sitting in the VAMC but new ones that may be accumulating.

During the 2011-12 banking crisis, the SBV declared the NPL ratio for the system was below 10%, while independent analysts said a figure of 15% to 20% was more likely. “We still think the NPLs are under-reported and they certainly do act as a drag on the financial performance of the banks, but the buffers are likely to be greater now,” says Fitch Ratings’ Mr Cornish. 

In 2019 Fitch upgraded Vietnam to BB (still below investment grade), with the banking sector seen as one of the economy’s drags. “There are a couple of issues that weigh on the rating. One is the weak banking sector and the weak capitalisation which poses high contingency liability risk to the sovereign balance sheet,” says Stephen Schwartz, Fitch Ratings’ head of sovereigns for Asia-Pacific.

Too many banks?

One structural challenge for Vietnam's banking system is that 42 institutions could be too many. The SBV passed out a bundle of bank licences in between 1990 and 1993, after opening the banking sector to the private sector in 1989. Many of the so-called joint-stock banks were founded by people with little banking experience but good connections to SOEs or the Communist Party. The SBV also handed out nine licences to several 100% foreign-owned banks: HSBC, Shinhan Bank Vietnam, ANZ Bank, Standard Chartered, Hong Leong Bank, Public Bank Vietnam, CIMB Vietnam, Woori Bank and UOB. No new licences have been granted to foreign banks over the past two years in what appears to be a deliberate tactic by the SBV to encourage newcomers to invest in existing banks instead.

There are plenty of distressed banks to choose from. There are the so-called ‘zero-dong’ banks, three joint-stock banks taken over by the SBV in 2011 and 2012 at zero payment. These three banks – Dai Dong Bank, Global Petro Bank and Construction Bank – are on the block for foreign buyers because the SBV has agreed to allow up to 100% ownership. To date there have been few takers.

The SBV has been encouraging mergers and acquisitions (M&As) among Vietnamese private banks and finance companies since the last crisis, opening up growth opportunities for some. HDBank, for example, has been expanding though M&As since 2013 when it acquired 100% of Société Générale Viet Finance and Dai A Commercial Bank. It has now sets its sights on a merger with Petrolimex Group Bank (PG Bank), a subsidiary of the state-owned Petrolimex, which owns 2000 petrol stations nationwide.

“The government asked Petrolimex to divest companies not related to its main business so that was an opportunity for us to acquire it,” says HDBank deputy CEO Pham Quoc Thanh. HDBank is linked to VietJet Air, Vietnam’s first privately owned airline, established in 2007 by the bank’s permanent vice-chairwoman, Nguyen Thi Phuong Thao. HD also owns 51% of HD Saison Finance, a consumer finance company.

With its plans to acquire PG Bank, HD’s management sees huge potential for leveraging these assets to promote its retail banking. “In our ecosystem we will have VietJet Air with 20 million customers, we have HD Saison Finance with 4 million customers and Petrolimex with 20 million customers, so our ecosystem is more than 50 million retail customers,” says HDBank’s Mr Thanh. “Currently, HDBank has only 1.8 million retail customers so the potential is still huge.” The bank plans to become Basel II compliant in the third quarter of 2019.

Retail is king

All the banks in Vietnam, including the Big Four state banks and some less regulated finance companies, are chasing the retail market, both for deposits and loans, and especially for home mortgages. The push towards retail banking and SME lending is happening at the same time as a decline in overall lending to SOEs. Since the loans crisis of 2011 to 2012, lending to SOEs has declined by 50% in Vietnam, falling from 16% of the system’s lending to only 8%, according to World Bank data.

State-run Vietcombank aims to be the top retail bank by 2020. “Vietcombank has devised a multi-phase strategic plan aimed at driving retail penetration through customer segmentation, the development of more customer-centric product offerings and service quality improvement,” says the bank's Mr Thanh. The bank has a network of 589 branches and 2555 ATMs. Vietcombank’s pre-tax profit was VND18,300bn ($790m) in 2018, the highest in the country.

Private banks are not far behind. Techcombank is pulling in about 200,000 new retail accounts each month through a combination of professional, modern services and a digital platform. The bank officially became Basel II compliant in June 2019, but claims it was already compliant in June 2018, when it completed its initial public offering (IPO) on the Ho Chi Minh City Stock Exchange. “After we did our IPO our CAR has steadily stood at about 13% to 14%. We have one of the highest CARs in the region,” says Techcombank CEO Nguyen Le Quoc Anh. “For us, within the bank, Basel II was anti-climactic. There was no popping of champagne.”

But there was good reason to celebrate. For banks such as Vietcombank and Techcombank which have met the Basel II standards and have exceeded the minimum CAR of 8%, the central bank extends a higher credit growth ceiling. In Techcombank’s case, the credit rate ceiling is 20% in 2019, close to what credit growth was in 2018. For the banking system as a whole, the SBV has set an average of 14% credit growth in 2019.

Digitalising for retail

Vietnam’s fastest growing, most profitable banks are investing in the future, which is digital, especially for retail banking. “To be able to service retail customers in a cost-efficient manner, the only way is through digital banking,” says Mr Quoc Anh. “This is the way of the future. But it is more than that; it is the way of now.” Techcombank’s retail customer base is already 6.5 million and growing fast. Pre-tax profits stood at VND10,700bn in 2018, second only to Vietcombank. The bank is the only one in Vietnam to have waived fees on digital transactions to attract more customers.

Digitalisation is likely to be another game changer in the banking status quo in Vietnam. “For the smaller banks, if they were to enter this digital race, then not only do they have to pay for the platform but they don’t have the scale to pay for the professionals who are at mid-career and very expensive,” says Mr Quoc Anh. Without a digital platform or nationwide branch network, weaker banks are being forced to lower their interest rates to attract more customers.

“The deposit rates are being driven by the smaller banks that are not in good shape, but are being forced to hike their rates to attract depositors,” says Vina Capital’s Mr Kokalari. The same banks are the ones most likely to have weak risk management systems for their loans. “So we have a two-tier situation where there is still a layer of banks at the bottom that are not in good shape. There are some distressed banks but I don’t think there will be a run,” adds Mr Kokalari.

The situation in Vietnam today is markedly different to what it was seven years ago. The economy is stronger and the banking system is a lot more secure, despite the rapid credit growth, with many of the top banks already Basel II compliant and others well on the way. Lending has shifted from the SOE sector to the retail sector, which has huge growth potential as Vietnam takes off. That said, the state-owned banks are still there to provide some security for the system, at least in the short term. 

“If you look at the banking sector I don’t see any looming crisis because about 45% of the market share is owned by the Big Four,” says ACB’s Mr Tuan. “The approach of the central bank is to have a smooth transformation, not shock therapy.”


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