Vietnam’s banks are pushing into retail, buoyed by a young and growing population. How will competition between new, tech-savvy private lenders and the big four public sector banks play out? Peter Janssen reports.

VP Bank

On tree-lined Pasteur Street in Ho Chi Minh City something new is afoot in Vietnamese banking. Easily mistaken for just another of the city’s many coffee bistros, Timo Hangout, at No 194DE Pasteur, is the hip headquarters of Vietnam’s first neo-bank. The ground floor bustles with young Timo employees clad in purple jackets serving espressos and mobile phone bank services. Timo is just the cool tip of Vietnam’s retail banking iceberg.

“Our core demographic is about 25 to 35 years old, so it’s young professionals,” says Cameron Warden, CEO of Timo Hangout, who sports tattoos but no tie. “They don’t want to take a ticket and stand in line at a bank for half an hour during their lunch break.”

Timo Hangout, which now boasts outlets in Hanoi, Da Nang and Can Tho after opening its Ho Chi Minh City headquarters in May 2016, offers the usual mobile phone bank apps such as top-ups and bill payments, along with more sophisticated products such as insurance policies and overdrafts. “We estimate our potential market to be about 34 million people. We have more than 100,000 customers now so there is a lot of room for growth,” says Mr Warden.

Tech-savvy partner

Timo Hangout was the brainchild of executives from VinaCapital, a Vietnam-based asset management company. Because Vietnam has not yet promulgated regulations covering fintech start-ups, Timo sought a local bank partner. “The owners talked to a bunch of different banks and found Vietnam Prosperity Bank [VPBank] to be the most forward-thinking, tech-savvy bank to work with,” says Mr Warden.

VPBank provides the platform for Timo’s bank licence. VP Bank does the know-your-customer checks on Timo’s new clients, takes the risk for overdrafts and shares the revenues with Timo. For VPBank, Timo is a new channel for tapping into Vietnam’s younger bankers and consumers.

VPBank, a private bank that began life in 1993 when the State Bank of Vietnam was handing out  'joint-stock' bank licences to local investors, was remodelled in 2010 when it came under the management of a new set of owners. The new board of directors – most of them graduates from Russian technical universities – had a vision to transform VPBank into one of the country’s leading joint-stock banks with an emphasis on retail banking, with a little advice from the consultant McKinsey & Company.

VPBank’s retail push

In 2012, VPBank hired the veteran Nguyen Duc Vinh, a former CEO of Technological & Commercial Bank (Techcombank). “When Mr Vinh was CEO of Techcombank, it became the best bank [in Vietnam],” says Nguyen Duc Thanh, director of think tank the Vietnam Centre for Economic and Policy Research (VEPR). “When he moved to VP Bank, it became the best retail bank within five years.”

VP Bank’s impressive growth has been fuelled by its plunge into retail banking, which it has split up into four separate divisions: unsecured consumer lending; retail small and medium-sized enterprises; household banking; and 'emerging affluent'. Since 2013 the bank has centralised all credit decision making to its headquarters, turning its 217 branches into sales offices.

The centralisation has allowed the bank to improve its risk management, a crucial area for Vietnam’s banking scene, which experienced its first crisis in 2012, from which it has yet to fully recover.

“Nowadays the four retail divisions account for 75% of our balance sheet and the so-called non-strategic account for 25%. Previously it was about 50/50 corporate/retail,” says VPBank’s chief financial officer and deputy CEO, Luu Thi Thao.

Between 2013 and 2016, VPBank’s total operating income tripled from VND4900bn ($219m) to VND16900bn, making it Vietnam’s lead joint-stock bank in terms of income generation. Unsecured personal loans – the bulk of which were handled by VPBank’s subsidiary Fast and Easy Credit – accounted for 40% of the bank’s revenues. By the third quarter of 2017, VP Bank’s total assets (loans and corporate bonds) reached VND253,800bn, up 25% from year-end 2016, placing it among the top 10 Vietnamese banks. 

Unsecured financing growth

“VPBank started its venture into the highly profitable – also high-risk – unsecured consumer finance segment some three years ago and its efforts are bearing fruit with profitability rising and emerging as one of the top 10 banks in Vietnam,” says Wee Siang Ng, senior director in Fitch Rating’s financial institutions team. Unsecured consumer finance is just one part of Vietnam’s retail banking boom.

"Retail loans took off some two years ago and we expect this sector to remain the key loan driver for the next two years – supported in part by an improving housing market, a rising middle class, strong gross domestic product [GDP] growth and good inflows of FDI,” says Mr Ng.

Vietnam’s GDP is expected to have grown 6.3% in 2017, slightly higher than the 6.2% growth of 2016, according to the Asian Development Bank. Foreign direct investment (FDI) hit a record high of $15.8bn in 2016, and could have surpassed $20bn in 2017, according to government estimates. Over the past two years, the government has controlled inflation, stabilised the dong currency, enhanced the ease of doing business in the country and generally supported private sector growth, despite its communist roots.

“There has been a consistency in policy direction for years that we don’t see in many economies, and that’s one of the nice things about Vietnam,” says John Ditty, managing partner at KPMG's tax and advisory arm.

Foreign presence

Steady economic growth has given birth to a fast-emerging middle class in Vietnam with a “couple hundred thousand” new affluent households joining the market annually, according to Dennis Hussey, chief executive of ANZ Vietnam, which opened its first office in Vietnam in 1993. ANZ is one of seven foreign-owned, fully Vietnamese licensed banks in the country. There are 41 foreign bank representative offices.

After building up a strong presence in the affluent segment of the market, ANZ decided to sell its retail operation to Shinhan Vietnam Bank in early 2017, with the handover of all branches, ATMs and retail personnel due to be completed by year-end.

“The decision to get out of retail was a group decision, based upon the reality of scarce capital, scarce investment dollars and because to remain competitive in a retail space we would need to invest quite significantly. But to set the record straight, this is a growth business,” says Mr Hussey. “Shinhan saw it as a big opportunity for it to leapfrog the rest of the market,” he adds. ANZ will retain its core business in corporate lending in Vietnam, specialising in trade finance and investment flows for its multi-national clients.

HSBC retains presence

HSBC, which has sold its retail banking operations in certain markets such as Thailand, opted to keep its business in fast-growing Vietnam. Unlike Thailand, where foreign-owned banks are generally limited to one branch, in Vietnam they can set up as many as they can afford. HSBC has 15 branches throughout Vietnam, giving it a significant reach to the urban-based affluent market. “Where we see our competitive market is the affluent segment, who have the aspiration to have access to international exposure,” says Pham Hong Hai, the first Vietnamese national to be appointed CEO of HSBC Vietnam.

HSBC has been capitalising on its global network and strong Asian presence in recent years as Vietnam became a darling for FDI inflows and a magnet for mergers and acquisitions (M&A). Between 2012 to 2016, HSBC Vietnam was involved in M&A deals totalling $3.8bn. For example, the bank served as the sell-side adviser to France’s Casino Group in the sale of its retail operation to the Big C retail group of Thailand.

HSBC Vietnam has also leveraged its strong corporate banking presence in the retail space. “We probably have the best corporate portfolio in the country today [among both] Vietnamese and foreign companies,” says Mr Hai. “So with that very good corporate market it is natural that we should penetrate deeper into the segment and offer retail products to employees because we know the companies so well.”

For example, one new product HSBC is offering its Vietnamese corporate clients is the convenience of opening a foreign bank account for their children studying abroad in the UK, Australia or Canada while they are still in Vietnam.

That said, there is an acknowledgement among foreign banks that their retail reach is limited. “My view of the game in Vietnam is that the local banks will remain the dominant players in the retail market. I think the foreign banks have a role to play in the affluent segment,” says Mr Hai.

Public-private competition

Among the Vietnamese banks, all eyes are on the 'big four' state-owned banks, which currently hold about half of the system’s assets, and the up-and-coming private banks. The big four are VietinBank, BIDV, Agribank and Vietcombank, which were all set up in 1988 to act as state banks for the main economic sectors of industry, infrastructure, agriculture and trade, respectively.

These majority state-owned banks remain important tools of the government and the Communist Party of Vietnam, although their independence was given a boost following the 2012 banking crisis, characterised by a surge in non-performing loans (NPLs). Many of the NPLs were the result of the big four state-owned banks lending to state-owned enterprises (SOEs), of which there are an estimated 5500 in Vietnam. By the end of 2012, NPLs had reached at least 12% of all loans, the World Bank estimated.

While the banking system has brought NPLs down to an estimated 3% by 2016, the banks still bear a burden of writing off bad debts, cutting into their profitability today. All Vietnamese banks (there are about 40) need to recapitalise by 2020 to meet Basel II compliance.

Bigger not better

Meeting this recapitalisation target may prove more challenging for the big entities than the more nimble, smaller private banks. VPBank, for instance, raised all the capital it needs in August 2017 with an initial public offering (IPO) that brought in VND6400bn ($280m), with shares selling at four times face value.

It is unlikely any of the big four banks would receive a similarly warm welcome should they go to the stock market, given their lingering NPLs and mediocre profits. Getting strategic foreign partners involved is also becoming more difficult. The government allows state-owned banks to sell up to 30% of their equity to foreign banks. Bank of Tokyo-Mitsubishi UFJ, for instance, owns 19.7% of VietinBank and Mizuho Corporate Bank owns 15% of Vietcombank.

Agribank and BIDV have no foreign partners, but are looking. “Vietnam’s banking sector has received less interest from foreign investors than previously,” says Tran Phuong, senior executive vice-president at BIDV, citing the application of Basel III regulations on foreign banks, which does not easily allow them to include minority holdings of banks in their balance sheets.

Mr Phuong is more optimistic about attracting regional banks. “At present, we are actively holding dialogues with potential investors and expect that the final announcement on investment will be coming soon,” he says.

Hiring in experience

There are other things the big banks in Vietnam could be doing to improve their performance, according to many market watchers. Vietcombank, for instance, recently hired Thomas Tobin, the former CEO of HSBC Vietnam, to head its retail banking team. BIDV is also pushing retail, which now accounts for 45% of all its lending, making it the largest retail lender in the country.

The state banks fall under the government’s ‘equitisation’ scheme, which is aimed at cutting inefficiency in the SOE sector. “Without the equitisation programme and the pressure to make SOEs more efficient and profitable, they will not compete in the international market,” says VinaCapital Group chief investment officer Andy Ho. “If [state-owned banks] don’t change the way they do business they will have their lunch eaten by CIMB, DBS and OCBC,” he adds, naming three Singaporean regional banks.

“I think the big four banks pose a dilemma for the government,” says VEPR’s Mr Thanh. “They want to keep the dominance of the state banks but they cannot attract foreign partners because foreign partners need profits.”

Profitable VPBank, for instance, had foreign investors snapping up 23% of its IPO. Other successful joint-stock banks in Vietnam include Saigon Commercial Bank, Military Bank, Asia Commercial Bank, Eximbank, Maritime Bank and HCMC Development Bank, which could be issuing their own IPOs soon.

Mr Thanh notes that before the 2012 banking crisis, the trend of the big four banks losing share to the private banks was already there, but stalled when the State Bank of Vietnam (the central bank) slapped a ceiling on banks’ interest rates, giving the big state banks an advantage. “Now that the economy is back to normal, the trend will continue again, so it’s a good time for the private banks. I think the big banks will still be there with a big role – but a declining one,” says Mr Thanh.


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