Robust economic growth, the easing of restrictions on foreign bank ownership and increasing technological sophistication have added to the dynamism of the Vietnamese banking sector in recent years, as the industry puts the mini-crisis of 2012 behind it.
Recent years have been characterised by substantial credit growth, as well as ongoing measures to address bad debt. Banking penetration is relatively low – only around 30% of the population have a bank account – providing ample space for growth. Nghiem Xuan Thanh, chairman of the Board of Directors of the Bank for Foreign Trade of Vietnam (Vietcombank), told OBG, “There are a large number of opportunities. Vietnam has a population of 90m, and a growing proportion of this are young people receptive to high-tech products.”
Recent Performance
The growth of domestic private sector credit as a percentage of GDP actually accelerated after the 2008 global financial crisis, driven by strong domestic consumption. While domestic credit then dropped as a share of GDP in 2011-12 as Vietnam experienced its own banking shock and subsequent deleveraging, it has since recovered, hitting the 100% mark at the end of 2014. This is considerably above the 40% credit-to GDP ratio in the Philippines and Indonesia – both countries had higher ratios than Vietnam until after the Asian financial crisis – but below that of Thailand, whose domestic credit is 160%, and Singapore and Malaysia, which have a 120-130% ratio, according to global bank BBVA’s “Asia Banking Watch” report, published at the end of 2016.
The banking crunch of 2012 was caused by a number of factors linked to poor lending and risk management practices. As the economy continued to grow despite the global economic crisis, state-owned banks pumped credit into state-owned enterprises (SOEs) that continued to grow rapidly, in some cases into non-core segments. Owners of some private banks were also accused of financing their own businesses or firms associated with their business networks. Challenges in the real estate sector, where supply outstripped demand in some segments, compounded difficulties for lenders.
Non-performing loans (NPLs) reached 17% in 2012, according to the State Bank of Vietnam (SBV). By official measures, they have since been reduced to less than 3%; however, this figure is regarded as an underestimate, as many NPLs have been repackaged as collateral for bonds issued by the newly-founded Vietnam Asset Management Company.
Liberalisation Process
Vietnam’s banking system has been undergoing gradual liberalisation for more than two and a half decades, in an ongoing process that is set to continue in the coming years. Before 1990 SBV functioned as both a central bank and the country’s main commercial lender. That year, following a government decree issued in March 1988, a two-tier system was introduced, separating the roles of monetary management and regulation, which remained with SBV, and commercial lending, which was delegated to newly-formed banks, cooperatives and other financial companies.
The reform established four commercial banks out of what had previously been departments of SBV. The central bank’s industrial and commercial lending department became the Vietnam Industrial and Commercial Bank, now called Vietinbank; the agricultural branch became the Vietnam Bank for Agriculture and Rural Development (Agribank); the international trade function was re-established as the Bank for Foreign Trade of Vietnam ( Vietcombank); and the infrastructure department became the Bank for Investment and Development of Vietnam (BIDV). The 1990 reforms also allowed foreign investors to hold minority stakes in local banks.
Vietnam’s growing integration with the global economy catalysed further liberalisation, including through accession to the World Trade Organisation in 2007 and the US-Vietnam Bilateral Trade Agreement (BTA) of 2001. Aware of the opportunities for stoking growth and boosting financial inclusion, the authorities acted swiftly, allowing 100% foreign-owned banks to operate in Vietnam in 2004, six years earlier than the BTA required. The first licences to wholly foreign-owned banks were issued in 2008. The new entrants were the UK’s HSBC and Standard Chartered, Australia’s ANZ Bank, South Korea’s Shinhan Bank and Malaysia’s Hong Leong Bank. Their operations have proved profitable, thanks partly to strong demand from foreign investors.
The government’s Decree 22 of February 2006 set out new parameters for foreign participation in the banking sector through joint ventures, fully foreign-owned Vietnamese subsidiaries and local branches of mother banks.
Types Of Bank
Vietnam’s banking system therefore now has four main types of banks: state-owned banks, in which private shareholders may hold minority stakes; joint-stock commercial banks, which tend to have a more diversified ownership structure, often with both private- and public-sector shareholders; joint-venture banks, in which foreign and local partners have a stake, with the former able to take a maximum of 50%; and fully foreign-owned banks. In addition, there are foreign bank branches, namely, local subsidiaries of foreign institutions, guaranteed by the mother bank.
Foreign Participation
Foreign institutions with stakes in Vietnamese banks include France’s BNP Paribas and Société Générale, which have holdings in Oricombank and SeABank, respectively; the Commonwealth Bank of Australia, which has a stake in Vietnam International Bank (VIB); Malaysia’s Maybank, which is invested in ABB ank, and Singapore’s United Overseas Bank, which holds a stake in Phuong Nam. All the foreign participants hold individual shares of 20%, except for Japan’s Mizuho Corporate Bank and Singapore’s GIC, which have a 15% and 7.73% interest, respectively, in Vietcombank.
Overall, foreign holdings in joint-stock commercial banks are currently limited to 30%, following Decree 01 of 2014. The decree raised the limit of a single foreign strategic investor’s stake in a bank from 15% to 20% in a move intended to encourage foreign banks to invest in local institutions still recovering from the 2012 crunch. The prime minister can grant exceptions to the 30% ceiling when the need for foreign capital to bolster weak credit institutions and restructure them is particularly acute.
Single foreign individuals are allowed stakes of up to 5%, foreign organisations (including non-financial institutions) can take stakes of up to 15% and foreign strategic investors bringing related parties to the deal can hold 15% or 20% of a company with prime ministerial approval.
Before Decree 01, foreign strategic investors could only own stakes in a maximum of two Vietnamese banks. This restriction has been lifted, but strategic investors with a stake in one Vietnamese credit institution cannot hold more than 10% of the charter capital in any others.
There is no restriction on the capital base of institutions holding less than 10% of a Vietnamese bank, but investors looking to acquire a stake of 10% or more must have minimal total assets of $1bn, or $10bn for foreign financial institutions. For classification as a strategic investor, foreign institutions must have minimum total assets of $20bn.
Lifting The Ceiling
In September 2016 Reuters reported that Prime Minister Nguyen Xuan Phuc had told investors in Hong Kong that the government may eventually lift the 30% ceiling on foreign ownership of banks. Phuc also said that the government would seek to keep the dong stable rather than devaluing to attract investment.
At least four banks with private shareholders are seeking the government’s permission to raise their foreign ownership above 30%, according to local press reports in May 2016. ABB ank is seeking to raise its foreign shareholding from 30% to 49%. In what would be a landmark deal, Saigon Commercial Bank (SCB) is looking for foreign investors to take a stake of over 50%. Vietinbank has also said that it would like to increase foreign investors’ shareholding, from 27.75% to 40%. The fourth bank, Vietcombank, reportedly aims for foreign ownership to rise from 21% to around 35%, through an issuance of new shares aimed at foreign investors, with the Japanese shareholder Mizuho Corporate Bank raising its stake from 15% to 20%.
There is some scepticism about whether the government will lift the general foreign ownership ceiling, particularly as many local banks are still unwinding from the banking crunch and would be vulnerable to competition. However, a major change in the market due in 2020 could alter the dynamics. The start of financial sector liberalisation under the ASEAN Economic Community will substantially open Vietnam to players from other member states and vice versa. The resulting expected increase in regional competition is one reason that the government and SBV are taking an incremental approach to liberalisation and to the costly implementation of the Basel II requirements. By this means they hope to give Vietnamese banks the opportunity to grow and become more robust and competitive.
Robust Growth
Total sector assets reached some VND8242trn ($368.7bn) at the end of November 2016, up 10.55% from the beginning of the year, according to the latest data published by SBV, while credit growth was reported at around 18% for the year. The credit intensity of growth is increasing, with the authorities happy for the time being to allow credit to take up some of the slack for driving the economy at a time of fiscal consolidation. With the state owning a substantial part of the banking system, the government can more directly use credit growth as a policy tool than many markets which rely on monetary policy levers.
State-owned banks still hold the biggest market share by assets, with VND3735trn ($167.1bn) or 45.3% of the total. State banks’ assets grew 13.05% during the year. The second-largest market share is taken by joint-stock commercial banks, with VND3260trn ($145.8bn) in assets, or 39.6% of the total, with growth of 11.35%. Banks with foreign shareholdings or branches of foreign banks had assets totalling VND862trn ($38.6bn), or 10.5% of the market, and grew 14.2% in the same period.
Other bank categories as defined by SBV are relatively small. The Vietnam Bank for Social Policies (VBSP), a state-owned bank specifically focusing on the poor and social development, had a 1.9% market share with approximately VND160.2trn ($7.2bn) in assets in 2016, up 11.08%. Finance and leasing companies had assets totalling VND109.6trn ($4.9bn), a 1.3% market share and were up 24.77%, showing the strongest growth of any segment.
Finally, there were tiny market shares for People’s Credit Funds (PCFs), with assets of around VND90trn ($4bn), showing growth of 15.28%, and the Cooperative Bank of Vietnam (Co-op Bank), at VND26trn ($1.2bn), up 14.94%. The PCFs are a network of more than 1100 mutual credit establishments focusing on farmers and are often owned and initiated by farmers themselves, using the Co-op Bank as an intermediary. As of late 2015 there were approximately 1.8m “member-client” farmers of the PCFs in 57 of the country’s 64 provinces.
Adequacy & Returns
The average capital adequacy ratio (CAR) for each segment varies quite widely. As of the end of November 2016 state-owned banks had an average CAR of 9.81% compared to 11.76% for joint-stock commercial banks, and 32.67% for banks with some degree of foreign ownership, according to data from SBV. Finance and leasing companies had CAR of 19.68%, and the Co-op Bank 28.62%. The VBSP and PCFs are not subject to reporting on their CAR.
The financial performance of the country’s banks also varies considerably between segments. State-owned banks achieve a return on assets (ROA) of a total of 0.27% compared to 0.18% for banks with foreign stakeholders, 0.41% for finance and leasing companies and 0.60% for PCFs. Return on equity (ROE) for the conventional state sector is 4.61% compared to 2.43% for banks with foreign participation and 7.03% for PCFs. System-wide ROA is 0.29%, while ROE is 3.54%. SBV does not give figures for joint-stock commercial banks.
As BBVA notes, Vietnam’s banks have the lowest ROA in ASEAN, averaging below 1% between 2011 and 2015. Singapore, Malaysia, Thailand and the Philippines, however, consistently achieved 1% or above in the same period. A number of factors contribute to lower ROA, including poor asset quality and elevated operating costs. ROE in Vietnam is also on the low side by regional standards.
Market Leaders
Vietnam’s largest bank by assets is the 100% state-owned Agribank, with total assets of VND980trn ($43.8bn) as of July 2016, the latest date for which figures were available, according to a table compiled and published by Reuters in December 2016. The second-largest is BIDV, with total assets of VND947.1trn ($42.4bn) at the end of the third quarter of 2016, according to Reuters, which used the latest data available for each bank. VietinBank ranked third, with VND900.8trn ($40.3bn) in assets in the third quarter of 2016. Fourth was Vietcombank, with total assets of VND737.6trn ($33bn) as of the third quarter of 2016. SCB ranked a more distant fifth in the same period, with VND339.2trn ($15.2bn), less than half Vietcombank’s assets.
Growing Regional Presence
Vietnamese banks’ asset sizes still lag well behind those of regional leaders in South-east Asia, particularly Singapore, which is a global financial centre, Malaysia and Thailand. However, this is on course to change. The asset growth of banks in Vietnam has outstripped the regional average in recent years, and the country is gaining a growing presence in the regional rankings. The Banker’s Top 100 ASEAN Banks 2016, for example, which ranks the region’s leading institutions by tier-1 capital, includes 19 Vietnamese banks, which between them saw asset growth of 15.66% during the year, the highest in the region save Cambodia.
Some were star performers. Six banks from Vietnam landed in the top 10 for asset growth: Vietnam Prosperity Bank (35.02%), Saigon Commercial Bank (34.22%), Shinhan Bank Vietnam (33.32%), LienViet Post Bank (27.03%), HSBC (26.84%) and Vietcombank (23.40%). The top four banks across the region for pre-tax profit growth were all Vietnamese: VIB with a remarkable 701.96%, HD Bank (173.16%), SCB (99.90%) and Techcombank (61.84%).
Overall, the local banking sector’s pre-tax profits rose 6% in 2016, second in the region behind Singapore, though overall profitability (assessed on ROA and return on capital) remains below its regional peers. HSBC Vietnam ranked third in the region for tier-one capital growth, at 43.57%, though the sector’s overall tier-one capital grew just 4.54%, the lowest among countries included in the rankings.
Margins
The net interest margins (NIM) of local banks averaged around 3% in 2010-15, according to BBVA, above those of wealthier countries in the region, such as Singapore, Malaysia and Thailand, but below the Philippines and Indonesia. NIMs picked up in 2014 partly due to increases in interbank lending rates, which rose on the expectation of a long-awaited interest rate hike by the US Federal Reserve, dropping back only slightly in the first half of 2015. The hike eventually came in December 2015, followed by another in December 2016.
Profitability was also bolstered by a significant fall in the cost of funds between the beginning of 2013 and late 2015, thanks to a number of factors, including robust liquidity and rising retail deposits. The effect was broadly seen region-wide, but was particularly marked in Vietnam.
Despite the headwinds from competition, asset quality issues and slowing domestic growth, BBVA expects NIMs to be supported somewhat by the relatively high proportion of deposits from current and savings accounts, which pay lower interest rates than term deposits. In 2015 BBVA estimated that net interest income contributed 74% of leading banks’ total net revenue. “My view is the NIMs of each type of product (auto loan, term deposit, etc.) are likely to narrow due to higher competition and precaution among the banks,” Nguyen Huy Dung, head of the strategy research and management department at VPB ank, told OBG. “As such, banks will try to go into underserved businesses, such as consumer finance or small and medium-sized enterprise (SME) lending to avoid competition and earn higher margins.”
Basel Ii
In a move to strengthen the sector, SBV is rolling out Basel II compliance. The process will be undertaken incrementally, starting with 10 of the country’s bigger and more robust banks, in order to give the smaller and weaker institutions more time to prepare for the regulations; all are currently compliant with Basel I criteria.
The first banks to adopt the new system include BIDV, VietinBank, Vietcombank and VIB. They began applying Basel II standards in February 2016, and the pilot phase is due to be completed by 2018, when the measures will be extended to other financial institutions. At present some of the selected players do not meet all of the new requirements, making it necessary for them to raise capital. State lenders generally have lower charter capital than joint-stock banks. Senior bankers have suggested that it would be easier for banks to raise the capital required if the ceiling on foreign ownership of local banks was raised, particularly given the cost to the government of recapitalising banks in which it holds large stakes.
The consensus among bankers and analysts is that while applying the Basel II requirements will be a significant challenge for many Vietnamese banks, the implementation is a necessity which will stand the sector in good stead over the longer term. “Basel II will be difficult to implement, but it will make banks stronger,” Le Dinh Quan, managing director of Vietnam Credit, a ratings agency and business intelligence provider, told OBG.
The expectation is that some banks will be unable to comply. This may lead to an extension of the deadline for implementation in some cases but, over the longer term, the new regulations will be a driver for consolidation, as weaker banks are acquired by stronger players. The raising of CARs may also lead to a tightening of credit in the short to medium term.
Prudential Regulations
In May 2016 SBV issued amendments to its 2014 circular regulating prudential ratios for credit institutions. The new rules raised the risk index of receivable lending for real estate and securities from 150% to 200% – well below the 250% that was originally proposed. The decision came as something of a relief to many in real estate, who had been concerned that lending to the sector would tighten.
A second, concurrent circular from 2016 issued regulations to taper down the maximum ratio of short-term funds that can be used for medium- and long-term loans, from 60% to 40%, with the ratio cut to 50% from January 1, 2017, and by another 10 percentage points at the start of 2018. “Circular 36 will push for banks to be more transparent and risk prudent, and that’s no bad thing for banks,” Trung Quang Ngo, member of the Board of Directors and CEO of Viet Capital Bank, told OBG.
Competition Hotting Up
Even Vietnam’s largest banks are modestly sized when compared to leading peers in countries such as Malaysia, Thailand and Indonesia. This, in part, reflects the size of the economy and the relatively late evolution of a private banking sector in the country, but it is also a reflection of the fragmented nature of the market.
Given the competitive market, banks are increasingly looking for new seams of growth and ways to strengthen their offerings to an increasingly sophisticated consumer base, whether through under-banked market niches, such as SMEs, product diversification or strengthening services.
Competition does not only come from conventional institutions. “Fintech is growing quickly, and I expect fintech players to be our main competitors in the long term, for example through online payments,” Thanh told OBG. “Thus we are focusing on two areas, upgrading technology and promoting innovation, to diversify our product base.”
Vietcombank alone allocates $30m a year to IT development. Only 10-20% of bank customers use online banking, according to VPB ank’s Dung, basing his estimate on experience and unofficial figures; with internet penetration and smartphone use growing rapidly, this is a segment that will be particularly dynamic in the coming years. Mobile money was effectively non-existent just five years ago, but following approval from SBV, such services can now be offered, though take-up is still quite low.
Sme Finance
The challenge of improving access to capital for smaller companies, as well as opportunities for banks in SME finance, is a common theme in emerging markets. Some see the issue as particularly acute in Vietnam, where there is a perception that SMEs are somewhat siloed as a fourth segment of the economy, separate from foreign-owned firms, SOEs, and the big private companies. Thanh told OBG that SMEs account for 98% of all Vietnamese firms, contribute 40% of GDP and employ half the workforce, and yet only 30% have access to capital. Several factors limit access to bank financing, including “crowding out” by bigger players, a lack of collateral and, perhaps most importantly, shortcomings in financial transparency and management. Nirukt Sapru, CEO of Standard Chartered Vietnam, is bullish on the opportunity for banks in the SME space. “Banks are absolutely interested in lending to SMEs,” he told OBG. “Although some of the smallest firms might find microfinance or other non-conventional lenders a better fit for their needs.”
Indeed some banks, such as HSBC, have moved away from SME financing in recent years. Others, however, are intensifying their efforts to tap into the segment, including AB Bank, Hong Leong, Viet Capital Bank, and VIB, which generates around 60% of its business from SMEs. “SMEs have huge potential for future growth,” Dang Vy, chairman of the board of directors of VIB, told OBG. “It is of critical importance to help SMEs. The task is complex but the situation will improve over time.” He added that foreign banks have more difficulties approving loans for such companies, which focus on their business operations rather than financial reporting. He reckons that from 2017 Vietnamese companies will generate more income, and that covering SMEs will be a more significant part of the market.
Outlook
Vietnam’s strong GDP growth outlook is the single biggest upside factor for the country’s growing banking sector. Demand from households and businesses continues to rise, and the government has taken a benign position towards credit growth at a time of some external uncertainty and domestic fiscal tightening.
It is little surprise, then, that foreign investors present in the sector are keen to expand, and that those who have yet to enter the market are eyeing moves towards liberalisation and consolidation with interest. Regulatory change will be incremental, but when it comes, it is likely to encourage mergers and acquisitions and, when the time is deemed right, entice further foreign penetration into the market.
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