HANOI - As Vietnam inches toward World
Trade Organization membership, local speculation
in banking shares is running hot and heavy here on
expectations that big foreign banks will buy into
smaller local state-owned commercial banks toward
the end of the year.
Local investors are
paying three to four times more than bank shares'
face value, and many have reportedly borrowed from
the same banks to purchase their shares on the
open market. Many have even mortgaged those shares
to access further bank loans to buy even more
shares, market insiders say.
Welcome to
the wild new world of Vietnam's fast-racing
capitalist
economy, where centrally
controlled, state-owned commercial banks have
perhaps surprisingly become the country's hottest
asset class. Vietnam's banking sector is dominated
by four big stodgy state-owned commercial banks,
which account for roughly 80% of the total assets
in Vietnam's financial system.
Bank shares
are without a doubt a good proxy for getting
exposure to Vietnam's economy, which expanded at a
blazing 8.4% last year. Communist planners have
helped to orchestrate Vietnam's boom by directing
state-owned commercial banks to bump up their
credit growth by 20% to 30%. Opaque state-owned
enterprises remain the main recipients of bank
credit, typically borrowing on an unsecured basis
at concessionary interest rates.
The
bottom line and underlying profitability is not
what is motivating investors, however. It's
speculation that they will soon be able to sell
their shares at five to six times face value to
foreign investors once ownership limits are
lifted. Some local analysts believe that the
recent ramping up of share prices has exceeded the
underlying value of most Vietnamese banks and that
even the biggest foreign banks might balk at
current asking prices.
Under-banked,
under-regulated If all this sounds like
risky business, it's because it is. Much of the
credit extended by state-owned commercial banks is
less than viable in commercial terms with a
growing risk of default, contend some Hanoi-based
financial analysts that requested anonymity. Heaps
of cash have recently been funneled into
extravagant property developments based on
particularly rosy projections of future domestic
demand and international business growth.
While local investors pour into banking
shares, there are concerns internationally about
the lack of effective governance mechanisms. In
theory, Vietnam's banks have been encouraged to
adopt banking and business practices in line with
best international practices. New regulations
require banks to establish controlling committees
and internal audit functions. But because of the
cozy relationship between the state-owned
commercial banks and the government, in practice
prudent practices are not always the rule.
The true level of non-performing and
under-performing loans in Vietnam's financial
system is difficult to gauge due to the enduring
lack of transparency and poor public disclosure.
As part of the banking reform effort - aimed at
nudging the financial sector toward international
norms - new rules for the classification of
non-performing loans were issued in 2001. Yet
state secrecy laws still cloak much of the
industry's information, while meaningful financial
sector and individual institution data is largely
not available.
What is clear is that
Vietnam remains one of Asia's most under-banked
economies. Vietnam continues to operate largely as
a cash economy with an estimated 45% of money
existing as cash and over 50% of local business
transactions conducted outside of the banking
system. At present, there are only around 1.3
million individual bank accounts for a population
of over 82 million.
Supported by the
International Monetary Fund and World Bank,
significant reforms have recently been implemented
in the structure, regulation and operations of
state-owned commercial banks. Since 2001,
Vietnam's banks have slowly but surely evolved
from their status as pure policy lending vehicles
into institutions that operate on a more
capitalist, commercially oriented basis.
For instance, deposit insurance was
instituted in 2000, where banks pay a premium on
all dong deposits placed by individual depositors.
However, the maximum amount insured was a mere 30
million dong (about US$2,000), and there are
questions as to whether local banks are actually
paying the insurance premiums. Because no
Vietnamese bank has failed since the inception of
the scheme, its viability remains wholly untested.
Vietnamese banks are currently not ranked
by the Bank for International Settlement (BIS),
nor have they adopted the Basel capital accord -
meaning details of risk-adjusted assets and
risk-adjusted capital ratios are either not
calculated or not publicly disclosed. Yet the
government has issued a number of new guidelines
for state-owned commercial banks' operations,
including specific financial targets which must be
met in order to receive phased re-capitalization
funds.
Moreover, a new draft decree on
banking governance has recently been lodged for
comment and notably aims to strengthen the
existing banking system by encouraging mergers and
acquisitions. It also reportedly aims to limit
lending to affiliates of large shareholders and
their relatives. Most significantly, perhaps, the
government is now considering lifting the
percentage of shares that any single institution
can hold in a joint stock bank from the current
10% to 49% - a market murmur that has raised
speculation about the possibility of future
foreign buy-ins.
Foreigners in the
wings Foreign banks play a minimal role in
Vietnam's economy, but this is expected to change
after accession to the World Trade Organization
and the anticipated opening up of the equity
market. For those foreign banks that already have
a local presence, business is booming.
HSBC, Standard Chartered and ANZ Bank all
have in recent years taken stakes in local banks,
albeit limited by the 10% foreign ownership cap.
Citigroup is now implementing a technical
assistance project with the Joint Stock Military
Bank - a step that the incumbent foreign banks all
took before putting their money down - and is on a
short list to participate in the equitization of
the state-owned Bank for Foreign Trade of Vietnam,
known locally as Vietcombank.
Total assets
of foreign financial institutions in Vietnam stood
at $6.2 billion in 2005, 25% higher than in 2004,
and total pre-tax revenues grew a whopping 45%
year-on-year. As of the end of 2005, total
outstanding loans at foreign bank branches
increased 30% year-on-year. More significantly,
perhaps, foreign banks' non-performing loans
accounted for just 0.06% of total loans, although
this figure came from the banks themselves.
Joint venture banks profits were up on
average 15% in 2005, while the pre-tax profits of
foreign-invested financial leasing companies were
up more than $1.25 million year-on-year. William
Gemmel, Standard Chartered Bank's Vietnam-based
chief executive officer, said his institution's
retail accounts in Ho Chi Minh City have nearly
doubled since February 2004, with 10,000 new
account openings per month. ATM installations grew
by more than 270% between 2003 and 2004, albeit
from a very low base.
HSBC took a 10%
stake in the Technological and Commercial Joint
Stock Bank, Vietnam's third largest with total
assets of $482 million as of the end of 2004. If
the government lifts the ownership cap, HSBC
senior executives say they intend to increase that
share. At first HSBC focused on financial services
for expatriates and their companies but is now
focused more on Vietnam's private sector,
particularly those areas of the economy involved
in import-export activities. They are also in the
growing business of providing home mortgages and
car loans to up-and-coming local entrepreneurs.
It's still a difficult market to assess,
according to Alain Cany, HSBC's Vietnam-based
president and chief executive officer. A
staggering 700 to 800 new enterprises are formed
each week in Vietnam, with an average of $100,000
in start-up capital. "HSBC does loan money to
individuals but [it] is difficult to assess the
credit risk factor when the official salary levels
are so low. We look at successful businesses in
the furniture, distribution, energy and telecom
sectors. We are not keen on the property and
construction sectors," said Cany in a recent
interview with Asia Times Online.
The
breakneck entrepreneurial expansion means there
are potentially as many risks as opportunities for
bankers. The government has enacted a number of
new laws recently aimed at leveling the
competitive playing field, in particular the
Unified Enterprise Law and Common Investment Law,
which will come into effect in July and remove the
current two-tier price system that discriminates
against foreign investors. New intellectual
property rights and bankruptcy laws, as well as
measures to streamline contract enforcement and
reduce registration costs, are also in the
pipeline.
A new decree issued earlier this
year dealing with the operations of foreign-owned
banks extended the maximum duration of bank
licenses from 20 to 99 years, a notable concession
to foreign demands. In order to establish a
foreign bank branch, you've got to be big, with
global assets equivalent to $20 billion the year
before applying. For a joint venture, total assets
must be equivalent to $10 billion.
Still,
foreign banks like HSBC say that they feel
restricted. "The tight regulations do not allow
foreign banks to develop enough ... Large
international banks interested in operating in
Vietnam should have little difficulty meeting such
asset and risk criteria. The main problem
[preventing] foreign banks [from participating] in
the state sector is a lack of transparency."
Although accession to the WTO is a
foregone conclusion, Vietnamese officials are
currently in negotiations with the US over a few
fine points related to its bid. All eyes are on
the Communist Party Congress, which starts on
April 18, for indications that the next generation
of leaders will stay the reform course,
particularly for the financial sector.
Hopes are running high among local and
foreign businesses that Vietnam will formally
accede to the WTO before the country hosts the
Asia Pacific Economic Cooperation forum meeting
this November - so that the globally attended
event can serve as a showcase for Vietnam's
successful transition from a centrally planned
command to a rules-based market economy. But for a
true measure of Vietnam's progress towards a
healthy market economy, keep a close eye on the
banks.
Karl D John is Chief Executive
Officer of The TCK Group, a
Vietnam-based consulting group.
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