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    Southeast Asia
     Apr 19, 2006
Vietnam's banks: A wild new world
By Karl D John

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.

(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us about sales, syndication and republishing .)

The new optimism over Vietnam investments (Mar 29, '06)

Foreign banks take larger market share (Jan 10, '06)

Reform key to Vietnam's economic growth (Mar 22, '05)

France pledges US$1.2m for Vietnam bank reform (Nov 6, '02)

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