The good and bad of Vietnam’s banks

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An image of the Vietnam's dong currency floating and sinking in water. Image: iStock/Getty Images

Vietnam Prosperity Bank raised more than 6.4 trillion dong (US$280 million) in a mid-August initial public offering (IPO) on the Ho Chi Minh City Stock Exchange, with 23% of the 164.7 million shares floated snapped up by foreign investors.

The capital infusion put the private joint-stock bank well on its way towards meeting minimal capital adequacy requirements under Basel II compliance rules, which go into effect for all of Vietnam’s 40-plus banks in 2020.

Communist Vietnam’s banking system has evolved in fits and starts since the country first launched its market-oriented “doi moi” economic reform program in 1986.

In 1988, the State Bank of Vietnam (SBV) hived off four of its previous banking activities into four big state-owned banks, namely Agribank (agriculture), Vietcombank (trade), Bank for Investment and Development of Vietnam (infrastructure), and Vietinank (industry).

All with majority state ownership, the four now account for more than 50% of Vietnam’s total bank lending.

Close up of the logo of Vietcombank branch office on Cau Go street near Hoan Kiem (Sword) lake. Vietcombank is the one of the biggest state owned banks in Vietnam.

A Vietcombank branch office on Cau Go street near Hanoi’s Hoan Kiem lake. Photo: iStock/Getty Images

But the industry could change quickly with many medium-sized, professionally run private banks on fast growth trajectories fueled by a retail banking boom and easy access to capital via two stock markets in Hanoi and Ho Chi Minh City.

VP Bank, for one, started operations in 1993 when the SBV issued a slew of new licenses to joint-stock banks, which are essentially private banks. They now number more than 30, varying widely in asset size and management efficiency.

VP Bank, a leader in the retail banking sector which accounts for 75% of its loans, saw its pre-tax profits rise from 949 billion dong (US$41.9 million) in 2012 to 4.9 trillion dong (US$217.4 million) in 2016.

The bank’s return on equity was 26% in 2016, the highest in the industry. That performance accounted for its impressive IPO debut, which brought in 6.4 trillion dong (US$282 million) at four times the shares’ book value.

None of the big four state-owned banks have recently launched IPOs, although they all need recapitalization to meet Basel II compliance requirements. Their reluctance to list shares may have something to do with an anticipated tepid market response.

“VP Bank is private and efficient,” said Andy Ho, chief investment officer of VinaCaptial, an asset management company. “They had a better story from the beginning…whereas a few of the state-owned commercial banks can perform better if the government holds a significantly lesser stake.”

Hanoi, Vietnam - November 26, 2016: Vietnamese vendor sitting in front of SHB commercial bank branch on an old quarter street. Vietnam is a developing economy oriented by the state run by Communist Party.

A Vietnamese vendor sitting in front of a SHB commercial bank branch in Hanoi, November 22, 2016. Photo: iStock/Getty Images

Vietnam is now pushing ahead with the partial privatization of its over 4,500 state-owned enterprises (SOEs), and floating shares in state-owned banks is part of the program.

The big four banks have already been partially equitized, with two of them already selling blocks of shares to foreign banks. Japan’s Bank of Tokyo-Mitsubishi UFJ owns 19.7% of Vietinbank, while Mizuho Corporate Bank owns 15% of Vietcombank.

AgriBank and BIDV are now in the market for strategic partners, but now is likely a poor time to find a match. Many international banks are gearing to meet Basel III compliance, new rules that bar counting minority stakes in other banks as capital, making strategic partnerships with Vietnam’s banks less attractive.

Under current regulations there is a 30% cap on foreign ownership of any Vietnamese bank, making managerial control impossible, although this can be waived by the Prime Minister on a case by case basis.

The SBV is known to be seeking buyers, local or foreign, for three Vietnamese banks it was forced to take over in 2015 to prevent them from going bankrupt under soaring bad debts and dubious lending practices.

The banks, each acquired for zero dong, include Ocean Bank, GP Bank and Vietnam Construction Bank, which all still operate under the SBV’s supervision.

Women count money at Hue's central market in central Vietnam. Non-performing loans topped $241 billion last year. Photo: AFP

Women count money at Hue’s central market in central Vietnam. Photo: AFP

Vietnam’s banking system suffered its first big crisis in 2012, when non-performing loans (NPLs) soared to at least 12% of all outstanding lending, according to World Bank estimates. Many of the NPLs were extended by the big four banks to SOEs.

Although the government set up the Vietnam Asset Management Company (VAMC) as a vehicle for banks to park their worst NPLs, the bad loans must still eventually be written off.

The NPL crisis, which followed the stock market crisis of 2010 and the real estate crisis of 2011, has led to much better regulation of the banking system, analysts say.

That’s included recent crackdowns on alleged fraudulent lending practices at Ocean Bank, whose top executives went on trial in August, and more recently Dong A Bank, whose executives are also in the dock.

Seasoned observers do not view these crackdowns as aimed at weakening the private banks vis-a-vis state-owned ones, but rather as part of an effort to clean up broad lending practices.

“I don’t think there is a view that any action taken against Ocean Bank is particularly related to private sector developments,” said John Ditty, managing partner at KPMG Tax & Advisory Ltd. “I think the central bank has done a particularly good job in managing the problem banks.”

A woman rides a bicycle past the building of the State Bank of Vietnam in Hanoi May 17, 2016. REUTERS/Kham

A woman rides a bicycle past the State Bank of Vietnam in Hanoi. Photo: Reuters/Kham

To their credit, Vietnamese authorities have dealt with the bad banks in ways that have avoided knock-on effects to the broad banking system, which has remained stable and in some sectors even robust.

This systemic stability can be chalked up in part to the intervention of the big four banks, which the SBV can ask to provide interbank capital to other ailing banks and even managerial input, analysts note.

In return, there are benefits for the big four. “The government gives the state banks a lot of privileges,” said Nguyen Duc Thanh, director of Vietnam Centre for Economic and Policy Research, a think tank. He notes, for instance, that cash held at the National Treasury is placed only in state banks.

“Politically I think the government still wants to keep the state-owned banks as leaders, because they think state banks can help them finance many types of state projects,” Thanh said. “They also look at the Chinese model, with the big state-owned banks going global.”

While few doubt that the big four state-owned banks will continue to be big players on the banking scene, the more pertinent question might be to what extent the private banks will be able to claim a larger share of the market in the next decade.

“It’s going to change materially in the next couple of years,” predicted Dennis Hussey, chief executive officer of ANZ Bank in Vietnam.

“At the end of the day these guys (big four) need capital to sustain themselves, otherwise they can’t keep growing. Whereas the joint-stock banks, the good ones, are growing rapidly and bringing in new capital every year.”

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