Efforts by the SBV during 2014 to effectively manage monetary and credit policies as well as other regulations in the industry made the year one full of activity.
Ms. Thao Cao, Academy of Finance
2014 will remain in the minds of a lot of industry observers, operators and other stakeholders in the banking sector, considering the events that occurred over the course of the 12 months. Overall it was a better year for the banking sector than 2013, given that management by the State Bank of Vietnam (SBV) was key to achieving the current macro stability and cleaning up the banking system. Nevertheless, non-performing loans (NPLs) are still to be properly handled, casting a shadow over the bank restructuring process.
On a positive note, the past 12 months have seen the economy be in better shape, and while policy responses from the government are undoubtedly a factor it is also true that the efforts of the banking sector helped control inflation, support economic activities, and ensure financial stability. The country’s inflation rate hit just 4.09 per cent year-on-year in 2014 while GDP growth reached 5.93 per cent.
As at December, credit had increased 11.8 per cent against late 2013 despite the fact that the mobilization rate stands at around 5.5 per cent, according to the SBV; the lowest level for the last three years. These increases helped the banking industry meet the targets set earlier. Banking industry insiders attribute the rapid increase in credit growth over the last few months to several factors, including the market’s increasing seasonal demand for funds and the impact of the government’s policies to boost the economy. “The early signs of an economic recovery also made a significant contribution to growth,” said Mr. Nguyen Tri Hieu, an independent analyst.
While there are remaining challenges, most observers share a positive outlook for 2015 and ratings for Vietnam’s banks by international rating agencies improved at year’s end. A combination of macroeconomic stability and improved governance in Vietnam prompted some credit differentiation among the country’s banks, as pointed out by the credit rating agency Moody’s, which rates nine banks in the country. The positive ratings, according to Mr. Eugene Tarzimanov, Vice President of Moody’s, are primarily driven by the stabilization of the operating environment, which will support recovery in their poor asset quality, provide stability to their deposit bases, and improve their business prospects. “Some Vietnamese banks have also improved their governance standards and lowered their risk appetite, thereby improving their credit underwriting standards,” he said. “Moody’s believe some of the banks have made more adjustments than others in response to the adverse market conditions since 2011.”
Unlike 2013, when regulators paid greater attention to consolidating operations in the banking sector, the focus in 2014, especially in the second half, has largely been on how to strengthen the monetary market, stabilize the exchange rate, and increase foreign exchange reserves, Mr. Le Xuan Nghia, Director of the Business Development Institute (BID), pointed out.
A number of key measures were introduced during 2014 and proved effective. From early in the year SBV Governor Nguyen Van Binh gave a signal that the central bank would keep the exchange rate within a 2 per cent band to ensure stability in the country’s foreign exchange market. By mid-year the SBV had increased the VND/US dollar exchange rate by 1 per cent to boost exports in the second half. Overall, the SBV’s management of monetary policy has supported monetary and exchange rate stabilization and the successful stabilization of the gold market. Meanwhile, credit policy and a flexible debt resolution mechanism have provided enterprises with good business plans access to credit. Vietnam’s foreign exchange reserves reached a record high of $35 billion in September, increasing from around $7 billion in 2011.
Last year, as Mr. Nghia said, was also characterized by several policies from the SBV that put banks on a better footing. “For example, with Circular No.9 issued in March, banks can continue to restructure existing loans and keep them in the same debt group until April 1, 2015, instead of reclassifying them using more rigorous standards by June 1, 2014, as planned previously,” he said. Indeed, the postponement came as a big relief to commercial banks, because if the new debt classification standards were to be applied from June 1 then all debt balances and the value of off-balance sheet commitments (OBS) of a customer with a credit institution would be placed in the same debt group.
Meanwhile, Circular No.36 regulating prudential ratios for the operations of credit institutions and foreign bank branches was issued, with the aim of helping the sector to operate in a safer manner. Under the circular, a commercial bank can hold shares in a maximum of two other credit institutions, and its stake at each must not exceed 5 per cent of that institution’s total equity. The circular aimed to meet the government’s target of restructuring the banking sector and help credit institutions govern risks in accordance with international rules. “It also aims to help secure banking operations by restricting cross-ownership situations, earlier singled out as responsible for the fragility of the local banking system in the last few years,” said Mr. Hieu.
A story that obviously attracted attention in late 2014 was the arrest of Mr. Ha Van Tham, the founder of Ocean Bank. The arrest came as authorities stepped up their crackdown on financial crimes in a bid to clean up the banking sector. Another was a court in June sentencing Mr. Nguyen Duc Kien, one of the founders of ACB, to 30 years in prison after finding him guilty of fraud, tax evasion, illegal trade, and deliberate wrongdoing in scams at investment companies.
2014 saw Vietnam make more attempts at whittling away the problem with bad debts, yet a cloud of uncertainty still hangs over the country’s banking sector. Governor Binh told the National Assembly that bad debts, as at the end of July, stood at around $8 billion, accounting for 4.11 per cent of total loans. Still, analysts are concerned that Vietnam has a bigger bad debt problem than the pretty high level the SBV’s official figures suggest. Just how big is unclear, because the country has many sources of bad debt information.
In fact, bad debts are ballooning even though the Vietnam Asset Management Company (VAMC), as at December, had acquired over VND123 trillion ($5.8 billion) worth of bad loans from banks. But this has not been enough to settle bad debts. With bad debts not completely removed, it is difficult to boost credit growth without lowering lending standards. And this is the cause of arising new bad debts.
Overall, the Vietnamese banking system has been carrying out bank restructuring for three years, along with the restructuring of public investment and State-owned enterprises (SOEs). In those three years nine weak banks have been merged without intervention by the SBV. While the restructuring process has brought the country considerable benefits, from the public’s point of view it was implemented on only a few small banks, not for the whole system.
Outlook for 2015
Looking forward, the SBV has set numerous tasks for 2015, which include restructuring credit organizations, increasing inspections and the supervision of the operations of credit organizations, boosting inter-bank payments, and fine-tuning monetary institutions. In particular, the central bank targets an increase of 16-18 per cent in liquidity and 13-15 per cent in credit growth this year. As confirmed by Prime Minister Nguyen Tan Dung, Vietnam wants to cut down bad debts, which are currently shackling the economy, to 3 per cent of total loans by the end of the year.
Lending is crucial to the SBV’s moves to boosting credit amid weak consumption and spurring economic growth. Although capital absorption in the economy will be better in 2015, Mr. Pham Hong Hai, the new CEO of HSBC Vietnam, does not expect to see any sudden changes, as demand in the economy is still weak and the global economy is still facing many difficulties. “Currently, banks still have to solve the problem of short-term excessive liquidity, leading to intense competition in lending by lowering lending rates, while the speed of lowering the mobilizing rate is much slower,” he was quoted as saying. “Banks need to be very cautious, as competition at all costs may generate losses and raise bad debts.”
Similar to 2014, the SBV said that it will keep the foreign exchange rate within 2 per cent in 2015 to help reduce dollarization and stabilize the local currency’s value. Still, with a forecast of a 10 per cent export value increase and a 5 per cent trade deficit next year, Governor Binh predicted that it would be a difficult task for the banking industry to keep the depreciation of the VND against the US dollar at less than 2 per cent during the year. But he said the banking industry would make greater efforts to meet targets that have been set.
From his point of view, Mr. Hai believes that the regulations of the SBV implemented in 2015 will be a big challenge for some banks. “In order to integrate fully with the global economy and become a fair partner of foreign investors, Vietnam will also have to integrate with international regulations and laws,” he said. “I believe that regulations are a very precise direction to increase standards and the safety of Vietnam’s banking sector.”