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Banking & Finance

Holding firm

Released at: 08:55, 20/03/2014

Holding firm

After a volatile 2012 the banking sector used 2013 to consolidate operations.

by Thong Dat

Given the criticism it faced at the beginning of the year it’s not unreasonable to say that the banking sector had a positive 2013. Liquidity improved significantly, interest rates fell and the credit structure continued to shift towards priority sectors. The past 12 months have seen the economy 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 have helped control inflation, support economic activities and ensure financial stability.

Stabilising efforts

A sense of stability has partly returned to the economy as the State Bank of Vietnam (SBV) was adept at applying monetary policy in 2013, and this paid off through lower inflation, of 6.04 per cent, and stronger economic growth of 5.4 per cent against 2012. “The economy may have found it even harder than predicted to stay afloat had it not been for the management of the SBV in this difficult economic climate,” said Mr Le Xuan Nghia, Director of the Business Development Institute.

From early 2013, Governor of the SBV Nguyen Van Binh sent a clear message that the central bank would gradually reduce interest rates to help the financing of businesses. And he kept his word, as lending interest rates came down by 2 - 5 per cent. Last year the SBV also had the flexibility to adjust credit growth targets for each local bank and financial institution. Credit growth to December stood at 8.83 per cent compared to 2012 and is forecasted to be 9 per cent for 2013 as a whole. Credit growth in the year was pretty decent, Mr Nghia observed, considering that economic recovery remains fragile and the health of the business community is still unstable.

Adding to what was a stringent year for the banking sector was the SBV’s efforts in strengthening the monetary market, stabilising the exchange rate and increasing foreign exchange reserves. A number of key measures were introduced during 2013 and proved effective. Indeed, the SBV was right to keep exchange rates stable within the 2 - 3 per cent band as it helped improve market sentiment, driving exchange rate expectations and bolstering people’s confidence in the Vietnam Dong. For example, the SBV, on June 2013, upgraded the average inter-bank exchange rate by 1 per cent while cutting interest rates on US dollar deposits, to encourage people to hold Vietnam Dong and reduce foreign currency holdings. The central bank also maintained flexible dollar bid prices to encourage banks to sell foreign currency.

The central bank has clearly been intent on stabilising the gold market. Firstly, it wants to promote financial stability by reducing banks’ exposure to the risks associated with gold assets and liabilities on their balance sheets. Secondly, it aims to reduce volatility in the gold and foreign exchange markets and thereby enhance the effectiveness of monetary policy. “By doing so, the SBV will eventually reduce the local versus global gold price differential,” said Mr Nguyen Tri Hieu, an independent banking analyst. “And, more importantly, the expectation is that greater stability in the gold and foreign exchange markets and macroeconomic stability in general will contribute to a reduction in gold holdings, an improved current account balance, and a shift from gold to productive assets.”

Health of banks

B&F in brief

Vietcombank and the Japan Bank for International Cooperation (JBIC) last month announced cooperation with 40 Japanese regional banks. Vietcombank will be the only bank in Vietnam serving the Japanese enterprises of these regional banks.

HDBank and Fubon Insurance Vietnam have signed a comprehensive cooperation agreement on product supply and brand communication cooperation. With over 200 banking transaction sites, HDBank will support Fubon Insurance Vietnam in accessing potential customers for its non-life insurance products. Singapore’s United Overseas Bank Limited (UOB) last month obtained clearance to begin due diligence at

GPBank in a bid to acquire the local lender. UOB plans to acquire GPBank and turn it into a 100 per cent foreign-owned branch.

Sacombank last month launched a $4 million new internet banking system in partnership with Infosys, an Indian multinational provider of business consulting, IT, software engineering and outsourcing services. In addition to providing all e-banking services, the new system can also help users manage their banking.

Eximbank and Japanese card issuer JCB last month jointly introduced the Eximbank-JCB international payment card, facilitating payments by customers in the country and overseas. The Eximbank-JCB credit card enables payments for goods and services at JCB international points of sale (POS) and via the internet in Vietnam and 190 other countries. The card also allows cardholders to pay electricity, water, telephone and cable TV bills.


Under the banking restructuring process, 2013 was to be used to reduce the number of weak banks and credit institutions in the system, and nine of the weakest were indeed restructured. Still, a further two banks and six credit institutions have just been identified as “weak” and put under special monitoring by the central bank. “The restructuring process is far from over,” Governor Binh was quoted as saying, implying that it will last for many years to come. “Now, as these nine banks have been addressed, we will focus on consolidating eight other banks and credit institutions that have fallen into to the ‘weak’ group under the new categories set by the SBV.” Apart from the group of weak banks, the central bank also asked State-owned commercial banks and other commercial joint stock banks to complete restructuring plans for now to 2015, for submission to the Prime Minister for approval.

Overall the banking industry is becoming healthier but troubled banks are still allowed to linger for longer periods, said Mr Hieu, adding that the process moves slowly as authorities focus on the higher priority of stabilising the economy. In 2012 restructuring and mergers were relatively commonplace but last year everything went calm and the attention turned to lending and interest rates, with only two cases of bank mergers, between PVFC and Western Bank and between HD Bank and DaiA Bank.

During the restructuring of ailing banks, many foreign banks expressed an interest in acquiring a dominant stake. Authorities last year hinted that they would create favourable conditions to encourage foreign credit institutions to buy or contribute capital to help local banks navigate the restructuring process, especially weak banks. They are considering regulations that allow foreign credit institutions to own up to 49 per cent of the charter capital in a local bank.

On a side note, banks emerged from a tough 2012 more profitable. They recorded accumulated profits of $1.34 billion during the first eleven months of 2013, up 3.2 per cent compared to the same period of 2012. Still, these profits are equal to only 53 - 64 per cent of the profits banks recorded in 2010 and 2011. And among the more profitable ones, more than half saw profits fall compared to 2012.

NPL Settlement

Vietnam’s efforts to deal with non-performing loans (NPLs) were reflected by the introduction of the Vietnam Asset Management Company (VAMC) in 2013, a move touted as a welcome change in the banking sector. The company was set up under the control of the SBV with a capital base of $23 million. It was expected to buy around $1.66 billion worth of NPLs by the end of last year. Local banks with NPLs of 3 per cent or more are required to sell their bad loans to VAMC in exchange for government-guaranteed bonds issued by the company. These bonds do not bear interest and have to be written off by 20 per cent each year over five years.

Still, Governor Binh retained a sense of caution in saying that VAMC is no magic wand that will make all NPLs disappear. “It’s just a tool to help resolve the NPL problem,” he said. “The primary short-term goal behind the move is to bring NPLs to a manageable level by 2015.”

Analysts also agree that the establishment of VAMC is unlikely to resolve deep-rooted problems in the country’s banking system unless it is accompanied by more stringent regulations and stronger risk management practices among banks. The company’s capacity to buy NPLs is limited by its small capital base compared with the large amount of NPLs it is tasked to resolve by 2015. According to a Standard & Poor’s report, the setting up of VAMC does little to strengthen underlying credit fundamentals. “It will only have a window-dressing effect, where the bad loans will be removed from the books of banks, causing a decline in reported NPLs,” the report noted. “In substance, banks will continue to bear the associated risks and credit losses.”

Nevertheless, it is believed that VAMC could offer weaker banks some respite from profitability and capital pressures because the provisioning of bad loans could be spread out over five years. Banks can also place these bonds with the central bank to support their funding and liquidity needs.

2014 outlook

2013 was a year of consolidation as the sound credit policy of the SBV prevented the vulnerabilities in the banking sector from spreading. Although the resolution of NPLs will require a more proactive approach, the establishment of the VAMC has so far been the most visible step on the part of the government to resolve the NPL issue.

As 2014 arrives the SBV has identified major targets and solutions in monetary policy management, including flexibly and actively using monetary policy to control inflation, stabilise the macro-economy and support economic growth at reasonable levels, ensuring the liquidity safety at credit organisations. The central bank has been handed a mission by the Prime Minister of keeping inflation under control in 2014, at between 6.5 per cent and 7 per cent, against 6.2 per cent to 6.3 per cent in 2013. VAMC, meanwhile, has a target of buying $4.76 billion worth of NPLs.

The SBV will also manage interest rates and exchange rates in accordance with macro-economic changes while ensuring the value of the Vietnam Dong and preventing goldenisation and dollarisation in the economy. It will also carry out credit management measures in the direction of credit expansion in parallel with credit quality control, synchronously conduct solutions for bad debt settlement, and strengthen supervision and inspection and improve transparency in the activities of credit organisations.

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