Efforts in the bank restructuring process need to push ahead despite encouraging results being seen over the last two years.
If the amount of work already done was the sole criteria then everything looks quite promising for Vietnam’s bank restructuring process. The State Bank of Vietnam (SBV) settled nine weak banks and recently identified two more and six credit institutions in need of restructuring. Meanwhile, the Vietnam Asset Management Company (VAMC) has been established to handle non-performing loans (NPLs), which are considered a serious problem for the banking system as a whole. Impending changes also aim at inviting more foreign participation into the process. But the feeling remains that something is missing from efforts to make the country’s banks more efficient.
Progress thus far
Analysts, in general, believe that the direction Vietnam has taken to restructure its banking sector is correct. “Steps have been taken that are in line with the actual situation the economy is facing,” said Mr Vo Tri Thanh, Deputy Director of the Central Institute for Economic Management (CIEM). The very first step was taken by the SBV in assessing the actual operations, asset quality and bad loans of local banks, in order to classify them into different groups. After nine weak banks were identified - SCB, Ficombank, Tin Nghia Bank, Habubank, Tienphong Bank, GP Bank, Navibank, TrustBank and Western Bank - the SBV introduced a number of measures for the implementation of drastic restructuring plans at each.
Overall, leaders at banks considered “weak” seem fairly content with the route the SBV has chosen. Mr Vo Tan Hoang Van, General Director of SCB Bank, one of the first to carry out a restructuring process, believes the steps taken comply with a direction from the SBV and SCB, because of this, has achieved results that have contributed to stabilising the banking system and build customer confidence. “SCB has settled the entire refinancing capital of the more than VND20,000 billion ($1 billion) it borrowed from the central bank, not to mention that the bank is working towards balancing its gold status and restructuring its balance sheet towards safety and efficiency,” he said.
Another is TP Bank (formerly known as Tienphong Bank), which has posted solid results since restructuring. After its restructuring scheme was approved by the SBV in July 2012, the bank’s charter capital has increased from $142.8 million to $264.2 million and its bad debts have fallen from 6.4 per cent to 2.7 per cent.
From the perspective of an independent financial analyst, Mr Le Xuan Nghia, Director of the Business Development Institute and former Deputy Chairman of the National Financial Supervisory Committee, is in an optimistic mood two years in to the restructuring process. “The restructuring of the banking system to date can be considered pretty satisfactory,” he said, adding that the sector had restructured the most compared to the other two pillars of economic restructuring: public investment and State-owed enterprises.
After two years of drastic restructuring, financial capacity at banks has seen improvement while the safety of the banking system as a whole has been bolstered. At the very least, nine of the weakest banks have determined how best to move forward and the SBV, bank shareholders and customers now can let out of sigh of relief that danger has passed, though it is still too early to say whether these banks will develop strongly in the future. “The compulsory restructuring of nine weak lenders has eliminated the risk that they posed to liquidity in the system,” Mr Nghia noted.
Considering the anticipated outcome from restructuring for the 2011-2013 period, Mr Nguyen Duc Huong, Deputy Chairman of Lien Viet Post Bank, believes the most important thing is that the possibility of the banking system collapsing is now zero. However, remaking and modernising the operations of local banks and establishing a strong banking system are major undertakings that will inevitably take time to fully implement. “Banks, after merger and acquisition (M&A) activities, often see a big jump in scale and total assets but I have yet to see much improvement in terms of financial supervision and corporate management,” he said. He also believes that the restructuring process can only work if M&A activities create a real difference in the newly-established entities.
Although initial results have been seen after two years of bank restructuring, there is still a long way to go if Vietnam wishes to have a healthy banking system with at least one or two commercial banks operating on a regional scale, as was once targeted. The main obstacles in the sector’s ongoing restructuring are high NPLs and complex cross-ownership within the banking system.
Local authorities earlier approved a restructuring roadmap in which NPLs were to be basically written off in 2015. However, analysts believe this target will be difficult to attain given the existing circumstances. “The best conditions for NPL settlement have not been met as the macro-economic conditions are not supportive while the debt settlement capability of the business community is modest,” said Mr Huong. “The frozen real estate market and the still-struggling stock market make it difficult to attract foreign capital into the banking sector’s battle against bad debts.”
As at the end of last year VAMC had bought VND39,000 billion ($1.87 billion) of NPLs from local banks and the company targets to buy VND10,000 billion ($476 million) more in the first quarter of this year. It remains doubtful, however, that the level of NPLs will fall quickly. “VAMC is only buying NPLs from banks to clean up their balance sheets and is yet to figure out how to settle these NPLs directly,” Mr Nguyen Duc Thanh, Director of the Vietnam Centre for Economics and Policy Research, was quoted as saying. “Although the speed of handling NPLs has accelerated, their sheer scale means the fear of a liquidity crisis happening at any time lingers.”
Similarly, one unanswered question for regulators is how cross-ownership among banks will be resolved. Acknowledging that the problem is serious, SBV Governor Nguyen Van Binh said that the handling of cross-ownership must be undertaken in a cautious manner with a clear roadmap to ensure stability in the banking system. “The central bank will focus on verifying the financial status of shareholders when they contribute capital or buy stakes in banks,” said Mr Binh, adding that supervision and inspection of cross ownership between banks, subsidiary companies and shareholders will be enhanced to deal with any violations in a timely manner. The SBV is also working on drafting a circular on capital adequacy ratios to ensure safety in the performance of banks, including regulations on limiting cross-ownership.
It’s true that the progress made on NPLs and handling cross-ownership has been slow. Transparency and the speed of the response from regulators have played a role, as the bank restructuring process needs to be clearer and Vietnam has no choice but to focus on these two complex issues in the medium and long terms.
Under its roadmap the SBV will attach much importance to improving stability, safety and resilience at banks this year. Among the measures, M&A and consolidations will be the continuing trend for 2014 as the central bank plans to reduce the number of local commercial banks. Governor Binh said in February that Vietnam’s roughly 30 banks and financial institutions would be pared down to between 14 and 17. He implied that M&A and consolidations will be the continuing trend of bank restructuring program in 2014 but also noted that restructuring activities need to be carried out not only at weak banks.
The central bank has encouraged M&A activity in the sector, hoping to use the balance sheets of relatively healthy banks to shore up the weaker ones. Truth be told, though, large and healthy banks will be reluctant to take on a weak banks’ large stock of bad debts, but appear to have little choice in the matter. This is why the central bank believes that voluntary moves by banks are the most important element of the restructuring process. Following on from the recent merger of two minor banks, DaiA Bank and the Ho Chi Minh City Development Bank, approved in November 2013, the possible upcoming merger of Sacombank and Southern Bank looks to confirm such a trend.
“Considering the anticipated outcome from restructuring for the 2011-2013 period, the most important thing is that the possibility of the banking system collapsing is now zero. However, remaking and modernising the operations of local banks and establishing a strong banking system are major undertakings that will inevitably take time to fully implement.”
Mr Nguyen Duc Huong, Deputy Chairman, Lien Viet Post Bank
“The restructuring of the banking system to date can be considered pretty satisfactory. The compulsory restructuring of nine weak lenders has eliminated the risk that they posed to liquidity in the system.”
Mr Le Xuan Nghia, Director, Business Development Institute