2013 didn't bring much in the way of breakthroughs for international financial institutions and foreign banks in Vietnam, who remain patiently biding their time.
From Vietnam’s perspective it now has a banking sector burdened with large non-performing loans (NPLs) and poor corporate governance that may prompt the opening up of the banking sector to foreign investment. And the presence of international financial institutions and foreign banks in the country has not only increased the competition and governance capacity of the banking system but also diversified the types of services, thereby strengthening the depth of financial markets.
In some respects foreign banks have advantages compared to local banks in terms of capital, management skills and technology. However, in the current environment it is not easy for most of these foreign lenders to operate profitably. And the meeting of the State Bank of Vietnam (SBV) with international financial and credit institutions late last year partly confirmed this. Given the way the meeting was conducted, with the SBV leaders putting more emphasis on the macro-economic situation than the performance of foreign banks, 2013 perhaps was not a happy time for foreign bankers in Vietnam.
Addressing the year-end meeting with international financial institutions and foreign banks, Deputy SBV Governor Le Minh Hung said that Vietnam’s economic conditions during 2013 saw positive steps in most sectors and made significant achievements, including macro-economic stability, inflation containment, and the lowering of deposit interest rates. In regard to monetary policy management and banking operations last year, he stressed that macro-economic conditions and money market movements were in line with the expectations of policy measures adopted by the SBV. “The SBV has consistently pursued inflation-targeted monetary policy, adopted flexible solutions for credit extension and interest rates to supply funds to the economy, and focused on taking synchronised measures to reorganise the gold market,” Deputy Governor Hung said.
Despite the difficult economic climate affecting foreign banks’ parent groups, the number of foreign institutions in the country remains the same. As at the end of 2013 there were 60 representative offices of foreign credit institutions, 54 foreign bank branches, four joint venture banks, five 100 per cent foreign-owned foreign banks, and 17 finance companies operating in Vietnam. HSBC, Standard Chartered, Shinhan Vietnam, ANZ and Hong Leong remain the five wholly foreign-owned banks while the Bank of Tokyo-Mitsubishi UFJ, CitiBank Ho Chi Minh City and Taipay Fubon were the latest foreign bank branches given licences to operate in 2013.
Foreign banks typically haven’t disclosed the results for their Vietnamese operations and data on them can be difficult to come across. Previously their business performance figures were revealed by the SBV at its annual meetings but this is no longer the case and 2013 was the second year in a row that the SBV did not disclose details of the performance of foreign banks in the country. While highlighting the contribution of foreign banks in Vietnam last year, SBV leaders appeared to overlook a fact that was of concern to most of those in attendance: the market share and profits of foreign banks.
The presence of foreign banks has not really made life difficult for local lenders in terms of mobilisation and lending, with foreign banks account for an average of 10 per cent of mobilisation and 8 per cent of lending each year. With limited branch networks and the pace of expansion being tightly regulated by authorities, it is much harder for foreign banks to generate deposits to funnel into loans. Foreign banks may also find themselves constrained in how they can lend by their head office being concerned about the risks in the local economy. Last but not least, providing retail banking in a non-home country is challenging, as foreign banks must compete with home grown lenders that are better positioned to attract low-cost deposits, which is an important success factor in retail banking.
Still, foreign banks in Vietnam have made big money from providing foreign exchange services to their customers. These can include buying foreign currency in cash form, making international bank-to-bank transfers or providing pure foreign exchange services for large global companies. Foreign banks have long targeted Vietnam as a key market for future growth and in the two to three years prior to 2010 they invested significantly in the country. Some say that effort is yet to pay off given Vietnam’s economic slowdown.
As at the end of October 2013, according to an SBV report, the total assets of foreign banks in Vietnam reached VND645,927 billion ($30.7 billion), accounting for nearly 12 per cent of the banking sector’s total assets. Their charter capital increased 3.22 per cent, standing at VND78,590 billion ($3.7 billion). Foreign credit institutions in Vietnam have strictly complied with local laws and SBV regulations and have also managed to meet prudential ratios such as capital adequacy ratio, the ratio of using short-term borrowing to finance medium-and long-term lending, and solvency ratios. Their return on assets (ROA) and return on equity (ROE) are reported at high levels, of 0.75 and 4.64, respectively.
These foreign banks have also continued to promote their role as transmission channels of modern banking technology and are an important bridge in attracting foreign direct investment (FDI) capital into Vietnam, at the same time creating positive competition for local banks. In particular, international financial institutions and foreign banks have actively given advice to the government and the SBV in the management of macro-economic policies. “The SBV also acknowledges and highlights the importance and efficiency of the policy dialogue and advice from international financial institutions and the Banking Working Group of the Vietnam Business Forum in the process of improving the legal framework and policy regulation,” said Deputy Governor Hung.
Patience is key
Although there weren’t many breakthroughs in 2013, foreign players are watching to see what business opportunities emerge for them in 2014. Some believe that participating in the NPL settlement process could prove to be an opportunity as it is where they can put their expertise to good use. The Banking Working Group, an organisation that has been working in close partnership with the SBV to improve the regulatory system in the country’s banking sector, agrees that the creation of the Vietnam Asset Management Company (VAMC) was a good first step but noted that NPLs were a long-term issue that is holding back the country’s overall growth.
There have been many foreign investors wishing to invest in NPLs in Vietnam but they are challenged by unclear regulations. Specifically, the lack of information on NPLs is the greatest challenge, not to mention barriers such as complicated administrative procedures and reluctant cooperation from local partners. “VAMC should use care in dealing with collateral assets as transparency will attract investors and help speed up banking system recovery,” suggested Mr Sumit Dutta, CEO of HSBC Vietnam and Representative of the Banking Working Group.
Pundits also predict that the first set of guidelines in 2014 allowing foreign investors to take larger stakes in local banks will help attract new foreign players to participate in the banking restructuring process. Under the new regulation the limit on foreign strategic investors will be increased to 20 per cent from 15 per cent, while the cap on total foreign holdings at any local bank remains at 30 per cent. But for some weak banks the total cap could exceed 30 per cent, depending on final approval from the Prime Minister. With the legal framework to be put in place this year it is expected that foreign banks will become more active in the bank restructuring process by partnering local lenders.
Basically, international financial institutions and foreign banks applauded the government and SBV response to stabilise the macro economy in 2013. “The macro economic situation is clearly better than in 2012,” said Mr Sanjay Kalra, Resident Representative of the IMF in Vietnam. Still, he warned that there is a long way to go. “We hope that in 2014 problems involving bad debts and State-owned enterprises will be gradually resolved so that economic growth will be higher than in 2013,” he said.
For its part, the SBV will continue its monetary policy regulation in a flexible and prudent manner as well as the effective and synchronised utilisation of monetary policy instruments in 2014 to curb inflation, maintain macro-economic stability and help to remove constraints on businesses, with the aim of obtaining proper economic growth. The central bank will also continue to undertake determined, flexible and appropriate measures to realise the credit institution restructuring plan to better accommodate public demands for financial and banking services, creating momentum for economic development in the years to come and fulfilling the first phase of the banking restructuring plan by 2015.