Mr. Douglas Jackson
Mr. Douglas Jackson, Partner and Managing Director of the Boston Consulting Group South East Asia, spoke with VET about Vietnam's banking sector in 2015 and the prospects for 2016.
■ In 2015 the State Bank of Vietnam (SBV) made a number of important moves regarding the restructuring of the banking sector with the purpose of improving the environment. How have these movements influenced banks in Vietnam?
A central bank encouraging mergers between weak banks and strong banks is not an uncommon practice internationally. For example, Indonesia did it to counter the adverse impacts of the Asian financial crisis. In Vietnam it seems this movement is more political than in other countries where the central bank has a greater degree of independence. In addition, market confidence is still high in Vietnam’s banking system, so it is not a pressing issue for the country.
The SBV bought some weak banks during the year for no exchange of cash and I personally believe this was a good move, punishing shareholders of weak banks who were taking advantage of unsustainable practices by the management team without standing up to them.
Key banking figures that have been arrested must accept responsibility for what they have done. This is the sensible thing to do to improve discipline in the industry, which should have zero tolerance for dishonesty. In the long term, what is more important than the punishment is to strengthen the SBV’s ability to investigate bank operations to consistently and systematically ensure policy compliance. The SBV should have sufficient independence to pursue its mandate.
■ Vietnam is heading into 2016 with free trade agreements (FTAs) and the ASEAN Economic Community (AEC) to take effect. What are the opportunities and challenges banks in Vietnam may face this year?
In the short term local banks should build up their capability to support investment from these FTAs. In my personal point of view, the AEC will not be as practical as the TPP. The impact of the TPP will produce more outcomes more quickly with the involvement of the US.
Regarding threats, we don’t see a significant risk to local banks because they have home ground advantage in funding sources and distribution channels, which are hard to replicate. Cooperation between local banks and international banks will be win-win arrangements.
Local banks can open up to foreign bank investment to enhance their capital position, leverage global expertise, and strengthen their corporate governance. Finally, the foreign ownership cap should be lifted to help foreign banks have a more positive influence on local banks’ operations.
■ You have worked in Vietnam and other ASEAN and APAC countries. Are there any specific characteristics of Vietnam’s banking sector compared to elsewhere?
In the past there were too many banks operating in Vietnam. It’s historically weak regulation couldn’t prevent unsustainable behavior in the market. For example, ensuring loans are used for the right purpose has been notoriously difficult in Vietnam, thus a large portion of those loans went into real estate speculation. BCG has therefore recommended that 10-15 banks in Vietnam is a good, solid number to serve the market.
The other issue is Vietnam’s four largest banks are majority held by the State and these dominate more than 50 per cent of the market. This is common in the region and also found in Indonesia, Malaysia, and Thailand. They all have strong banks owned by the State that are developing healthily. It is not a problem because State-owned banks can develop well.
■ How would you evaluate the handling of bad debts in 2015 and what could be done more efficiently this year?
We still see a kind of “kicking the can down the road” mentality, where important decisions are being delayed until the market recovers and then they won’t need to be made anymore. Most of the recent purchases by the Vietnam Asset Management Company (VAMC) were not based on book value but on market value, whose definition is not clear. Moreover, the reported non-performing loan (NPL) ratios from banks do not accurately reflect the problems. We all know higher numbers exist.
Therefore, the issue has not been completely tackled because reported NPLs seem to greatly underestimate the magnitude of actual bad debts. If we have no idea how big the problem is, we can’t solve it completely.
■ What do you see for retail and corporate banking in Vietnam in 2016?
Mass Affluent Consumers (MAC) will double by 2020, so there will be more spending and trade-up in leisure products. This will magnify through banking credit, so retail banking will be the main beneficiary. People will begin to spend more and trade-up, increasing consumption, and purchasing power will rise with the number of wealthy individuals growing. More quality housing in the growth market of real estate will bring opportunities for the consumer credit market. Consumer payments and affordable housing mortgages are also key growth areas for retail banking.
Regarding corporate banking activities, foreign direct investment (FDI) in Vietnam will increase because the country is becoming a leading destination for foreign companies when relocating, and demand from enterprises for capital from banks will also increase and this mean banks need more capital to provide to the market.