Luận văn building competitive strategies for shinhan bank vietnam

SBV State Bank of Vietnam SCP Structure — Conduct — Oerformance ESH Efficient Structure Hypothesis HHI Herfindahl-Hirschman Index IFE Internal Factor Evaluation EFE External Factor Evalu

ĐẠI HỌC QUỐC GIÁ HÀ NỘI

KHOA QUAN TRỊ VẢ KINH DOANH

KIM, JIHYUN

BUILDING COMPETITIVE STRATEGIES

FOR SHINHAN BANK VIETNAM

XÂY DỰNG CHIẾN LƯỢC CẠNH TRANH CHO NGAN HANG SHINHAN BANK VIET NAM

Chuyên ngành: Quản trị kinh doanh

Mã số: 6 34 01 02

LUẬN VAN TIIAC Si QUAN TRI KINII DOANIT

NGƯỜI HƯỚNG DẪN KHOA HỌC: PGS.TS HOÀNG ĐÌNH PHI

HÀ NỘI - 2020

DECLARATION

The author confirms that the research outcome in the thesis is the result of author's independent work during study and research period and it is not yet published in other’s research and article

The other’s research result and documentation (extraction, table, figure, formula, and other document) used in the thesis are cited properly and the

permission (if required) is given

The author is responsible in front of the Thesis Assessment Committee, Hanoi School of Business and Management, and the laws for above-mentioned declaration

Place: Hanoi, Vietnam

Jihyun Kim

ACKNOWLEDGEMENT

MBA program at Hanoi School of Business has encouraged me to pursue the field of global banking at more advanced level because I became convinced of

my ability to endeavor in researching banking sector in Vietnam Before I

started my studies with the brightest students in the most prestigious institute

in Vietnam, my passion in banking field had been enervated due to the lack of competition in Korea, Although I worked at the one of the Asia’s leading financial groups, Shinhan Financial group, I only considered myself as the frog in the wall who knows nothing of the great ocean Moreover, I was afraid that I would not survive in my chosen field due to extremely prominent competitors in the countries outside of my home country Korea

My experiences in Vietnam, however, allowed me to realize that they are not

competitors but colleagues who inspire each other and constructively

influence the world of businessmen, so that humanity can discover innovative theories in various issues Consequently, I realized that I wish to be able to contribute to my chosen field substantially as a leader who has a flexible thinking and sincerely enjoy studying and researching with outstanding individuals leading a variety of markets of Vietnam

I plan to pursue the career of an international banker who does his best to

contribute to banking sector of Vietnam as well as Korea I wish to work in

Vietnam where I have had the opportunity to meet brightest students and professors and social diversity can be strengthened in the field of banking I

also hope to further expand my role as a group leader through designing

global business strategies and planting motivations in the mind of young

employees and give the fair chances to every employee to experience the

ii

fascination of banking industry With strong molivalion and oxtensive working and studying experiences, I firmly beheve that T will become the one

I want to be

Once again, | really appreciate my company for giving me such a great chance to leam a lot about Viemam and also thank all of my Vietnamese friends who have actively supported me My memories in Vietnam will stay

with me forever

3 Review of the Previous Studies and Researches Relating to the Thesis Title 3

4 Objective of Thesis đïgtigklailii2i200 0iàu Pe ans

2.1.3 Bank Concentration Ratio

2.1.4 Herfindahl — Hirschman Index (HHI) - -: - Ï

2.2 Tools for Business Environment Analysis and Building Competitive Strat

Sey NANA

BBY svissisnicinwiniausciscctentsusiecuevcctccetat se scistsieceacciiuisstecuccusiateteceasce TA 2.2.1 EEE (External Factor Evaluation) Matrix 11

2.2.2 IFE (Internal Factor Evaluation) Matrix sen LỆ

CHAPTER THREE ANALYSIS OF BANKING INDUSTRY IN VIETNAM

AND SHINHAN BANK VIETNAM 15

3.2 Structure of the Victnam’s Ranking Sector - - 17

3.3.2 The Herfindah] — Hirschman Index Result - 26

3.4.3 Financial Innovation and Technological Advances 36

3.5 Shmhan Bank Victnam - 37 3.5.1 EEE 43 3.5.2 0E - - 44 3.5.3 TOWS - - 45 CHAPTER FOUR PROPOSAL OF COMPETITIVE STRATEGIES AND 8 OLUTIONS FOR SHINHAN BANK VIETNAM 46 4.1 SO Strategies - - - 46 4.1.1 Leaming Know-

How from Shinhan Financial Group and Implementing “Spoke & Hub” strat

G8Y 46

4.1.2 Focusing on Non Face-to-Face Transactions and ATM Business 48

4.2 WO Strategies 49

4.2.1 Using Global Networks with Fast-

Growing Economy lo Overcome the Small Sized Assets and Network 49

43 Proposal of Solutions for Implementing Competitive Strategies for Shinh

an Bank

SBV State Bank of Vietnam

SCP Structure — Conduct — Oerformance

ESH Efficient Structure Hypothesis

HHI Herfindahl-Hirschman Index

IFE Internal Factor Evaluation

EFE External Factor Evaluation

TOWS Threat-Opportunity-Weakness-Strength Analysis

IMF International Monetary Fund

BSA Banking Supervisory Agency

MOF Ministry of Finance

SSC State Security Commission

ISA Insurance Supervisory Agency

SOCB State Owned Commercial Bank

FOCB Foreign Owned Commercial Bank

JSCB Joint Stock Commercial Bank

CAR Capital Adequacy Ratio

VAMC Vietnam Asset Management Company

vi

LIST OF TABLES

The 2:12 TQWS MRHWEDfionoeensnsuntrdinnoaeniadrrraararnanrsasapapooresssgsn TẾ Table 3.1: Key Statistical Ratios of credit institutions of Vietnam as of

Table 3.3: Bank Concentration Ratio Results 25

Table 3.5: Shinhan Bank Vietnam Performance 2017-2018 42

FABIE 37: TEE: Anahi os exsnarnicnaoavcavesonevnsinsesanetnasandaahooonnsnonnaensntenneononsmneann’ ep

Table 4.1: Opening New Branches Status 5s sisxszasseesossiSQ

vil

Eigure 3.4: Credit and Deposit Growth ¿sscssccssesssscosero 2T Figure 3.5: Bad Debt Ratio and ROE — 22 Figure 3.6: Total Number of Banks in Vietnam from 2012 to 2018 23

Figure:3/8: HHI Trend ssssvsssesesvscsersererevcesiasees — ==-

Figure 3.9: Shinhan Financial Group’s Net Income by International Business 38 Figure 3.10: Shinhan Financial Group’s Asset by International Business 38 Figure 3.11: Shinhan Financial Group’s Net Income & Asset Composition as

of December 2018 (đi21438158001018512866 setts Site 55) Figure 3.12: Golden population of Vietnam as of December 2017 40 Figure 3.13: Market Position Analysis of Vietnam’s Banking Industry as of D

ecember 2018 8 x atocsiatcsst th saasgavaszailft]

Figure 4.1: Income Bracket of 5 Major Cities of Vietnam (%) 47 Figure 4.2: Increase in Non Face-to-Face Transaction

Figure 4.3: Shinhan Fianncial Group’s Indochina Region svosuisrsesasnlÐÔ) Figure 4.4: The Spread of Population in Vietnam Based on Region and Incom

eLevwel SEkHSH101001461400408123/00 iHHngHangag sini D1

viii

CHAPTER ONE INTRODUCTION

1 Rationale

Vietnam's economy has experienced strong growth, driven by international

trade and foreign investment since the 2000s Favorable government policies

and laws, in combination with Vietnam’s young, educated workforce and other advantages have allowed the country to develop into an attractive place

to invest in South East Asia

In 1987, the National Assembly passed the Law on Foreign Investment and today, the country is reaping the benefits 30 years later Between 2002 and

2018, more than 45 million people were lifted out of poverty Poverty rates declined sharply from over 70% to below 6%, and GDP per capita increased

by 2.5 times, standing over US$2,500 in 2018

Meanwhile, Vietnam’s banking and financial services sector is still under- developed but boasts high growth potential Within this sector, according to the research from PwC Vietnam, growth is expected much more in retail banking, in particular payment cards and wealth management services

Demand for a range of retail banking products is set to grow due to the huge

untapped market There is also opportunity to modernize Vietnam's cash-

based society where 90% of payment transactions are stillin cash and the market for payment cards is relatively untapped

Since Shinhan Bank Vietnam has been focusing on retail business in Vietnam

and has acquired ANZ Vietnam successfully in 2018, analyzing banking sector of Vietnam and finding competitive strategies for it will be meaningful

Moreover, in recent years, the Vietnam banking system has gone through a

1

big wave of restructuring where smaller and weak banks were acquired by or

merged with bigger banks or came under supervision by the State Bank of

Vietnam (SBV)

In order to provide Shinhan with competitive strategies, analyzing the

banking sector of Vietnam should take first priority to figure out the degree of

concentration and competition According to Sanya and Gaertner (2012),

competition is the driving force to enhance the role of banks in an economy Without competition, it is implausible to bring about efficiency and foster financial sector development When there is a lack of competition in the market, banks exercise monopoly power and sets higher rates for loans and lower rates for deposits

Based on the empirical findings and the analysis using a variety of tools, this

study focuses on suggesting competitive strategies for Shinhan Bank Vietnam

to compete with Vietnamese commercial banks

2 Significance of Study

As explained in the previous chapter, this study aims to build competitive strategies for Shinhan Bank Vietnam based on the characteristics of Vietnam’s financial market Closely looking at the the Vietnam’s market will give

Shinhan Bank Vietnam meaningful messages because the banking industry of

Vietnam is now attractive for all commercial banks including foreign banks

like Shinhan in terms of a lot of opportunities from the fast growing economic environment, cash-based society, and the high demand for advanced retail

banking services

Moreover, the degree of concentration in Vietnam’s banking sector will

2

provide Shinhan with insights when establishing competitive strategies based

on IFE, EFE and TOWS because according to the characteristics of banking

sector, diverse strategies should be built so that Shinhan Bank Vietnam competes effectively and efficiently

3 Review of the Previous Studies and Researches Relating to the Thesis Title

The purpose of this section is to concisely review significant studies carried as

part of the current study Numerous researchers in developed countries have studied concentration and competition in the banking industry from different

perspectives However, little is known regarding Vietnam’s banking sector in

terms of concentration and competition In addition, there have been no investigations for Shinhan Bank Vietnam from its point of view Therefore, this review will focus on theoretical literature on measurement of competition and the review of relevant empirical studies on Vietnam’s banking

competition

The fact that competition is a complex concept and not directly observable, has resulted in the development of many techniques for its assessment One approach assesses competitiveness following the structure — conduct — performance (SCP) paradigm and the alternative efficient structure hypothesis (ESH) The SCP and ESH are the most commonly used approaches to gauge

the effect of concentration on competition The structure — conduct —

performance joins structure and performance and defines the market structure

by the level of concentration meaning that high concentration in the market implies high market power and it will lead to less competition while in a less

concentrated market there will be lower market power and high competition

The SCP is formerly developed by Bain (1956), this approach evaluates

banking competition by applying concentration ratios and indexes The two

3

broadly utilized methods of market concentrations are bank concentration ratio and the Herfindahl-Hirschman Index (HHT) The bank concentration

ratio sums only the market share of the largest banks in the industry, but IZIL

includes the market share of all banks in the industry to measure the level of

concentration

le Hai ‘Irung (2014) investigated the competitive conditions and

concentration of Vietnam’s banking sector by using both concentration ratio

and TI] Index for the period from 2007 to 2012 [lis findings show thal there had been a significant decrease in the market share of four largest banks and

six largest banks suggesting the changing in the market structure in Viemam’s banking soclor lo a more compelilive naturc However, the main drawback of using “k largest banks” ratio is that it does net account for the number of banks in

the market although it introduces a direct indication to measure the concentration

and competition in the industry Herfindahl-Hirschman Index is usually used to overcome this disadvantage The changes in value of HHI confirm a decreasing

trend in markel concentration and increasing compelilive nature in Viclnam’s

banking sector All ratios he computed demonstrates that a decreasing trend in the concentration of Vietnam’s banking industry as a result of financial liberalization, deregulation and loosening entry to foreign banks duc to wider assess of the

country to global trade

‘The main reason of the discussion above is that it is necessary for Shinhan

Bank Vietnam to understand the degree of concentration and competition of

Vietnam’s banking industry so that it finds competitiveness and build

strategies based on analytical tools such as IFK, KKK and TOWS ‘There is a

big difference between doing a business in a competitive and non-competitive

environment,

4 Objective of Thesis

This paper has a lot of attention to analytical tools and a variety of data to

investigate the business environment and the other factors in order to build

and propose competitive strategies for Shinhan Bank Vietnam

The general objective of the study is to investigate the trend and degree of

concentration in the banking industry of Vietnam and to suggest competition

strategies for Shinhan Bank Vietnam Based on the general objectives above, the study has specific objectives as below

1 To determine the degree of concentration in the banking industry of

Vietnam

2 To survey the theoretical and empirical literature on banking concentration and analyze the Vietnam’s banking system from 2012 to

2018

3 To provide competitive suggestions for Shinhan Bank Vietnam based

on the investigation 1 and 2 above

5 Methodology

Based on the study of theory of business strategy and the degree of

concentration in Vietnam’s banking sector by using CR(Concentration Ratio)

and HHI(Herfindahl — Hirschman Index), this study aims to use tools such as

IFE(Internal Factor Evaluation), EFE(External Factor Evaluation), and TOWS

and suggests competitive strategies for Shinhan Bank Vietnam

Bank-level data used for this study was collected from the financial statement

of each bank from 2012 to 2018 Country-level data were gathered from State

Bank of Vietnam (SBV), International Monetary Fund (IMF), the World Bank

and from diverse papers with proper quotation

5

6 Scope of Research

This paper deals with the amount of assets of 29 banks in Vietnam from 2012

to 2018 in order to analyze how concentrate the Vietnam’s banking industry is, which allows Shinhan Bank Vietnam to build strategies toward them

7 Thesis Structure

The study is organized into six chapters The chapter one introduces

background of the study, significance of the study, review of the previous studies and researches relating to the thesis title, objective of studies, methodology, data, and scope of research Chapter two discusses basic concepts and definitions such as strategy, competitive strategy, bank

concentration ration and Herfindahl — Hirschman Index, and tools for

business environment analysis and building competitive strategy Chapter three provides analysis of banking industry in Vietnam and Shinhan Bank

Vietnam by taking a closer look at history of banking in Vietnam, structure of

the Vietnam’s banking sector and by using tools EFE, IFE and TOWS Finally,

chapter four constitutes the conclusion of the study and gives strategic

recommendations for Shinhan Bank Vietnam

CHAPTER TWO BASIC THEORY ON COMPETITIVE STRATEGY

AND BANKING CONCENTRATION

2.1 Basic Concepts and Definitions

with the organization’s mission and goals (Wright, Peter L., Mark J.-Kroll and

John Alan Pamell, 1998, Strategic Management, 4" edition, Prentice Hall)

2.1.2 Competitive Strategy

Competitive strategy is a long-term action plan of a company which is

directed to gain competitive advantages over its rivals after evaluating their

strengths, weaknesses, opportunities and threats in the industry and compare it

with your own According to Michael Porter, a professor at Harvard, tt is

necessary for businesses to understand the core principles of this concept that

will help them to make a well-informed business decisions in the course of action This strategy is very important when firms have a competitive

marketplace and several similar products available for consumers like

banking services Michael Porter divided competitive strategy in for different

type of strategies

Cost Leadership Strategy

Cost leadership strategy is difficult to implement for small scale business as it involves making long term commitment for offering products and services at lower prices in the market For this purpose firms need to produce products at low cost otherwise it will not make profit Since the cost leadership means to become low cost producer or provider in the industry, any large-scale business which can provide and manufacture products such efficient operation, large distribution channels, technological advancement and bargaining power

Differentiatiun Leadership Strategy

Identifying attribute of a product which are unique from competitors in the industry is the driving lactor in the diilurentiation leadersinp stralegy When a product is able to differentiate itself from other similar products or services in

the market through superior brand quality and value added features il will be

able lo charge premium prices lo cover the high vost

Cost Focus Strategy

This strategy 1s quite a resemblance to the cost leadership strategy However,

a major difference is that the cost focus strategy business target a particular scgment within the market and that segment is offered the lowest price of the product or services This type of strategy is very useful to satisfy your

consumer and increase brand awareness

cl ion Focus Strategy

Similar to the cost focus strategy, differentiation Locus strategy largets a particular

segment within the market, However, instead of offering lower prices to consumer, firms differentiate itself from its competitors Differentiation strategy offers unique

features and altributes to appeal ils target segment,

8

2.1.3 Bank Concentration Ratio

The K-bank concentration ratio is one of the most frequently used measures

of concentration in the empirical literature It means the extent of concentration in the banking industry by computing the market share of the

top k largest banks (typically three or five) in the market

CRk= vy si

Concentration ratios range from 0 to 100 percent The levels reach from no,

low or medium to high to “total” concentration

Perfect competition

If there are K firms in an industry and we are looking at the top of n of them, equal market share for all of them means that CRk = k/K All other possible values will be greater than this

No concentration

If CRk is close to 0, (which is only possible for quite a large number of firms

in the industry N) this means perfect competition or at the very least

monopolistic competition, For example if CR4 = 0, the four largest firm in the industry would not have any significant market share

Low concentration

If CRk is between 0 and 0.4, this category ranges from perfect competition to

an oligopoly

2.1.4 Herfindahl — Hirschman Index (HHI)

The Herfindahl-Hirshman Index (HHI) is commonly used measure of market

concentration that measures the size of the bank in relation to the industry and

serves as an indicator of the degree of competition among banks It is the sum

of squared market shares of all banks operating in the market The major advantage of the HHI over the concentration ratio is that it comprises the number of firms in the industry which is not included in the k-bank

concentration ratio The HHI increases both as the number of firms in the

market decreases and ad as the disparity in size between those firm’s increases The HHI is computed as,

HHI = YR (Msi)?

Where MS is the market share of firm ith in the market and N is the total number of firms in the market The result of HHI is interpreted as follows If the value of HHI is less than 0.01 the banking industry is considered as a highly competitive market, if HHI is below 0.1 it indicates that the market is

10

unconcentrated, if the HHI lies between 0.10 and 0.18 moderate concentration,

and finally the HHI index more than 0.18 indicates highly concentrated market

2.2 Tools for Business Environment Analysis and Building Competitive Strategy

2.2.1 EFE (External Factor Evaluation) Matrix

The External Factor Evaluation (EFE) matrix is the strategic tool used to evaluate firm existing strategies, EFE matrix can be defined as the strategic tool

to evaluate external environment or macro environment of the firm include

economic, social, technological, government, political, legal and competitive

information The EFE matrix is similar to IFE matrix but the only difference is that IFE matrix evaluates the internal factors of the company and EFE matrix evaluates the external factors Rating in EFE matrix represents the response of firm toward the opportunities and threats Highest the rating better the response

of the firm to exploit opportunities and defend the threats Rating range from 1.0

to 4.0 and can be applied to any factor whether it comes under opportunities or

threats If the response is poor, average, above average and superior, then the rating 1,0, 2.0, 3.0 and 4.0 will be applied respectively Weight attribute in EFE matrix indicates the relative importance of factor to being successful in the firm’s

industry The weight range from 0.0 means not important and 1.0 means

important, sum of all assigned weight to factors must be equal to 1.0 otherwise the calculation would not be considered correct

The sum of all weighted score is equal to the total weighted score, final value

of total weighted score should be between ranges 1.0 (low) to 4.0(high) The

average weighted score for EFE matrix is 2.5 any company total weighted

score fall below 2.5 consider as weak The company total weighted score

higher than 2.5 is consider as strong in position

11

2.2.2 IFE (Internal Factor Evaluation) Matrix

The Internal Factor Evaluation (IFE) matrix is a strategic management tool

for auditing or evaluating major strengths and weaknesses in functional areas

of a business IFE matrix also provides a basis for identifying and evaluating relationships among those areas The way of calculating for ICE is same as the one used for EFE,

2.2.3 TOWS

The TOWS Matrix is derived from the SWOT Analysis model, which stands for the internal Strengths and Weaknesses of an organization and the external Opportunities and Threats that the business is confronted with The acronym TOWS is a variant of this and was developed by the American international business professor Heinz Weirich The TOWS Matrix is aimed at developing strategic options from an external-internal analysis and is a practical tool,

particularly in the fields of business administration and marketing

Whereas SWOT Analysis starts with an internal analysis, the TOWS Matrix starts the other way around, with an external environment analysis; the threats and opportunities are examined first From that standpoint, an organization gets a clear picture of its environment and the opportunity to think about strategy and what direction the company will go in Next the company’s

strengths and weaknesses are considered, what it’s good at internally and

what it’s not so good at The external analysis is linked to the analysis and the resulting TOWS Matrix can help an organization to make decisions better, seize opportunities and protect itself better against threats

The TOWS Matrix helps businesses to identify their strategic options An

organization gets the opportunity to make the most of its strengths and get

12

around ils internal weaknesses and lcarn to đcai with them properly Fxternally, an organization learns ta carefully look for market opportunities and recognize possibilities And they learn how to control and overcome potential threats

The TOWS Matrix can also help with brainstorming and developing great

ideas to generate effective marketing strategies and tactics Furthermore, the

model goes beyond merely finding out the strengths and weaknesses within

an organization and what opporiunities and threats there are in ils

environment It forces organizations to really think about how they can improve themselves, how they can guard against threats and become more aware of their cxporlise and potential shortcomings

The TOWS Matrix is not just meant for the highest levels of management in

an organization TL can be a very usoful tool for departments (i.c a markcling

or sales team) or for individual employees on an operational level Once its employees or a department’s strengths arc known, these can be improved

further to become even better The TOWS Matrix emphasizes on the extemal

environment

It begins with analyzing external opportunities and threats Up next are the

internal strengths and weaknesses, which will subsequently be linked to the

external analysis And this is where it goes a step beyond the traditional SWOT analysis, strategic tactics emerge by opposing S-O (Strengths

Opportunilies), W-O (Weaknesses-Opportunilies), S-T (8trengths-Threats)

and W~T' (Weaknesses-Ihreats)

A next step in the analysis helps when thinking about the option they want to

pursue Here the extemal opportunities and threats are compared to the

internal strengths and weaknesses to help identify strategic options Firstly, by

combining internal strength and external opportunities (S-O), the question will arise “how can they use the strength to benefit from existing external opportunities?” Secondly, with internal strength and external threats (S-T),

“how can they benefit from their strengths to avoid or lessen external threats?”

Thirdly, with internal weakness and external opportunities (W-O), “how can

they use opportunities to overcome the organization’s internal weakness?”

Lastly, with internal weakness and external threats (W-T), “how can they

minimize weakness and thus avoid potential threats?”

Table 2.1: TOWS Matrix

CHAPTER THREE ANALYSIS OF BANKING INDUSTRY IN

VIETNAM AND SHINHAN BANK VIETNAM

3.1 History of Banking in Vietnam

Before the August Revolution in 1945, Vietnam was a feudal-colonial country under the French colonialists’ rule The banking and credit system was founded and protected by the French colonialists through the Indo China bank

It functioned as both the central bank of the whole Indochinese region

(Vietnam, Laos and Cambodia) and a commercial bank with commercial

banking operations and investment

After the August Revolution, one of the key tasks of the August Revolution then, was to build an independent and autonomous monetary and banking system to serve for the national cause of revolution and construction The task

was fulfilled by 1950, when the anti-French resistance war grew stronger,

obtaining many triumphs in the battled field, and expanding the liberalized

region In this context, the development required economic and financial activities to be improved and promoted to meet new demands On the basis of the new economic and financial policy set out in the 2nd Congress of the

Vietnam Workers’ Party (February,1951), President Ho Chi Minh signed

Decision 15/SL on the establishment of the Vietnam National Bank — Bank of

the first people’s democratic state in Southeast Asia in order to carry out five

urgent missions: issuing banknotes, managing treasury, carrying out credit

policy in order to facilitate production and coordinating with the trade authorities for monetary management and struggling against the enemy The

foundation of the Vietnam National Bank was the result of the struggle

process to develop an independent, and autonomous monetary and credit

15

sysicm, marking a new development stop, ic, changing the quality of the national monetary and credit sector

Turing anti — American resistance war (1955 — 1975), the performance of the Vietnam National Bank focused on currency management and circulation under the socialist economic management principles; formulated and promoted bank credit scheme for state - owned and collective rnterprises; improved non-cash payment, established payment centers as commercial

banks; expanded intemational credit and payment relationship, implemented

the state exclusive scheme for foreign exchange management

The Victnam National Bank was renamed as the State Bank of Victnam on October 26, 1961 From 1975 to 1985 - the ten-year postwar economic

recovery period: The banking sector had quickly taken over banking system

of the old regime in the South, revoked the old banknolcs in both the South

kinds of banknotes of the Socialist Republic of Viclnam In this period, basically, the slate banking system did not implement

and the North and issued new

the market — oriented monetary, but still served as a budget tool

On March, 1988, the Council of Government issued Deeree No 33/HDBT

laying the foundation to "transform the banking system to commercial operations” In May 1990, the Ordinance on the State Bank of Vietnam and ordinance on banking, credit co-operatives and finance companies, were enacted, thereby officially changing the operation mechanism of the banking

system of Vietnam from one-tier to two — lier system, in which the SBV

implements the state management of currency trading and banking, and

implements the task of a central bank; The tier of commercial banks and

credit institutions conduct currency trading, credit, payment, foreign exchange and banking services in line with law

From 1990 up to now, the functions, roles and responsibilities and structure of the SBV continue to be supplemented and completed in line with the Law on the State Bank of Vietnam and the Law on Credit institutions dated 2/12/1997

and their revision in 2003; the the Law on the State Bank of Vietnam 2010,

the Law on Credit institutions 2010 and Degree No.88/1998/ND-CP dated November 2nd, 1988 and Degree No.52/2003/ND-CP dated May 19,2003, Degree No.96/2008/NĐ-CP dated August 26th, 2008 and Degree

No.156/2013/ND-CP dated November 11th, 2013

3.2 Structure of the Vietnam’s Banking Sector

Vietnam’s banking and financial services sector is under-developed but boasts

high growth potential Within this sector, growth is expected in retail banking,

in particular payment and wealth management services Demand for a range

of retail banking products is set to grow due to the huge untapped market

There is also opportunity to modernize Vietnam’s cash-based society where 90% of payment transactions are still in cash and the market for payment cards is relatively untapped

2018 remarked a significant growth in Vietnam economy GDP growth at

highest level in the last decade, GDP surpassed 7%, reaching 7.08% and CPI

is managed at 3.54% In banking industry, banks announced their tremendous

growth in profit even though limited credit growth

The banking and finance industry of Vietnam is divided into two groups

which are classified into 7 institutions according to availability upon giving

17

credit Credit institutions include bank, finance company, micro finance

company and lease company The other two institutions are securities, asset management and insurance company These institutions are supervised by the State Bank of Vietnam (SBV), the Banking Supervisory Agency(BSA), the Ministry of Finance(MOF), State Security Commission(SSC) and Insurance

| Structure | | ‘Major Factors of each industry

EE Es Bl Naty tice iy elt

cee U§D4£lbn USD 32be 181% oo

: “susie

(Banking Supervisory | 1) (State Security || (Insurance Socata Copnceisr OMAR hae, TÌM

Agency) | commission) || supervisory Agency) worse = So,

Bank Finance | | Securtien USD ITED USD OSI SO yale S)

2 Insurance

[im] [om]; [ate] “El or oer

Figure 3.1: Structure of the Industry of Banking and Finance in Vietnam

as of December 2018

(Source: SBV, MOF)

The Vietnam’s banking sector has been led by state-owned commercial banks

and the rest around 40 join-stock commercial banks, wholly foreign owned banks and joint-venture banks Also, about 100 foreign banks branches and representative offices participate in this competition The number of all banks and branches are relatively excessive regarding the size of banking industry of Vietnam, so the government of Vietnam has reduced government equity and there has been restructuring for small and medium sized banks Therefore, it

18

is expected that the numbers of banks to be decreased and the degree of

concentration would increase in the future

(Unit: billions USD)

Banking sector in Vietnam ‘Major Banks

Major state conn banks lead the banking industry of Vietnam

Foveign Bank 49 ase

4600

1 Karen ks Zt it nanef bớt hi Woaf] Tol fom.)

‘Abvanches and representative offices,

Figure 3.2: Structure of Banking Sector as of December 2018

(Source: SBV Financial Statement of each bank) Table 3.1: Key Statistical Ratios of credit institutions of Vietnam as of

Total Assets eae (Charter Capital]

11,064,239 10.62 806,156 12.89 376,338 12.47 12.14

(Source: SDV)

Market is dominated mostly by state-owned commercial banks (SOCBs: 44%)

and joint-stock commercial banks JOCBs: 54%) while 9 foreign-owned commercial banks (KOCHs) take only 2% of market by the number of banks

in Vietnam ‘he market share below is based on the financial statement that

29 commercial banks published

20

The credit growth of commercial banks in Vietnam is closely related to SBV’s guideline regarding it SBV announces credit growth rate every year and all banks playing in Vietnam must follow it The credit growth rate of Vietnam’s banking industry increased from 2012 to 2016 but declined for the last two recent years The deposit growth rate shows the trend of slight declining from 2012 to 2018 except between 2015 and 2016

Figure 3.4: Credit and Deposit Growth

(Source: Shinhan Bank Vietnam Business Report)

21

In 2017, SBV issued guideline on a resolution for resolving long outstanding

bad debts It was the first time that a clear legal framework for selling

collateral assets and bad debts was provided Therefore, following the recent trend, the bad debt ratio is expected to decrease in the future

(FOCBs) and Joint stock commercial banks (JOCBs) and the rest 16% is State

owned commercial banks (more than 50% share owned by State) Banks

include state-owned subsidiary banks, joint-venture banks, joint stock commercial banks and foreign bank branches The Law on Credit Institutions allows commercial banks to provide a wide range of products and services, from traditional financial products to fund management and securities business In recent years, the Vietnam’s banking system has gone through a

big wave of restructuring where smaller and weak banks were acquired by or

merged with bigger banks or came under supervision by the State Bank of

Vietnam (SBV)

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JVCBs

| FOCBs EJOCBs mSOCBs Total

2012 2013 2014 2015 2016 2017 2018

Note:

SOCBs: State owned commercial banks

JOCBs: Joint stock commercial banks

FOCBs: Foreign owned commercial banks

JVCBs: Joint venture commercial banks

Figure 3.6: Total Number of Banks in Vietnam from 2012 to 2018

(Source: Shinhan Bank Vietnam Business Report)

The state bank of Vietnam stated in its guidelines that all banks will implement Basel II by 2020 The minimum capital ratio required is 9 % under Basel 1, and 8% by Basel 2 Most of banks will need to expand capital to satisfy new standard of RWA because the capital ratio is expected to decrease after Basel 2 As of November 2019, 12 commercial banks below has implemented Basel IL

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