000067071 The evolution of Vietnamese commercial banks with WTO accession as the biggest contributor Sự phát triển của các ngân hàng thương mại Việt Nam với sự đóng góp lớn nhất là gia nhập WTO

000067071 The evolution of Vietnamese commercial banks with WTO accession as the biggest contributor Sự phát triển của các ngân hàng thương mại Việt Nam với sự đóng góp lớn nhất là gia nhập WTO

Facility of M %

and Tourism

BANKS WITH WTO ACCESSION AS THE BIGGEST CONTRIBUTOR

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T h e e v o lu tio n o f V ie tn a m e s e c o m m e r c ia l b a n k s

w ith W T O a c c e ssio n a s th e b ig g e st c o n tr ib u to r

Submitted by

Le Thi Thuy Ngoc

A thesis submitted as a requirement for the degree of

Bachelor o f Finance and Banking

Hanoi University Faculty o f Management and Tourism

THJ V IÊN OAI HOC HANOI HANOI UNIVERSITY LIBRARY

M a I 3 i l i e u 6W11

Hanoi November 2010

S T A T E M E N T O F A U T H O R S H I P

"Except where reference is made in the text o f the thesis, this thesis contains no material published elsewhere or extracted in whole or in part from a thesis or any other degree or diploma

No other person's work has been used without due acknowledgment in the main text of the thesis

This thesis has not been submitted for the award o f any degree or diploma in any other tertiary institution."

Student signature

Li Tty.

Date 3 9 / « / ¿0 1 °

i

A c k n o w le d g e m e n t

First and foremost, I owe my deepest gratitude to my supervisor, Ms Nguyen Quynh Anh, for instructing and guiding me from the beginning until the end This thesis would not have been possible without her patience, enthusiasm, motivation and immense knowledge She was the one who helped me tackle every problem while writing with her valuable instruction and guidance

My sincere thanks also go to Dr Pham Thanh Thai Linh, Head of Research and Financial Advisory Department o f Bao Viet Securities Company for offering me the summer internship opportunities, consulting and giving his criticism to my report, which served as the basis for this dissertation

I wish to express my warm and sincere thanks to every teacher in Faculty o f Management and Tourism Without their education not only in knowledge but also in behaviors, I would never have been me o f today

Moreover, I would like to extend my heartfelt gratitude to my mom, dad and brother for constantly supporting me Without their encouragement and understanding it would have been impossible for me to finish this work I wish to thank my parents for giving birth to

me and raising me with unconditional love throughout my life

Additionally, I am grateful to my best friends Ngoc and Van for helping me get through the difficult times, and for all the emotional support, entertainment, and caring they provided

Last but not least, I would like to thank my friends in Le Petit thesis group for their corporation and stimulating discussions during the time this thesis was written

ii

T a b le o f C o n te n ts

Statement o f authorship i

Acknowledgement ii

Table of co n ten t iii

Abbreviations vi

List of T ab les vii

List of Figures viii

Abstract x

CHAPTER 1: INTRODUCTION 1

CHAPTER 2: LITERATURE R E V IE W 3

2.1 Definition of commercial banks 3

2.2 Structure o f commercial ban k s 4

2.3 Main businesses o f commercial banks 4

2.4 Previous studies about the evolution of Vietnamese banking system 5

CHAPTER 3: RESEARCH M ETHOD 9

CHAPTER 4: RESEARCH FINDINGS 10

4.1 The development of banking system in V ietnam 10

4.1.1 Banking system before 1986 11

4.1.2 Banking system after 1986 12

4.2 Current situation of banking system 17

4.3 SWOT analysis o f commercial banking sector 25

4.3.1 Strengths 25

4.3.2 W eaknesses 28

4.3.3 Opportunities 32

4.3.4 Threats 34

4.4 Competition among banks 37

4.4.1 Competitive rivalry 37

4.4.2 Threat of new entrants 42

4.4.3 Threat of substitutes 44

4.4.4 Bargaining power of suppliers 46

4.4.5 Bargaining power of customers 47

iv

4.5 A nalysis o f impacts o f WTO accession on operational efficiency o f banking

system 47

4.5.1 Background 47

4.5.2 M ethodology 50

4.5.3 Results and Findings 52

4.5.4 Discussion of research results 67

4.6 Growth potential for banking sector 74

4.6.1 The penetration o f foreign banks 75

4.6.2 Retail banking services 76

4.6.3 Investment banking services 77

CHAPTER 5: LIMITATIONS AND IMPLICATIONS 80

5.1 Limitations 80

5.2 Implications 80

5.3 C onclusion 81

ANNEX: Data for hypothesis testing 82

A b b r e v ia tio n s

VBARD: Vietnam Bank for Agriculture and Rural Development

L ist o f T a b le s

Table 4-1 Commercial banks in Vietnam from 1991 to 1999 13

Table 4-2 Commercial banks in Vietnam and market share from 1993 to 1996 14

Table 4-3 GDP and Domestic credit from 1991 to 1999 14

Table 4-4 Commercial banks in Vietnam from 2001 to 2005 15

Table 4-5 GDP and Domestic credit from 2000 to 2 0 0 5 16

Table 4-6 Summary o f SWOT analysis 36

Table 4-7 CAR o f several banks in from 2005 to 2 0 0 9 40

Table 4-8 Securities companies owned by commercial b a n k s 79

vii

L ist o f F ig u r es

Figure 4-1 Credit/GDP ratio in 2005 16

Figure 4-2 Credit and Credit growth from 2005 to 2009 18

Figure 4-3 Deposit and Deposit growth from 2005 to 2009 18

Figure 4-4 Loan/Deposit ratio from 2005 to 2009 19

Figure 4-5 Loan/Deposit ratio compared within Asia in 20 0 8 19

Figure 4-6 Percentage o f fees and commission in bank’s total income in 2009 20

Figure 4-7 Fees and commission growth between 2008 and 2009 20

Figure 4-8 Income composition in 2009 21

Figure 4-9 Expenses composition in 2009 22

Figure 4-10 Assets composition in 2009 23

Figure 4-11 Liabilities composition in 2009 24

Figure 4-12 Political instablility index o f Asia countries in 2009 26

Figure 4-13 GDP from 2000 to 2010 37

Figure 4-14 Total assets growth o f banks in 2009 38

Figure 4-15 Owner’s equity growth of banks in 2009 39

Figure 4-16 Number of banks’ branches in 2 0 0 9 40

Figure 4-17 Cash/Total money supply (M2) ratio from 2005 to 20 0 9 45

viii

Figure 4-18 Cash/Total money supply (M2) ratio of Asian countries in 2008 44

Figure 4-19 Total investment growth from 2003 to 2009 48

Figure 4-20 t Probability, Degree of freedom: 50, Showing the Region of Rejection, 1 Level o f Significance 55

Figure 4-21 t Probability, Degree of freedom: 50, Showing the Region of Rejection, 1 Level o f Significance 58

Figure 4-22 t Probability, Degree of freedom: 60, Showing the Region of Rejection, 1 Level o f Significance 61

Figure 4-23 t Probability, Degree of freedom: 60, Showing the Region of Rejection, 1 Level o f Significance 64

Figure 4-24 t Probability, Degree o f freedom: 60, Showing the Region of Rejection, 1 Level o f Significance 67

Figure 4-25 Average Total assets growth o f banking sector from 2004 to 2009 68

Figure 4-26 Average Owner’s equity growth o f banking sector from 2004 to 2009 69

Figure 4-27 Return on average assets o f banking sector from 2004 to 2009 70

Figure 4-28 Return on average equity of banking sector from 2004 to 2009 70

Figure 4-29 Net interest margin o f banking sector from 2004 to 2 0 0 9 72

Figure 4-30 Average interest rates from 2004 to 2009 73

A b s tr a c t

This paper explores the evolution o f Vietnamese banking system over 59 years since its establishment in 1951, with special interest in commercial banking sector The purpose o f this study is to obtain an understanding about both quantitative and qualitative modifications in Vietnamese commercial banks during their evolutional process Analysis, interpretation and statistical hypothesis testing will be performed in order to fin d out the impacts o f WTO accession

on operational efficiency o f commercial banks The conclusion that most drastic changes occurred after Vietnam joined WTO will be discussed as well.

(This thesis has 13,394 words and 90 pages.)

CHAPTER 1: INTRODUCTION

The establishment of banking system in Vietnam dated back in 1951, since when the system has witnessed major changes Commercial banking sector was born after banking system transformed from one-tier to two-tier system, with a long story of evolution since then However, most of the important modifications happened in recent years, especially after the country opened its market for international integration Globalization and economic integration have become an inevitable trend, which gradually cover most areas of social life, let alone banking industry Integration process in the banking sector has significant influence to the economic situation of each country in the world Not only does it raise the efficiency of capital mobilization but it also help to develop the whole economy Moreover, economic integration improves the liquidity in financial market, which in turn promotes the operation of financial intermediaries and banking system as a whole Therefore, it is very important to study the influence of integration on banks

The establishment of ASEAN Free Trade Area (AFTA), the Bilateral Trade Agreement with the United States and most recently the entrance to WTO are major economic initiatives for Vietnam Among those, WTO entrance in 2007 may be considered the milestone of significant transformation not only for the country but also for commercial banks in particular Three years have passed since Vietnam became a WTO member, apart from new advantages and opportunities, there are still many difficulties and challenges that Vietnam has to overcome Although there have been many important achievements and innovation and the banking system has been

growing stronger than before, the development is still modest and inadequate in comparison with other countries in the world.

Realizing of the importance of international integration, this thesis will discuss the changes in Vietnamese commercial banks with special concentration on impacts of WTO entrance The dissertation will be divided into five chapters as follow:

Chapter 1 is the introduction.

Chapter 2 presents the literature review on the topic, including background and

previous studies about the evolution of banking system in Vietnam

Chapter 3 discusses the methodology of the study.

Chapter 4 provides the development of Vietnamese banking system and the overall

picture about the operation of commercial banks Moreover, a SWOT analysis is provided to identify the strengths, weaknesses, opportunities and challenges of Vietnamese banks in the context of international integration The chapter also includes a hypothesis testing about the influence of WTO accession on the efficiency

of the whole banking system The results are based on analysis about different aspects

of banking operation, which will serve as the basis for the discussion, proving that joining WTO is the biggest contributor for significant modification in commercial bank sector Furthermore, some potential growing trends in banking system that may take place in the near future are suggested

Chapter 5 points out the limitations and puts forward several implications of the

study

CHAPTER 2: LITERATURE REVIEW

2.1 Definition of commercial banks

There are various definitions of commercial banks, which are the most important type

of financial institution in the economy

• “A bank is any business offering deposits subject to withdrawal on demand and making loans of a commercial or business nature.” Rose, Hudgins 2009,

Bank management & Financial services, McGraw-Hill/Irwin.

• “A financial institution that provides services such as a accepting deposits and

giving business loans.” - Investopedia, viewed 9 November 2010, <

http://www.investopedia.eom/terms/c/commercialbank.asp >

• “A commercial bank is a financial institution with regular and primarily role

of accepting deposits from customers, repaying and using that money to lend,

discount or as a payment facility.” - Vietnamese Government 1990, The Ordinance on Banks, Credit cooperatives and Financial enterprises.

• “A commercial bank is a financial institution that is allowed for entire banking operations and other relevant business activities.” - Vietnamese Government

1998, Law on Credit cooperatives.

• “A commercial bank is a financial institution that is allowed for entire banking operations and other relevant business activities for profit, thus contributing to the economic objectives of the state.” Vietnamese Government 2000, Government Decree no 49/20001ND-CP dated 12 September 2000

Despite the slight difference, all the definitions above point out the main characteristics of commercial banks as financial institutions that accept deposits and make loans for business objectives.

2.2 Structure of commercial banks

The organization structure of a commercial bank includes two main parts: headquarter and branches/transaction points

• Headquarter is the main office with full operation, including a transaction center and many departments with distinguished functions, including: credit department, international payment department, foreign exchange department, treasury department, international relation department, administrative department and IT department

• Branches consist of first-level branches and second-level branches located in provinces There are also transaction points directly under branches or independent ones located in various places

2.3 Main businesses of commercial banks

Modern commercial banks involve in a wide variety of business activities to serve different purposes and needs of customers The main and most important businesses are still lending and mobilizing, though non-credit services are also growing faster and faster recently and may predominate the former activities

• Funds mobilizing activities

Commercial banks can mobilize capital under the following forms:

Taking deposits from individuals, organizations and other credit institutions in the form of demand deposits, term deposits and other types of deposits

Issuing certificates of deposit, bonds and other valuable papers to raise funds from domestic and foreign individuals or organizations

Borrowing from other domestic or foreign credit institutions

• Credit activities

Credit businesses of a commercial bank include: loan and advances to customers, guarantee, discount, financial leasing, factoring, import and export financing and overdraft

• Other activities

Apart from lending and mobilizing, commercial banks also participate in various business activities such as capital contribution and share purchase, foreign exchange trading, financial consultation, entrust, insurance and properties preservation

2.4 Previous studies about the evolution of Vietnamese banking system

Before this study was started, there had been several researches about the evolution of banking systems in different periods

Before WTO entrance, Ke 2003 provided a number of necessary reforms in banking system as preparation for WTO accession Trung 2003 talked about banking reforms during pre-integration period and plans for integration until 2010 Similarly, a paper

by Sam & Thu 2004 discussed significant changes that banking system needed to achieve before joining WTO

Several studies on Vietnamese banking system post-integration were also carried out

In the working paper titled “The Banking System of Vietnam after the Accession to WTO: Transition and its Challenges”, Bellocq and Silve 2008 assessed the stability in banking system post-liberization and concluded that there was still fragility and risk remaining in the sector Leung 2009 discussed about the banking industry’s development until the time of study and pointed out the need for further reforms in Vietnam’s key macroeconomic institutions Hung 2008 analyzed about the factors affecting banking operation and suggested several solutions for improving the efficiency of the system such as reducing liquidity risk, training staffs, cultivating services business and completing the privatization process of state-owned banks By examining banking sector from two perspectives: reform strategies and transitioning structure, Son 2009 figured out that Vietnamese commercial banking system was still imbalance in structure and slow in reform speed

In analyzing Vietnamese banking sector, researches on banking systems of countries within the region are revised as examples for Vietnam to follow during the reforming process Tam 2000, in his paper named “ Reforming Vietnam’s banking system: Learning from Singapore’s model”, pointed out the problems with reforms in Vietnam’s banking sector during the period from 1993 to 1998 and also gave an

overview about Singapore model as an experience to build an efficient banking system Another study by Satsanguan & Lewis 2007 explored the development and current situation of Thailand's financial and banking system As Vietnamese and Thai banking industry share similar characteristics, we can learn from the strengths and weaknesses of Thailand’s banking system assessed in the paper Okazaki 2007 presented the history of Chinese banking system as well as recent government reforms concerning state-owned commercial banks Chinese banking sector started its reforming process since 2002 and opened to foreign banks through WTO commitments since 2006 The study diagnosed current situation of commercial banks

in comparison with international standards to suggest further necessary reforms in the system Despite major restructuring of ownership and asset structure of Chinese commercial banks, the paper criticized the efficiency, profitability and quality of services Since China is also moving towards market economy like Vietnam, lessons can be learned from the reforms of Chinese banking system to improve the efficiency

of the banking sector in Vietnam

The above papers provide a solid foundation for any further study about Vietnam’s banking system However, most of them mainly focused on reforms of banking sector

on the regulatory perspective and their impacts on banking systems but not the core changes in the operational efficiency of commercial banks This thesis, therefore, is directed toward the evolution of Vietnamese commercial banks before and after WTO participation and looks deeply in the changes in terms of size, growth and profitability

of banking sector Major objectives of the study are:

1 To obtain an overview of banking history and the current situation of commercial banking sector.

2 To prove that joining WTO accession is the milestone that contributes to the recent significant changes and development of banking system in Vietnam

3 To project the growth potential of commercial banking sector in the future

CHAPTER 3: RESEARCH METHOD

Materials for the study are primarily collected through desk research from reliable resources such as State Bank of Vietnam, Vietnam Banks Association, commercial banks’ published information and prestigious audit companies Information are processed and analyzed in order to provide a deep understanding about the evolution and the current situation of Vietnamese commercial banking sector

In chapter 4, a quantitative study was carried out to investigate the impact of WTO entrance on the operational efficiency of commercial banks Firstly, financial information from 10 biggest banks were collected and processed to provide materials for the statistical tests In specification, growth rate of total assets and owner’s equity, required rate of return on average assets (ROAA), required rate of return on average owner’s equity (ROAE), and net interest margin (NIM) were calculated After that, student-t tests of means were taken to compare the difference between means of these variables before and after WTO accession Finally, results of the tests were interpreted and discussed further

CHAPTER 4: RESEARCH FINDINGS

This section presents the history of Vietnamese banking system since establishment until now as well as an overview of the current state of commercial banking sector A SWOT analysis is carried out to analyze four aspects: strengths, weaknesses, opportunities and threats of commercial banks in the present situation Competition among commercial banks is also assessed based on Porter’s five forces model The most important part of research findings is the analysis of impacts of WTO accession

on operational efficiency of commercial banks

4.1 The development of banking system in Vietnam

Vietnamese banking system has a history of nearly 60 years, during which substantial changes have taken place The development of the system is associated with the history of each revolutionary period

Before The August Revolution in 1945, Vietnam was a colony of France and the banking system was established mainly to serve the policy of French colonialism Bank of Indochina, which was the Central Bank of Vietnam, Laos and Cambodia, acted as an agent of French government to develop and control the monetary system

in the Indochina The bank was powerful tool for the French government to exploit the colonies and enrich mother country

After the success of The August Revolution, an independent financial system was needed for the government to develop and protect the country In 1950, when the

resistance against the French had certain victory over the battlefield and the liberated areas were expanded, the requirement for an independent economy and financial system became stronger than ever Therefore, in the Second Party Congress held in February, 1951, National Bank of Vietnam was founded on May 6th 1951 under Decree 15/SL signed by President Ho Chi Minh to carry out five urgent tasks: money issue, treasury management, credit policy implementation, currency management and monetary struggle.

Vietnam’s banking system has witnessed major changes during the process of industrializing and modernizing the economy In general, there are two main stages of

development: before and after Doi Moi in 1986 Before Doi Moi, the banking system

had only one tier in which the Central Bank served as both State bank and commercial

bank The fundamental change happened after Doi Moi when the one-tier banking

system transformed to a new two-tier banking system

4.1.1 Banking system before 1986

Before Doi Moi, National Bank of Vietnam operated independently in the financial

system with the main roles of issuing notes, withdrawing money from circulation, managing the State Treasury to increase revenue and developing bank credit to boost production During the period of resistance against the American (1955-1975), National Bank of Vietnam had the tasks of strengthening the currency markets, keeping stable prices in the markets as favorable conditions for economic recovery The bank also developed credit to promote the production of food and development of

agriculture, industry and trade All these tasks aimed to build the socialist economy in the North and liberate the South.

During the decade from 1975 to 1985, the country was reunified and economy was recovered Therefore, it was required that old banking system in the South to be liquidated and a uniform banking system to be built Thus, the National Bank of Vietnam in the South was nationalized and merged into the system of the State Bank

of Vietnam to carry out the tasks of releasing new currency and withdrawing oldmoney in the whole country in 1978 Banking system still operated as a budgetarytool of the government until the late 80’s

4.1.2 Banking system after 1986

• Banking system from 1987 to 1999

From 1986 until now, there were major reforms in Vietnam’s banking system as the

economy was transformed from centralized to open market mechanism under Doi Moi The function of State management was gradually separated from credit and

banking activities through the new mechanism In May 1990, two banking ordinances (the Ordinance on State Bank of Vietnam and Ordinance on Banks, Credit cooperatives and Financial enterprises) were passed and officially separated the banking system into 2 tiers: State bank & commercial banks For the first time, State management task was separated from banking business State Bank was in charge of currency trading management, credit, payments, foreign exchange and banking activities It conducted monetary policy, kept currency value stable and controlled the

two-tier banking system Commercial banks, including banks and non-bank organizations, were responsible for money, credit, payments and banking services in the whole economy This structure o f banking system is similar to that o f countries with market economy.

There was a rapid growth o f commercial banks with different types o f ownership during this period such as state-owned commercial banks, joint-stock commercial banks, representative offices o f foreign banks, credit cooperatives, people's credit funds and finance companies Four state-owned commercial banks were founded: Vietnam Bank for Agriculture and Rural Development (VBARD), Bank for Investment and Development o f Vietnam (BIDV), Vietnam Bank for Industry and Trade (Incombank) and Commercial Bank for Foreign Trade o f Vietnam (Vietcombank) The number o f joint-stock commercial banks increased tremendously from 4 in 1991 to 48 in 1995 (See Table 4-1) Besides, the authorization to establish joint ventures and foreign bank branches helped banking sector to attract foreign capital and update modem technology.

Table 4-1 Commercial banks in Vietnam from 1991 to 1999

(Source: State Bank o f Vietnam)

Although commercial banks grew in both number and type o f ownership, state- owned commercial banks still held most o f the credit and deposit market share, thus controlling the whole banking system Nonetheless, their market shares gradually decreased with the appearance of more commercial banks (See Table 4-

Table 4-2 Commercial banks in Vietnam and market share from 1993 to 19%

(Source: State Bank o f Vietnam)

In 1997, Law on State Bank o f Vietnam and Law on Credit Organizations replaced the two banking ordinances and became the official laws to govern the operation o f the whole banking system With this improved legal framework, commercial banking sector became more and more important in raising capital for the economy and fostered the economic growth during the 90’s.

The above table showed an upward trend in GDP and domestic credit during a ten- year period from 1991 to 1999 As can be seen, domestic credit gradually increased over the years together with strong growth in GDP Domestic credit/GDP growth also experienced a period o f increase, especially from 1991 to 1994 Hence, together with the development o f commercial banks, credit became a more important part o f the economy.

• Banking system from 2000 to 2005

Since 2000, the government saw a necessity for restructuring the banking system because o f serious problems such as inefficient operation and non-performing loans

In 2000, the asset management companies were established to address the issue o f non-performing loans in state-owned commercial banks The equitization plan for state-owned commercial banks was initially designed in 2004 Moreover, the number

o f joint-stock commercial banks reduced from 48 in 1991 to 37 in 2005 because banks that operated inefficiently were closed or consolidated However, the number o f joint- venture banks and foreign bank branches still had a tendency to increase.

Table 4-4 Commercial banks in Vietnam from 2001 to 2005

(Source: State Bank o f Vietnam)

During this period, commercial banks showed their important role as the main channel to mobilize and provide capital to the economy According to Hung 2007, 30% o f investment capital for development and 40% o f total need for capital of enterprises were supplied by banking credit Total domestic credit grew gradually from 2000 to 2005 and by 2005 the ratio o f total credit/GDP reached a record high

4.2 Current situation of banking system

On January 11, 2007, Vietnam became an official member of WTO and committed to open its banking sector within a seven-year period The integration to international market provided not only opportunities but also many challenges to Vietnam’s banking system

Vietnam’s banking industry has witnessed tremendous growth recently, not only in quantity of banks but also in operation scale From only nine banks in 1991, the number of banks in 2009 increased almost ten times By the end of 2009, Vietnam has

89 banks, including 5 state-owned commercial banks, 39 joint-stock commercial banks, 40 branches of foreign banks and 5 joint-venture banks Due to WTO commitments to open the banking sector, there were five one-hundred percent foreign-owned banks licensed to operate in Vietnam

The growth of banking sector focused on two traditional activities: lending and mobilizing Credit and deposit throve during 2005-2009 with the average rate of 34.8% and 33.2% per year, respectively In 2007, credit growth became too hot with the rate of 54% because of high demand for securities and real estate investments (See Figure 4-2 and 4-3)

billion VND 2,000 T

Figure 4-2 Credit and Credit growth from 2005 to 2009

Figure 4-3 Deposit and Deposit growth from 2005 to 2009

(Source: GSO)

Rapid credit growth led to greater risks in the banking systems Loan to deposit ratio o f the whole industry was always over 90% during the period 2005-2009 and very high compared to the average ratio o f other countries in the region, which was about 81% in 2008 (See Figure 4-4 and 4-5)

Malaysia

Thailand

India China Indonesia

Percentage of fees and commission in total Income

25.3%

Figure 4-6 Percentage o f fees and commission in bank’s total income in 2009

(Source: Banks’ financial reports)

Fee and commission growth between 2008 and 2009

Figure 4-7 Fees and commission growth between 2008 and 2009

(Source: Banks’ financial reports)

Figure 4-6 and 4-7 present the development o f income from services o f banks The average growth rate o f fee and commission income in 2009 was 38% compared to that

o f 2008 Banks with highest proportion of fee and commission income and strongest growth rates were ones which pursue the strategy o f developing services activities, such as Sacombank, Asia Commercial Bank, Techcombank and Millitary Bank.

To have a better look at the composition o f the whole banking system, data from 10 biggest banks in 2009 were collected and studied These banks included Agribank, BIDV, Vietcombank, Vietinbank, ACB, Sacombank, Techcombank, Millitary Bank, Eximbank and Saigon Commercial Bank Total income, expenses, assets and liabilities o f these commercial banks were analyzed in light o f the make-up components.

■ Trading securities Fee and

At the moment, lending and deposit are still main activities o f banks as banks’ profits are mostly from interests Two largest sources o f income o f the banking sector are net interest income and service charges, which account for 69% and 11% o f total income respectively Despite the tremendous growth o f fee income and commissions recently, services activities are still new to banks and hold only a small part o f total income Some smaller portions o f profit come from trading o f foreign currencies and securities and investment in other companies.

0%

■ Interest expenses

■ Operating expenses

u Income tax expenses

■ Fee and commission expenses

expenses Surprisingly, service costs occupy only a small fraction (1%) while income from this segment is large, showing a significant potential for the development o f services business in the future.

investment securities (12%) Thus lending, interbank activities and securities

> - t

)

investment are the most important activities in the banking system Meanwhile, cash, gold and precious stones represent only a small part o f the asset structure (2%), which means that banks do not focus on gold and precious stones trading.

* Deposits from customers

from other credit institutions

« Amounts due to Gov &

SBV

i Valuable papers issued

■ Other liabilities

■ Other borrowed funds

Figure 4-11 Liabilities composition in 2009 (Source: Banks’ financial reports)

In the debt structure o f the industry, deposits from customers account for the largest proportion, which is 68% Apart from customers deposits, loans and deposits in other credit institutions and borrowing from SBV also play an important role in banks’ liabilities These two components occupy 10% and 8% o f total liabilities o f banks, respectively To mobilize funds, commercial banks also rely on issuing valuable papers such as certificates o f deposits, bonds etc, which hold 6% o f total debts o f banks.

In general, banks’ main source o f funds is deposits from customers and main use o f funds is loans to customers Lending and mobilizing are still main activities o f banking sector However, commercial banks are gradually switching to other

activities such as personal services, interbank credit, as these businesses have a great potential to grow in the near future.

4.3 SWOT analysis of commercial banking sector

On January 1 2007, Vietnam formally joined the World Trade Organization (WTO) This event opened up not only new opportunities for development but also major challenges to be overcome when Vietnam engaged in the largest trade organization in the world In order to cope with the changes in business environment, commercial banks have to maximize their existing strengths and counter their weaknesses as well

as take hold of opportunities and minimize threats The following section provides a

SW OT analysis of Vietnamese commercial banking sectors

4.3.1 Strengths

• Good knowledge of domestic market

An important strength o f Vietnamese commercial banks lies in their domestic advantages in the market W ith a long history of operation within domestic market, they have deep understanding about the operation and characteristic of Vietnamese market as well as the customs and behaviours of domestic customers Furthermore, they also build strong relationship with their clients including large state-owned enterprises and local businesses, which will help them to obtain better information about their trading partners

• Stable political position

The political environment o f Vietnam is quite stable, which is a favourable condition for commercial banks to operate The level o f political instability o f Vietnam is considerably low in comparison with other countries in the region (See Figure 4-12) According to U.S Department o f Commerce's 2007 report, Vietnam is "essentially stable,” even though the country has undergone significant domestic and international transitioning recently It is also noted that there is little opposition to the ruling Communist Party o f Vietnam, though complaints against corruption have increased Stable political condition enables banks to grow their activities, especially lending and mobilizing, thus increase their profits Moreover, foreign investors are more encouraged to invest and establish their business in a stable country, which in turn develop die Vietnamese banking system.

Political Instability index of Asia countries in 2009

Figure 4-12 Political instability index o f Asia countries in 2009

(Source: visionofhumanity.org)

• Abundant human resources

Another advantage is that Vietnam has an abundant supply of young human resources According to the 2009 Population and Housing Census by GSO, 66.1% of Vietnamese population is at the working age of 15 to 60 years old They are not only a pool of human resources but also a huge potential customer base for banks A McKinsey’s study shows that Vietnamese people from 21 to 29 years old will play an important role in the rapid growth of banking sector in the coming years As young people have an open attitude for innovations such as online banking service and mobile banking, they are more likely to experience these services than older people

• Credit and deposit market domination

Credit and deposit market in Vietnam are mostly dominated by domestic commercial banks They account for approximately 90% of the market share, while only 10% are

in the hands of foreign banks According to financial specialists, despite some siructural renovations such as increase in the number of foreign banks, market share

of domestic credit institutions is not likely to witness major changes

• Regulatory advantages

Domestic banks receive great supports from State bank of Vietnam and regulators They are not limited in the operation scale and number of branches, whereas foreign banks have to face with several restrictions in these fields The regulatory constrains sich as allowing foreign banks to hold only 30% of owner’s equity in domestic banks

help to restrict the influence of foreign banks to Vietnamese economy during the integration process.

4.3.2 Weaknesses

• Limited financial capacity

The biggest weakness of Vietnamese commercial banks is their limited financial capacity Vietnamese banks have very small equity capital compared to foreign ones Four largest banks, which are Agribank, BIDV, Vietcombank, and Vietinbank, have equity capital of US$ 1010 million, US$ 900 million, US$ 858 million and US$ 877 million, respectively as of 2009 Meanwhile, equity capital of major banks in the world such as HSBC and Standard Chartered Bank already reached US$ 100.2 billionand US$ 22.7 billion as of 2008 Although commercial banks have attempted to raisetheir equity recently, the capital scale of the whole banking system is still so limited that it prevents banks from upgrading their technology and introducing modem services

• Undeveloped, monotonous services

Although banking sector has witnessed major development recently, banking services are still monotonous and poor in both quality and quantity Traditional services such

as foreign currency exchange, accepting deposits, lending and conducting checking accounts for business customers, are still preferred by most banks In contrast, the