Vietnam commercial banking report q1 2011

Business Environment Outlook Commercial Banking Business Environment Ratings Table: Vietnam’s Commercial Banking Business Environment Rating Risks to Realisation of Returns Source: BMI

Business Monitor International

© 2011 Business Monitor International

All rights reserved

All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher

DISCLAIMER

BANKING REPORT Q1 2011

INCLUDING 5-YEAR INDUSTRY FORECASTS TO 2015

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2011

CONTENTS

Executive Summary 5

Table: Levels (VNDbn) 5

Table: Levels (US$bn) 5

Table: Levels At August 2009 5

Table: Annual Growth Rate Projections 2010-2014 (%) 5

Table: Ranking Out Of 59 Countries Reviewed In 2010 6

Table: Projected Levels (VNDbn) 6

Table: Projected Levels (US$bn) 6

SWOT Analysis 7

Vietnam Commercial Banking SWOT 7

Vietnam Political SWOT 7

Vietnam Economic SWOT 8

Vietnam Business Environment SWOT 8

Business Environment Outlook 9

Commercial Banking Business Environment Ratings 9

Table: Vietnam’s Commercial Banking Business Environment Rating 9

Commercial Banking Business Environment Rating Methodology 9

Table: Asia Commercial Banking Business Environment Ratings 10

Global Commercial Banking Outlook 12

Asia Banking Sector Outlook 18

Table: Banks' Bond Portfolios 20

Table: Asia Commercial Banking Business Environment Ratings 21

Table: Comparison Of Loan/Deposit, Loan/Asset And Loan/GDP Ratios 22

Table: Anticipated Developments In 2011 23

Table: Comparison Of Total Assets, Client Loans And Client Deposits, 2009-2010 (US$bn) 24

Table: Comparison Of Per Capita Deposits, 2010e (US$) 25

Table: Interbank Rates And Bond Yields, 2009-2010 26

Vietnam Banking Sector Outlook 27

Economic Outlook 30

Table: Vietnam Economic Activity, 2007-2015 31

Company Profiles 33

Vietcombank 33

Table: Key Statistics For Vietcombank, 2004-2008 (VNDmn) 34

BIDV 35

Table: Key Statistics For BIDV, 2004-2006 (VNDmn) 36

VietinBank 37

Table: Key Statistics For VietinBank, 2005-2008 (VNDmn) 38

Agribank 39

Table: Balance Sheet (VNDmn, unless stated) 40

Table: Balance Sheet (US$mn, unless stated) 40

Table: Key Statistics For MHB Bank, 2006-2008 (VNDmn) 42

Habubank 43

Table: Key Statistics For Habubank, 2004-2007 (VNDmn) 44

Eximbank 45

Table: Balance Sheet (VNDmn, unless stated) 46

Table: Balance Sheet (US$mn, unless stated) 46

Table: Key Ratios (%) 46

Sacombank 47

Table: Stock Market Indicators 48

Table: Balance Sheet (VNDmn, unless stated) 48

Table: Balance Sheet (US$mn, unless stated) 49

Table: Key Ratios (%) 49

Saigonbank 50

Table: Stock Market Indicators 50

Table: Balance Sheet (VNDmn, unless stated) 51

Table: Balance Sheet (US$mn, unless stated) 51

Table: Key Ratios (%) 51

SeABank 52

Table: Balance Sheet (VNDmn, unless stated) 53

Table: Balance Sheet (US$mn, unless stated) 53

Table: Key Ratios (%) 53

BMI Banking Sector Methodology 54

Commercial Bank Business Environment Rating 55

Table: Commercial Banking Business Environment Indicators And Rationale 56

Table: Weighting Of Indicators 57

Executive Summary

Table: Levels (VNDbn)

Date

Total Assets

Client Loans

Bond Portfolio Other

Liabilities&

Capital Capital

Client Deposits Other

August 2008 1,659,548.7 1,259,980.0 149,816.7 249,752.01,659,548.7 217,173.0 1,205,967.7 236,408.0August 2009 2,065,761.6 1,706,340.0 173,358.3 186,063.32,065,761.6 286,547.0 1,594,992.6 184,222.0

Client Loans

Bond Portfolio Other

Liabilities

& Capital Capital

Client Deposits Other

Source: BMI, SBV

Table: Levels At August 2009

Loan/Deposit Ratio Loan/Asset Ratio Loan/GDP Ratio

GDP Per Capita,

US$

Deposits Per Capita, US$

Source: BMI, SBV

Table: Annual Growth Rate Projections 2010-2014 (%)

Table: Ranking Out Of 59 Countries Reviewed In 2010

e/f = BMI estimate/forecast Source: BMI, SBV

Table: Projected Levels (US$bn)

SWOT Analysis

Vietnam Commercial Banking SWOT

ƒ Untapped potential

ƒ The high savings rate of Vietnamese households

ƒ Increasingly open to foreign banks since accession to the WTO in 2007

ƒ The role of state-owned banks is steadily decreasing

Weaknesses ƒ Domestic banks lack the capital and technology to sustain high credit growth

ƒ The financial accounts of many banks are still opaque

ƒ High exposure to real estate and stock market loans among smaller banks

Opportunities ƒ The population is still under-banked

ƒ Income levels are likely to rise strongly over the medium term

Threats ƒ The National Congress of the Communist Party of Vietnam in January 2011 could

result in a shift of economic policy away from further liberalisation

Vietnam Political SWOT

Strengths ƒ The Communist Party government appears committed to market-oriented reforms,

although specific economic policies will undoubtedly be discussed at the 2011 National Congress The one-party system is generally conducive to short-term political stability

ƒ Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia

Weaknesses ƒ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

ƒ There is increasing (albeit still limited) public dissatisfaction with the leadership’s tight control over political dissent

Opportunities ƒ The government recognises the threat that corruption poses to its legitimacy, and

has acted to clamp down on graft among party officials

ƒ Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system

Threats ƒ The slowdown in growth in 2009 and 2010 is likely to weigh on public acceptance of

the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocratic rule

ƒ Although strong domestic control will ensure little change to Vietnam’s political scene in the next few years, over the longer term, the one-party-state will probably

be unsustainable

ƒ Relations with China have deteriorated in recent years due to Beijing’s more assertive stance over disputed islands in the South China Sea and domestic

Vietnam Economic SWOT

Strengths ƒ Vietnam has been one of the fastest growing economies in Asia in recent years,

with GDP growth averaging 7.6% annually between 2000 and 2007

ƒ The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004

Weaknesses ƒ Vietnam still suffers from substantial trade, current account and fiscal deficits,

leaving the economy vulnerable as the global economy continued to suffer in 2010

The fiscal picture is clouded by considerable ‘off the books’ spending

ƒ The heavily-managed and weak dong currency reduces incentives to improve quality of exports, and also serves to keep import costs high, thus contributing to inflationary pressures

Opportunities ƒ WTO membership has given Vietnam access to both foreign markets and capital,

while making Vietnamese enterprises stronger through increased competition

ƒ The government will, despite the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector

ƒ Urbanisation will continue to be a long-term growth driver The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s

Threats ƒ Inflation and deficit concerns have caused some investors to re-assess their hitherto

upbeat view of Vietnam If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis

ƒ Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy

Vietnam Business Environment SWOT

Strengths ƒ Vietnam has a large, skilled and low-cost workforce which has made the country

attractive to foreign investors

ƒ Vietnam’s proximity to China and South East Asia, and its good sea links, make it a good base for foreign companies to export to the rest of Asia, and beyond

Weaknesses ƒ Vietnam’s infrastructure is still weak Roads, railways and ports are inadequate to cope

with the country’s economic growth and links with the outside world

ƒ Vietnam remains one of the world’s most corrupt countries Its score in Transparency International’s 2010 Corruption Perceptions Index was 2.7, placing it in 22nd place in the Asia Pacific region and 116th overall

Opportunities ƒ Vietnam is increasingly attracting investment from key Asian economies, such as Japan,

South Korea and Taiwan This offers the possibility of the transfer of high-tech skills and knowhow

ƒ Vietnam is pressing ahead with the privatisation of state-owned enterprises and the liberalisation of the banking sector This should offer foreign investors new entry points

Threats ƒ Ongoing trade disputes with the US, and the general threat of American protectionism,

which will remain a concern

ƒ Labour unrest remains a lingering threat Failure by the authorities to boost skills levels could leave Vietnam a second-rate economy for an indefinite period

Business Environment Outlook

Commercial Banking Business Environment Ratings

Table: Vietnam’s Commercial Banking Business Environment Rating

Risks to Realisation of Returns

Source: BMI

Commercial Banking Business Environment Rating Methodology

Since Q108, we have described numerically the banking business environment for each of the countries

surveyed by BMI We do this through our Commercial Banking Business Environment Rating (CBBER),

a measure that ensures we capture the latest quantitative information available It also ensures consistency across all countries and between the inputs to the CBBER and the Insurance Business Environment Rating, which is likewise now a feature of our insurance reports Like the Business Environment Ratings

calculated by BMI for all the other industries on which it reports, the CBBER takes into account the

limits of potential returns and the risks to the realisation of those returns It is weighted 70% to the former

The evaluation of the Limits of Potential Returns includes market elements that are specific to the

banking industry of the country in question and elements that relate to that country in general Within the 70% of the CBBER that takes into account the ‘Limits of potential returns’, the market elements have a 60% weighting and the country elements have a 40% weighting The evaluation of the Risks to

Realisation of Returns also includes banking elements and country elements (specifically, BMI’s

assessment of long-term country risk) However, within the 30% of the CBBER that take into account the risks, these elements are weighted 40% and 60%, respectively

Further details on how we calculate the CBBER are provided at the end of this report In general, though, three aspects need to be borne in mind in interpreting the CBBERs The first is that the market elements

of the Limits of Potential Returns are by far the most heavily weighted of the four elements They account for 60% of 70% (or 42%) of the overall CBBER Second, if the market elements are significantly higher than the country elements of the Limits of Potential Returns, it usually implies that the banking sector is (very) large and/or developed relative to the general wealth, stability and financial infrastructure in the country Conversely, if the market elements are significantly lower than the country elements, it usually means that the banking sector is small and/or underdeveloped relative to the general wealth, stability and financial infrastructure in the country Third, within the Risks to Realisation of Returns category, the market elements (ie: how regulations affect the development of the sector, how regulations affect

competition within it, and Moody’s Investors Service’s ratings for local currency deposits) can be markedly different from BMI’s long-term risk rating

Table: Asia Commercial Banking Business Environment Ratings

Limits of Potential Returns

Risks to Potential

Market Structure

Country Structure

Market Risks

Table: Asia Commercial Banking Business Environment Ratings

Limits of Potential Returns

Risks to Potential

Market Structure

Country Structure

Market Risks

Global Commercial Banking Outlook

Emerging Markets Still Set To Outperform

Our outlook for commercial banking in emerging markets remains broadly positive, with more robust economic growth and healthier banking systems than in most of their developed world counterparts We emphasise that the key macroeconomic dynamics underpinning global banking in 2011 will continue to

be deflation and deleveraging in much of the developed world, contrasting with inflation and lending growth in emerging markets The implementation of quantitative easing policies by major central banks, notably the US Federal Reserve and the Bank of Japan, will result in the purchase of hundreds of billions

of dollars worth of government securities in an effort to grease the wheels of lending While we are not convinced that quantitative easing will have significant positive effects for economic growth, or even for lending, increasing central bank support will further reduce the potential for another systemic banking crisis, which fits with our core assumptions However, it could fuel asset price inflation and tighter policy

in emerging markets, which could eventually lead to a boom-and-bust cycle Meanwhile, the introduction

of a new Basel framework on banking regulation will also underpin confidence in banking stability, and does not greatly threaten lending growth, given banks’ pre-emptive capital raising and the gradual

schedule for Basel III implementation

Regional Outlooks: Uneven Recovery Underway

Below we present brief outlooks for regional banking sectors:

Developed states: We continue to expect underperformance by the developed world’s banking sectors in

terms of loan growth and profitability compared with emerging markets This is due to our

below-consensus outlook for economic growth in developed states, the likelihood of retrenchment by both households and governments, and the potential for tighter sector regulation In the US, loan growth will remain slow due to ongoing post-recession household deleveraging A major concern for the eurozone heading into 2011 is the impact that government austerity measures will have on demand Should

governments cut too far at a time when consumer spending and investment is yet to sufficiently recover, growth could quickly stagnate This would further dent the operating outlook for European banks and could mean more deterioration in asset quality as non-performing loans edge higher

Weak Outlook

Europe – Banking Sector Asset Growth, % y-o-y

Source: BMI, central banks

Emerging Asia: After suffering only minor profit damage from the global financial crisis due to their

strong capitalisation and less risky lending practices than in the US and Europe, Asian banks are now increasingly positioning for growth The well capitalised nature of the region’s banking sector is the main reason why banks are now in a position to expand their loan books and support domestic economic growth, and with the exception of Japan we continue to forecast solid equity-to-asset ratios preventing any major banking sector dislocation, even if property bubbles across the region continue to inflate and burst in 2011 Despite the limited crisis risks we remain concerned that profitability will take a significant hit once hot money inflows into Asia slow down

Latin America: Thanks to prudential regulation and a lack of cross-border lending few banking sectors

in Latin America face systemic risks, even with the wave of foreign capital entering the region We believe that over the long-term time, Peru offers the greatest potential in the region for commercial banking sector expansion, followed by Mexico and Guatemala

Searching For Potential

Latin America – Commercial Banking Sector Assets-to-GDP, %

Source: BMI, central banks, national financial regulators

Emerging Europe: Our outlook for the emerging Europe banking sector is mixed, reflecting the

divergent growth trajectories that we forecast for the region We have long highlighted Turkey and Poland as economic outperformers in the region, with domestic demand driving rapid economic

convergence with Western peers We highlight Hungary and Romania as two countries where the outlook for the banking industry is negatively affected by domestic economic conditions

Middle East and North Africa: That a significant share of lending throughout MENA was directed

towards the real estate and construction sectors, particularly in Bahrain and Kuwait, in the run-up to 2009 underscores our view that a return to pre-crisis asset and loan growth rates will be unlikely for the

foreseeable future While the outlook for lending to the real estate sector appears relatively weak, except

in Saudi Arabia, we expect the infrastructure sector to play an increasingly important role in driving loan growth, particularly given the number large-scale projects in the pipeline While a robust bounce in asset growth and profitability should not be expected in the short term, a recovery (within the Gulf Cooperation Council in particular) should begin to gain steam in H111 concomitant with publicly funded investment projects

Sub-Saharan Africa: Sub-Saharan Africa’s major banking sectors (South Africa, Nigeria, Ghana and

Kenya) all survived the global financial crisis and are continuing to rebound from the various difficulties they experienced in 2009 Rebounding economic activity and improved liquidity are bolstering growth,

and the most recent available data for the region show that the recovery in the banking sector is

accelerating

South Africa Lagging

Africa – Banking Sector Asset Growth, % y-o-y

Source: South African Reserve Bank; Central Bank of Nigeria; Central Bank of Kenya

Basel III: Still Some Uncertainty

The Basel Committee on Banking Supervision signed off its new capital requirements in September 2010, marking a regulatory regime shift from Basel II to Basel III Overall, we believe that Basel III will make the global banking system more robust However, some questions remain about the implementation and enforcement of the new regulations The key revisions were:

ƒ The quality and size of capital ratios are to be strengthened These will include a common equity (core) capital requirement of 4.5% of risk-adjusted assets plus a ‘conservation buffer’ of 2.5% for a total requirement of 7.0% (compared with the 2.0% minimum under Basel II) Failure to meet the conservation buffer will lead to constraints on dividend payments and bonuses The broader Tier 1 ratio requirement is being raised from 4.0% to 6.0% (8.5% including the conservation buffer)

ƒ Tier 1 equity capital is going to be redefined to exclude lower-quality assets, including deferred tax assets, while asset weightings will be less forgiving All of this will toughen ratio

requirements, meaning that some banks that meet current criteria will have to improve their capital levels to meet Basel III standards

ƒ The less quantifiable amendments include the creation of a ‘macroprudential overlay’ This includes mandating that banks build up buffers of a 0-2.5% of risk-adjusted assets in the upward part of the economic cycle that can be drawn upon in slowdowns Furthermore, the Basel Committee are exploring measures to deal with the systemic risks caused by banks that are ‘too big to fail’, which may include larger capital requirements and surcharges for big banks

Raising The Bar

Capital Requirements As % Of Risk-Weighted Assets

Source: Bank for International Settlements

Basel III is not going to make a major difference to BMI’s short-term forecasts For a start, the revisions

are certainly more stringent but not as tough as they could have been, and banks (and markets) were slightly relieved at the announcement Banks also have until 2019 to comply with the new regulations, meaning that implementation will be gradual and have a more limited effect on the short-term outlook In addition, banks are generally already ahead of the game on capital raising The new requirements will not require major levels of new equity issuance on aggregate, with most major banks easily meeting the broad Tier 1 criteria set out by Basel III These are minimum standards and in the post-Lehman environment investors have looked for banks to build stronger capital bases anyway

There are, however, unanswered questions about the new regulatory requirements that cloud the term outlook The biggest questions for us is how the countercyclical measures will work and what further steps might be taken to rein in risks from ‘too big to fail’ banks As it stands, domestic authorities will have to decide whether the rate of economic activity exceeds the desirable, pre-set pace of growth for any particular country We believe that since the criteria will boil down to country-specific regulations it will be difficult to reach consensus on this issue Regulations that are too stringent for a specific country, particularly if the economic trajectory is not as expected, would force further capital raising or profit retention and could well lead to lower loan growth It would certainly complicate the work of fiscal and monetary policymakers in participating countries as it would add another layer of countercyclicality to the economy, in addition to tighter or looser official policy

medium-Other questions relate to the composition of capital For example, the requirement for banks to hold sufficient cash and government paper to meet a liquidity coverage ratio and survive a 30-day market crisis may be difficult to meet for emerging market banks operating in countries without deep, liquid

government bond markets As such, the Basel Committee agreed that this requirement would be

‘observational’ until 2015, but other questions remain Even if these liquidity requirements are met, we question whether the perceived risk of government paper is line with the actual risk: what of sovereign

bonds in ‘safe’ countries that are, in BMI’s view, at risk of restructuring or defaulting, including some in

the eurozone such as Greece and Portugal?

Ultimately, Basel III’s success will be determined by whether it improves the stability of the banking sector while not stifling innovation, profitability and lending We believe it is an improvement on the previous framework but several questions still need to be answered

Asia Banking Sector Outlook

Banks Riding The Liquidity Wave

With the developed world’s central banks accelerating their monetary stimulus measures, the potential for

a continued surge in hot money inflows into Asia is high This poses major risks for local banking sectors, not only due to the formation of asset bubbles, but also in lending to the real economy as banks increase credit expansion across the region There could be a spike in non-performing loans (NPLs) if easy

monetary policy is forcefully reversed down the line, although the crisis risks are minimal

Governments and central banks in Asia have kept their currencies artificially weak in recent years This has attracted a surge in speculative inflows as investors believe these currencies will eventually have to be revalued Because of the large current account surpluses across the region, most countries are exporting capital and capital controls are unlikely to stop the flood of money coming in While South Korea sets limits on banks’ exposure to foreign exchange derivatives, Indonesia has introduced measures such as a one-month minimum holding period on monetary instruments issued by the central bank and Thailand removed the tax exemption of foreign purchases of government bonds, such measures are unlikely to stem the tide The solution would be for Asian central banks to allow their currencies to revalue to the extent that this would eliminate their current account surpluses, but we believe this is unlikely and even if

it were to happen it could attract more destabilising inflows in the interim Whatever path is chosen, it seems that Asian banks would be forced to absorb an increasing amount of liquidity While this should help profit growth and keep economic activity buoyant, the risk of a rise in NPLs in future is growing

Hot Money Pouring In

Asia – Reserves At Asian Central Banks, US$bn

Source: BMI, central bank data

Crisis Passes, Positioning For Growth

After suffering only minor profit damage as a result of the global financial crisis due to strong

capitalisation and less risky lending practices than in the US and Europe, Asia’s banks are now

increasingly positioning for growth Hong Kong has been the most clear example, where unfettered currency inflows have allowed banks to increase lending, with credit growth coming in at 24.1% year-on-year (y-o-y) in August 2010, after being in deeply negative territory 12 months earlier As it has the region’s most tightly managed peg and one of the highest current account surpluses this stands to reason

We continue to caution, however, that burgeoning property prices could take a dip in 2011, undermining loan quality for a large chunk of the banking sector

While Hong Kong is perhaps the clearest example, we are seeing a shift in tact across the board In Singapore and Taiwan, also economies with huge fundamental upside pressure on their currencies, loan growth has risen substantially After dropping into negative territory in late 2009, Singaporean loan growth has surged to almost 10% y-o-y in August 2010, and this is on top of continued overseas

expansion The Taiwanese banking sector’s loan trajectory has shown a similar trend, supported by the recent improvement in relations with Beijing Meanwhile, Thailand’s loan-to-deposit ratio has ticked up amid a newfound appetite for domestic lending, while Malaysian banks have accelerated lending with support from widening interest margins and are increasingly expanding operations overseas

Bubble Risks Grow

It is no surprise that the economies that are most actively seeking to prevent currency appreciation (Hong Kong, China, Taiwan and Singapore) are experiencing the most significant upside pressure on local property prices as hot money inflows are channelled into this area Central bank sterilisation measures have clearly been inadequate in preventing domestic currency weakness measures from feeding through

to local monetary expansion As long as the US dollar continues to weaken, property bubbles across Asia will continue to build, in our view

Well Capitalised And Able To Withstand Potential Shocks

The well capitalised nature of the region’s banking sector was the main reason why banks are now in a position to expand their loan books and support domestic economic growth, and with the exception of Japan we continue to anticipate solid equity-to-asset ratios preventing any major banking sector

dislocation, even if property bubbles across Asia continue to inflate and burst in 2011 Tier 1 capital is estimated to be above 10% across Asia, far in excess of the 6% figure agreed upon in the Basel III

requirements Even in China, where we believe that the government may have to stand behind some of the larger banks if the property bubble bursts and local governments threaten to default on loans, Tier 1 capital remains high compared to US and European banks, with Industrial and Commercial Bank of China, one of the world’s largest bank by market value, boasting a common equity-to-assets ratio of roughly 10% Despite the limited crisis risks, we remain concerned that profitability will take a significant

Table: Banks' Bond Portfolios

Bond Portfolio, US$bn Bond, % total assets Year-on-Year growth, %

Table: Asia Commercial Banking Business Environment Ratings

Limits of Potential Returns

Risks to Potential

Market Structure

Country Structure

Market Risks

Table: Comparison Of Loan/Deposit, Loan/Asset And Loan/GDP Ratios

Loan/

Deposit Ratio, % Rank Trend

Loan/

Asset Ratio, % Rank Trend

Loan/

GDP Ratio,

Source: Central banks, regulators, BMI

Table: Anticipated Developments In 2011

Loan/Deposit

Loan Growth, US$bn

Deposit Growth, US$bn

Residual, US$bn

Table: Comparison Of Total Assets, Client Loans And Client Deposits, 2009-2010 (US$bn)

Total Assets

Client Loans

Client Deposits

Total Assets

Client Loans

Client Deposits

Table: Comparison Of Per Capita Deposits, 2010e (US$)

GDP Per Capita

Client Deposits Per Capita

Rich 20% Client Deposits Per Capita

Poor 80% Client Deposits Per Capita

Table: Interbank Rates And Bond Yields, 2009-2010

3-Month Interbank Rate, % Current Account,

Vietnam Banking Sector Outlook

Foreign Banks Poised To Heat Up Competition In 2011

Competition in Vietnam’s banking industry looks set to intensify in 2011 as foreign banks prepare to penetrate a market that has traditionally been dominated by state-owned banks We believe small-sized domestic banks will lack economies of scale to compete effectively with foreign banks, resulting in weaker profit margins and a shrinking market share However, we remain optimistic that the participation

of foreign banks will result in a transfer of technological and operational know-how, which will help to

speed up the modernisation of Vietnam’s banking sector over the coming years

Vietnam is expected to honour its commitment to the WTO by opening up its banking sector to foreign competition by end-2010 We believe that competition in the banking industry will intensify, particularly

in domestic retail banking services as foreign banks will be allowed to compete on a level playing field with domestic banks As Vietnam’s economy embarks on its next phase of growth, liberalisation of the financial sector with help to pave the way for better financial products and services to meet the needs of businesses over the coming years

However, as Vietnam prepares to open up its banking industry, foreign banks are ramping up efforts to

establish their presence in retail banking services (see chart) To put this in perspective, Citibank and

Standard Chartered Bank officially launched their respective retail banking operations in Hanoi in October These moves came shortly after HSBC opened its fifth branch in Vietnam These developments

highlight the optimism that foreign banks have for the banking sector

Gaining In Presence

Number Of Banks By Category

Source: State Bank Of Vietnam, BMI

An Edge Over The Competition

According to the State Bank of Vietnam, domestic banks currently dominate approximately 90% of the retail market share in Vietnam Although this represents a significant challenge for foreign banks to penetrate a heavily entrenched market, we note that foreign banks hold a significant technological

advantage over their competitors This suggests that foreign banks are capable of providing more efficient and sophisticated financial services or introducing new services that domestic state-owned banks have neglected due to their limitations on the technological front The existence of technological gaps, which are to a certain extent a result of a state-controlled banking sector, could be a key reason behind the optimism of foreign banks

Capitalising Small-To-Medium Domestic Banks

The opening up of the banking industry will have a significant impact on small-to-medium sized domestic banks Small Vietnamese banks that are undercapitalised could lack the economies of scale to compete effectively with foreign banks In a bid to address the issue, the Vietnamese government imposed a minimum capital of VND3.0trn (US$0.15bn) on commercial banks by December 2010 The

government’s decision effectively resulted in a consolidation of the banking sector through a series of mergers and acquisitions and initial public offerings Nonetheless, we believe that small domestic banks will fail to compete effectively against foreign banks without considerable economies of scale that larger domestic banks currently command As such, we expect weaker profit margins for small domestic banks

in 2011 as they struggle to defend their market share