Vietnam commercial banking report q2 2010

Business Environment Outlook Commercial Banking Business Environment Rating Table: Commercial Banking Business Environment Rating Limits of Potential Returns Data Score, out of 10 Rat

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DISCLAIMER

BANKING REPORT Q2 2010

INCLUDING 5-YEAR INDUSTRY FORECASTS BY BMI

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Publication date: May 2010

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 (%) 6

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 8

Vietnam Economic SWOT 9

Vietnam Business Environment SWOT 10

Business Environment Outlook 11

Commercial Banking Business Environment Rating 11

Table: Commercial Banking Business Environment Rating 11

Commercial Banking Business Environment Rating Methodology 12

Table: Asia Commercial Banking Business Environment Ratings 13

Global Commercial Banking Outlook 14

Asia Banking Sector Outlook 16

Five Themes For The Regional Banking Sector 16

Comparison Of Loan/Deposit & Loan/Asset & Loan/GDP Ratios 20

Anticipated Developments In 2010 21

Comparison Of Total Assets & Client Loans & Client Deposits (US$bn) 22

Comparison Of US$ Per Capita Deposits (Late 2009) 23

Interbank Rates & Bond Yields 24

Vietnam Banking Sector Outlook 25

Economic Outlook 28

Table: Vietnam Economic Activity, 2007-2014 30

Competitive Landscape 31

Protagonists 31

Table: Protagonists In Vietnam’s Commercial Banking Sector 31

Definition Of The Commercial Banking Universe 31

List Of Banks 32

Table: Financial Institutions In Vietnam (February 2010) 32

Company Profiles 35

Vietcombank 35

Table: Key Statistics For Vietcombank, 2004-2007 (VNDmn) 36

BIDV 37

Agribank 41

Balance Sheet (VNDmn) 42

Balance Sheet (US$mn) 42

Key Ratios (%) 42

MHB Bank 43

Table: Key Statistics For MHB Bank, 2006-2007 (VNDmn) 44

Habubank 45

Balance Sheet (VNDmn, unless stated) 46

Balance Sheet (US$mn, unless stated) 46

Key Ratios (%) 46

Eximbank 47

Balance Sheet (VNDmn, unless stated) 48

Balance Sheet (US$mn, unless stated) 48

Key Ratios (%) 48

Sacombank 49

Stock Market Indicators 50

Balance Sheet (VNDmn, unless stated) 50

Balance Sheet (US$mn, unless stated) 51

Key Ratios (%) 51

Saigonbank 52

Balance Sheet (VNDmn) 53

Balance Sheet (US$mn) 53

Key Ratios (%) 53

SeABank 54

Balance Sheet (VNDmn, unless stated) 55

Balance Sheet (US$mn, unless stated) 55

Key Ratios (%) 55

BMI Banking Sector Methodology 56

Commercial Bank Business Environment Rating 57

Table: Commercial Banking Business Environment Indicators And Rationale 58

Table: Weighting Of Indicators 59

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 1,259,980.0 149,816.7 249,752.0 1,659,548.7 217,173.0 1,205,967.7 236,408.0 August

2009 2,065,761.6 1,706,340.0 173,358.3 186,063.3 2,065,761.6 286,547.0 1,594,992.6 184,222.0 Change,

Source: BMI, central banks, regulators

Table: Levels (US$bn)

Date

Total assets

Client loans

Bond portfolio Other

Liabilities &

capital Capital

Client deposits Other

August

2008 100.4 76.2 9.1 15.1 100.4 13.1 73.0 14.3August

2009 116.0 95.8 9.7 10.4 116.0 16.1 89.6 10.3

Source: BMI, central banks, regulators

Table: Levels At August 2009

Loan/deposit ratio Loan/asset ratio Loan/GDP ratio

GDP per capita,

US$

Deposits per capita, US$

Source: BMI, central banks, regulators

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

Assets Loans Deposits

Source: BMI, central banks, regulators

Table: Ranking Out Of 59 Countries Reviewed In 2010

Loan/deposit ratio Loan/asset ratio Loan/GDP ratio

Local currency asset growth Local currency loan growth Local currency deposit growth

Source: BMI, central banks, regulators

Table: Projected Levels (VNDbn)

Client deposits 1100392.90 1341142.80 1528902.79 1697082.10 1917702.77 2186181.16 2492246.52 2841161.04

e/f = BMI estimate/forecast Source: BMI, central banks, regulators

Table: Projected Levels (US$bn)

2007 2008 2009 2010 2011 2012 2013 2014

Total assets 88.04 99.96 122.99 133.96 156.74 188.08 231.49 285.09Client loans 66.66 76.62 100.07 115.63 135.29 162.34 199.81 246.08Client deposits 68.70 76.72 82.78 87.03 95.89 109.31 127.81 149.53

e/f = estimate/forecast Source: BMI, central banks, regulators

SWOT Analysis

Vietnam Commercial Banking SWOT

Strengths ! Rapid growth in the industry

! Untapped potential in the market

! High savings rate of Vietnamese consumers

! The Vietnamese commercial banking sector is open to foreign banks

! No overwhelming local majority in the market

Weaknesses ! It is still an underdeveloped and opaque industry

! Still recovering from the bursting of the asset price bubble in early 2008

Opportunities ! The Vietnamese population is under-banked

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

Threats ! The impact of global economic downturn and financial crisis

Vietnam Political SWOT

Strengths ! 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

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

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

the ruling Communist Party

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

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

and has acted to clamp down on graft among party officials

! 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 ! 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 undemocractic rule

! 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

! Relations with China have deteriorated over the past year due to Beijing’s more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause large environmental damage

Vietnam Economic SWOT

Strengths ! 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

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

leaving the economy vulnerable as the global economy continues to suffer in

2010 The fiscal picture is clouded by considerable ‘off-the-books’ spending

! 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 ! WTO membership has given Vietnam access to both foreign markets and

capital, while making Vietnamese enterprises stronger through increased competition

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

! 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 ! 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

! Prolonged macroeconomic instability could prompt the authorities to put reforms

on hold, as they struggle to stabilise the economy

Vietnam Business Environment SWOT

Strengths ! Vietnam has a large, skilled and low-cost workforce, that has made the country

attractive to foreign investors

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

Weaknesses ! 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

! Vietnam remains one of the world’s most corrupt countries Its score in Transparency International’s 2008 Corruption Perceptions Index was 2.7, placing it in 20th place in the Asia-Pacific region

Opportunities ! 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

! 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 ! Ongoing trade disputes with the US, and the general threat of American

protectionism, which will remain a concern

! Labour unrest remains a lingering threat A 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 Rating

Table: Commercial Banking Business Environment Rating

Limits of Potential

Returns Data Score, out of 10 Ratings score, out of 100

Total assets, end 2008 US$100mn 5 Market Structure 60Growth in total assets,

Long-term financial risk 6.0 6 Country Risk 50

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 and 30% to the latter

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 the

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 the 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 Investor Services’ ratings for local currency deposits) can be

markedly different from BMI’s long-term risk rating

Table: Asia Commercial Banking Business Environment Ratings

Global Commercial Banking Outlook

Regulatory Reform To The Fore

Calls for a new regulatory system for the global banking sector have gained momentum on both sides of the Atlantic, and in a continuation of a theme we started highlighting in 2009, we believe that in 2011 there could be some major changes put into place

With elections ahead this year in the US and the UK, which together formed the epicentre of the global financial crisis, increasing attention is being cast upon banking regulation Although proposals are still in their early stages, it is increasingly clear that the industry faces its biggest regulatory tightening since the Great Depression of the 1930s

US President Barack Obama proposed a scheme in January 2010 that includes a ban on commercial bank proprietary trading, as well as ownership, investment in, or sponsorship of hedge funds and private equity Our interpretation of the White House’s proposals suggest the potential for a revival of the Glass-Steagall Banking Act that separates commercial and investment banking operations, which was enacted during the Great Depression and repealed in 1999 More than a mere intensification of size restrictions, the main issue raised by Obama’s plan is banning banks from pursuing a number of high risk activities such as prop trading, forcing a choice between owning a deposit taking institution and engaging in higher-risk activities Thus the banks most affected by the Obama plan, at least in its preliminary stages, would be the

largest integrated banks such as JPMorgan Chase and Bank of America Deposit-taking institutions

would be allowed to facilitate customer orders as brokers have always done and continue to underwrite new issues of stocks and bonds but very little else Those banks that wished to stick to high risk activities would be free to do so, but would have to sell their retail banking assets and, as a result, lose access to emergency federal funding

Across the Atlantic, Bank of England governor Mervyn King has also argued for a comprehensive

regulatory regime change His ‘three-legged stool’ approach, outlined in January 2010, includes higher capital requirements, predetermined plans for bank failures (‘living wills’) and a major overhaul of the banking industry’s structure in an attempt to reduce systemic risk The key, King said, is a structure that is comprehensive enough to avoid a major systemic crisis King said: ’The right thing is not to pretend in advance you can stop [a crisis] from happening but to design a system that is resilient enough, so that when it still happens one part of the sector doesn’t bring down the other’ At its heart is the idea that banks should not be ‘too big to fail’, and like Obama’s proposal the endgame would probably be a

divestiture of banking operations and increasing supervision in an effort to break up behemoth banks

A major problem with ‘traditional’ banking regulation, in which large institutions are closely monitored,

is that the financial industry has changed substantially over the past two decades Traditional financial intermediation, by which retail banks take deposits and lend them out directly, has gone by the wayside

In its place has emerged securitisation, which diffuses exposure throughout the financial system and obscures fair market accounting of assets While it was assumed that this would allow risk to be reduced,

as no single entity would be too heavily exposed to a single risky asset, it in fact exacerbated the problem,

as demonstrated by the subprime mortgage crisis It is difficult to deal with this system via centralised regulation, partly because securitisation makes it difficult to pinpoint exactly where risk lies Better, Obama and King would argue, would be to ensure that there are no institutions that are so large that their failure would cause a systemic collapse Breaking up banks would not even be the most drastic step: King has also called for serious parliamentary debate about a radical proposal by American economics

professor Laurence Kotlikoff, which would end fractional reserve banking altogether by requiring

investments to essentially equal client deposits We doubt very much whether regulators will go down that path, but the fact that it is even being discussed shows the lengths to which regulators are willing to

go to avoid another financial crisis

Whose vision will win out? It is likely that a global agreement will eventually take shape, especially with European Central Bank (ECB) president Jean-Claude Trichet lending his support to the principles behind the Obama plan At a minimum, we would expect policymakers to attempt to limit the degree to which deposit taking institutions are permitted to trade risky assets Higher capital adequacy ratios, with more stringent accounting standards, may also be enforced And with politicians feeling the electorate’s fury over bank bailouts, regulators are likely to pursue ways to cut ‘too big to fail’ banks down to size

There are always unintended consequences when it comes to regulation, no matter how well designed Stricter standards may hurt lending at a time when politicians and central bankers are also prodding banks

to extend credit Furthermore, it is unclear whether such measures would have prevented the banking

meltdown in the first place Bear Stearns, for example, would not have been covered by Obama’s new

proposal, as it was a pure investment bank But it still failed due to an internal hedge fund, caused

systemic risk, and was taken onboard the Federal Reserve’s balance sheet Other major banks that

securitised mortgages and held them on their balance sheets, such as Countrywide (now called Bank of

America Home Loans) and Washington Mutual, did nothing that would have specifically run afoul of

these rules This implies that other blanket legislation will be passed to patch over the cracks and some of this regulation could be onerous

Whatever regulations emerge, timing may be as important as design Policymakers want banks to grow their loan books in an effort to sustain the nascent economic recovery, but at the same time they want to tighten risk management standards and avoid creating another lending bubble Even King has encouraged

a gradual transition in order to allow sufficient time for public debate about any new proposals

Implementing a new strict regulatory framework will probably have to wait until 2011 at least, and in the meantime the global banking industry will be casting a wary eye towards the regulators

Asia Banking Sector Outlook

Five Themes For The Regional Banking Sector

In this article, we look at a number of key themes, cyclical and structural, which we expect to dominate Asia’s banking sector over the course of 2010

Slow Asset Growth Recovery

The downturn in external and internal

demand in 2009 inevitably hit demand

for consumer, business and trade finance

Coupled with the need to build-up

sufficient loan-loss coverage, this led to a

broad-based slowdown in asset growth

across Asia’s banking sector Hong Kong

actually experienced asset contraction

from March 2009 onwards While we

now expect banking sector assets to

mount a recovery region-wide,

commercial banks will be in no rush to

aggressively expand their loan books For

one thing, while the bounce in real

activity has been impressive, much of the growth momentum has come from low base effects, inventory rebuilding and a reversal in net exports Only in a few countries has there been a genuine recovery in private sector investment and household consumption Second, ultra-accommodative monetary conditions are expected to be wound down across the board in 2010, with Vietnam, India, South Korea and

Indonesia leading the way While we reiterate that this will be more of a rate normalisation than

a tightening process, we still expect to see lending rates get higher over the coming months

The one notable outlier in terms of asset growth has been China (see chart, above) Total assets in China

have exploded upwards in recent months on the back of massive government stimulus, with growth reaching 34.8% y-o-y in November 2009 While such dizzy rates of growth are unlikely to be maintained

in 2010, this is not to say that new loans will be curtailed December 2009’s new loan figure of

CNY379.8bn, exceeding November’s CNY294.8bn, shows that monetary policy is still extremely loose

Non-performing Loans Contained For Now

In the immediate aftermath of the global financial crisis, one major concern of ours regarding Asia’s banking sector was a possible spike in non-performing loans (NPLs), as higher unemployment and stagnant income growth hurt the ability of consumers and businesses to repay their obligations While

Spot The Odd One Out

Asia – Asset Growth Of Commercial Banks,

% change y-o-y

Source: BMI

there has been some slippage in NPL portfolios, the impact to date has been much less painful than previously feared The multiyear downtrend has remained largely in place for NPL ratios (as a percentage

of total loans) across Asia, with many countries already recovering (see chart, below) While we could yet

see some slippage in H210 and beyond, as our China tightening scenario comes into play, which would also have spillover effects for the likes of Hong Kong and South Korea, there is little denying that the deterioration in asset quality has not been as severe as previously anticipated

Bubble Formation Still A Worry

In a previous Asia update (see our online

service, October 28 2009, ’Bubble

Trouble For Regional Banking Sector’),

we warned that rapid asset price reflation,

particularly in the real estate sector,

would be a dangerous side effect of easy

monetary and fiscal policy in Asia,

cautioning that continued bubble-like

behaviour in property prices and

mortgage loan growth could pose a risk

to banking sector stability later on In line

with our view, government responses to

take the froth out of property markets

have had only a mooted impact so far In

several key markets, including Australia, New Zealand, South Korea and Hong Kong, property prices

rocketed back up to all-time highs (see chart, below) The spike in Asian real estate valuations, at a time

when the medium-term outlook for the real economy remains far from certain, is a major risk factor facing the regional banking sector in 2010, and a potential bubble bursting is another risk to asset growth and NPLs in the coming years

Spot The Odd One Out

Asia – Asset Growth Of Commercial Banks,

% change y-o-y

Note: Non-performing assets used for India Source: BMI.

The Rise Of Regional Super-banks?

Assuming that of the financial instability

has passed, Asia’s banking giants may

look to embark on more aggressive

expansion plans in order to capitalise on

the region’s expected real growth

outperformance in the coming years,

especially as their developed world

competitors remain in relatively weak

shape Government policy could also

welcome greater merger and

acquisition activity given the expected

liberalisation of the banking sectors in

India, Vietnam and Taiwan

Regionalisation is an important theme too The signing of a memorandum of understanding

(MOU) between Taiwan and China in November 2009, as well as a free trade agreement between the Association of Southeast Asian Nations (ASEAN) economies and China (the world’s third largest

economy) in January 2010, should bolster bilateral investment flows, particularly in the banking industry Taiwanese banks have been allowed to open branches on the mainland as a result of the MOU, giving them access to over a billion potential customers whose incomes are rising This is a huge boost to the Taiwanese banking sector and Chinese minority investments in Taiwanese banks is arguably a

worthwhile price to pay

Islamic Finance Competition to Hot Up

Over the coming quarters and years we expect several Asian economies to follow in Malaysia’s footsteps

by offering broader expertise and products in Islamic finance Malaysia is the top of the global issuance

league with 51 domestic issuances, amounting to US$8.5bn and making up 38% of the global sukuk

market share in Q309 Malaysia’s initiatives to make Islamic finance part of its mainstream economy

have been reflected on the stock market Bursa Malaysia’s introduced a fee waiver for sukuk listed in

2009 and created of the world’s first shari’a compliant commodity trading platform, Bursa Suq al-Sila’

The South Korean government has expressed its desire to attract potential Islamic finance investors and is

seeking the help of Malaysia to launch its debut sukuk Singapore already has a head start, having

announced its intentions to become an Islamic financial hub in Asia about four years ago, and the

authorities there have already made the necessary regulatory changes to try to achieve this objective The amendments have allowed global banks such as Standard Chartered, HSBC and Citibank to offer a wider range of shari’acompliant products in Singapore Islamic Bank of Asia, Singapore’s first fully shari’a compliant bank, was launched in 2007 With all the regulations in place, the country unveiled its first

Hitting New Highs

Asia – Property Price Indices

Note: Reindexed from Q105 Source: BMI.

sovereign sukuk on January 19 2009, becoming the first non-Muslim nation to do so, and there could be

Comparison Of Loan/Deposit & Loan/Asset & Loan/GDP Ratios

Loan/Deposit ratio % Rank Trend

Loan/Asset ratio % Rank Trend

Loan/GDP ratio % Rank Trend

Bangladesh 78.3 47 Falling 65.1 21 Falling 42.3 46 Rising China 69.9 51 Rising 51.2 34 Rising 113.4 11 Rising Hong Kong 51.2 59 Falling 30.8 56 Rising 201.3 2 Rising India 79.5 40 Falling 62.3 17 Rising 50.8 37 Rising Indonesia 72.9 48 Falling 58.9 26 Falling 28.3 52 Rising Japan 73.6 50 Falling 52.1 35 Falling 86.1 20 Rising Malaysia 76.3 44 Falling 57.0 27 Rising 110.9 12 Rising Pakistan 72.2 41 Falling 54.1 53 Falling 24.4 56 Falling Philippines 65.4 54 Falling 49.5 38 Falling 32.5 48 Falling Singapore 74.1 45 Falling 39.9 47 Falling 111.5 9 Rising Sri Lanka 74.1 46 Falling 62.1 30 Rising 25.0 54 Falling South

Korea 124.3 8 Falling 65.1 15 Falling 102.7 13 Falling Taiwan 74.0 35 Falling 59.7 19 Falling 153.6 5 Rising Thailand 95.3 25 Falling 64.5 11 Falling 74.4 26 Falling

Vietnam 120.9 5 Rising 81.4 3 Rising 112.3 10 Rising

US 79.7 42 Falling 56.3 31 Falling 52.8 41 Falling

Source: Central banks, regulators, BMI

Anticipated Developments In 2010

Loan/Deposit ratio, % Trend

Loan Growth, US$bn

Deposit Growth, US$bn

Residual, US$bn

Comparison Of Total Assets & Client Loans & Client Deposits (US$bn)

2009 2008 Total

Assets

Client Loans

Client Deposits

Total Assets

Client Loans

Client Deposits

China 10,488.8 5,373.1 7,683.0 9,389.7 4,684.6 7,003.0Hong Kong 1,370.6 422.8 825.8 1,384.1 423.8 781.9India 1,105.4 688.6 865.9 896.5 547.9 674.9Indonesia 259.8 153.0 209.9 203.1 120.5 161.6Japan 8,574.9 4,470.8 6,073.0 8,976.7 4,778.8 6,166.8Malaysia 395.6 225.5 295.4 364.3 205.3 267.5

Philippines 109.4 54.2 82.8 106.0 53.1 78.0Singapore 509.8 203.6 275.0 464.5 189.1 241.5

South Korea 1,483.2 965.1 776.3 1,407.9 920.9 693.6Taiwan 975.6 582.2 787.0 901.8 567.8 694.6Thailand 310.5 200.3 210.1 289.5 195.9 202.7

Vietnam 123.0 100.1 82.8 100.0 76.6 76.7

US 13,368.4 7,521.5 9,442.3 13,853.2 7,875.9 9,035.7

Source: Central banks, regulators, BMI

Comparison Of US$ Per Capita Deposits (Late 2009)

GDP per capita

Client Deposits, per capita

Rich 20% Client Deposits, per capita

Poor 80% Client Deposits, per capita

Interbank Rates & Bond Yields

3-Month Interbank Rate %

Vietnam Banking Sector Outlook

The expected tightening of monetary

policy in 2010 will undoubtedly hurt the

Vietnamese banking sector, with smaller

joint-stock commercial banks particularly

at risk Nonetheless, we expect further

growth in the sector in coming years with

an increased participation of foreign

players putting pressure on domestic

banks

Several of Vietnam’s major banks, such

as Vietcombank and Asia Commercial

Bank (ACB), beat their profit targets in

2009 after subsidised lending under the

government’s interest rate subsidy

programme was introduced in H109 in reaction to rapid deterioration in global conditions This resulted

in credit growth increasing rapidly from 17.4% year-on-year (y-o-y) in February to a full-year credit expansion of 37.7% We expect 2010 to be considerably tougher as monetary policy is tightened

Turbulent conditions in the foreign exchange market and persistent downside pressure on the dong have inhibited banks’ access to capital and overall liquidity in the banking sector in late 2009 and early 2010 The latest devaluation of the dong on February 12 2010 alleviated the most immediate liquidity strains but we believe the Vietnamese banking sector is far from out of the woods yet We forecast a risk of future liquidity squeezes affecting bank profits on the back of our expectations for further downside pressure on the dong until the authorities implement a tightening of fiscal and monetary policy in order to dampen domestic demand and curb the widening trade deficit

Hanoi has so far been averse to take any action that would negatively affect its policy aim of supporting continued robust economic growth The government has set a growth target of 6.5% for 2010, which although below its previous growth targets of 8.0-9.0% is still an ambitious target considering that

demand conditions in key export markets such as the EU and the US remain weak and the need to rein in inflation, which is expected to hit double digits by Q210

The State Bank of Vietnam (SBV) has set a 25% credit growth target for 2010 but we caution that

previous targets have been overshot as the interest cap on lending rates at commercial banks, which

Subsidies Revived Loan Growth, Risks In

2010

Credit Growth, % change y-o-y

Source: IMF International Financial Statistics

banks (JSCBs) again With the government holding more sway with state-owned banks such as

Agribank, for which it has set a 20% credit growth target in 2010, we expect their market share to be

further eroded by the JSCBs We are encouraged by reports in February 2010 that the SBV may lift the interest rate cap for medium and long-term dong-denominated loans but we do not believe this will have a material effect on lending practices in the short term

Policy Paralysis Could

Delay Necessary Monetary Tightening

The SBV is a ministry level body under

the administration of the government, and

central bank governor Nguyen Van Giau

is under the direct command of the

government This explains the central

bank’s feeble reaction to rising

inflationary pressures and the repeated

devaluations of the dong The SBV held

interest rates at 8.00% at its latest

meeting on February 25 2010 for the

fourth consecutive month despite

consumer prices increasing by 4.8%

between December and February, lifting the y-o-y rate to a 10-month high of 8.5% in February

We remain concerned that a policy paralysis leading up to the Communist Party of Vietnam’s 11th

National Congress in January 2011 will lead to a delay or lack of commitment to preventing another balance of payments crisis and an inflation spike as in mid-2008, when consumer price inflation reached 28.4% However, our core macroeconomic scenario still includes the authorities being forced to

implement a tightening of fiscal and macroeconomic policy during 2010 as inflation again threatens to spiral out of control and the widening trade deficit puts pressure on Hanoi’s scare foreign exchange reserves We forecast for the SBV to raise the benchmark base rate by 400 basis points in H110 to

12.00% by mid-year, which combined with a tightening of fiscal policy will put borrowers under severe pressure in 2010

We expect the amount of outstanding loans to expand by 22% in 2010, up from a previous projection of 18% due to the rising signs that policy paralysis within the politburo is delaying the necessary tightening

of monetary policy While tighter monetary conditions will undoubtedly hurt the banking sector across the board, we maintain our view that the balance sheets of the major JSCBs are in relative good shape and that risks to the banking sector are concentrated with the smaller players in the market Faced with

increasingly troubled loan portfolios, with property and security-related loans particularly at risk, we believe some smaller players will struggle to raise their chartered capital to the VND3trn (US$157mn)

Slower Credit Growth Ahead

Annual Credit Growth, %

Source: IMF International Financial Statistics, BMI forecasts

minimum required by the SBV by the end of 2010 Several local banks are also seeking to expand their branch networks in order to get a head start on foreign banks, which will strain net cash flows The SBV placed a moratorium on the licensing of new bank branches in 2009 but we expect this to be lifted in

2010

Seeing trouble down the line and wanting

to encourage banking sector

consolidation, Nguyen van Giau has

issued a circular giving banks, finance

companies and cooperative credit

institutions the right to merge,

consolidate and acquire other credit

institutions Larger JSCBs such as

Eximbank and Maritime Bank have

already taken stakes in smaller banks and

we expect this to continue in 2010 as

smaller JSCBs will struggle to stay afloat

and fulfil the SBV’s chartered capital

requirements

While this outlook may paint a downbeat picture, we maintain our bullish view for the Vietnamese banking sector over the medium-to-long term due to the robust expansion in the underdeveloped market, where less than 10% of the population have a bank account However, we also maintain our view that only a few of the larger and more efficient JSCBs will be able to compete with foreign players in the medium-to-long term We therefore believe there is a risk that domestic players will be confined to less densely populated areas and to policy directed lending

To Go Higher Still

Loans as % of GDP

Source: IMF International Financial Statistics

Economic Outlook

Policy Tightening To Slow Growth

The strong domestic demand-driven recovery in Vietnam brought real GDP growth to 6.9% y-o-y in Q409, and full-year expansion to 5.3% We believe a sharp tightening of fiscal and monetary policy will

be needed in 2010 to avoid overheating and to plug a widening trade deficit We thus maintain our consensus forecast of real GDP growth dropping to 4.4% in 2010

below-Our outlook on Vietnam has essentially not changed since early Q409 when it became increasingly clear that the economy was overheating We thus went from expecting a gradual economic recovery in 2010 to

a double-dip scenario with real GDP expansion dipping to 4.4% in 2010 after a forceful economic

recovery in the three last quarters of 2009 This was based on our expectations that fiscal and monetary policy would have to be tightened sharply in H110 in order to rein in the widening trade deficit and halt inflationary pressures With Vietnam having effected yet another devaluation of the dong in February, less than three months after the previous devaluation in late November, our conviction in this view is even stronger

Indeed, the stimulus-driven economic recovery roared on in Q409 with real GDP growth clocking 6.9% y-o-y, the highest outturn since Q108 As illustrated in the chart below, Q409 saw the manufacturing sector come back in force with its contribution to real GDP growth rising from 0.6 percentage points (pp)

in Q309 to 1.7pp The industrial output reading of 13.4% y-o-y in December confirmed that momentum was still strong in the industrial sector going into 2010 The construction sector also recovered forcefully

in 2009 after a bleak 2008, with growth rising to 13.2% y-o-y in Q409 Meanwhile, the service sector continued to perform well, with growth rising from 6.6% y-o-y in Q309 to 8.7% in Q409

The unexpectedly strong Q409 reading helped bring full-year growth in 2009 to 5.3%, slightly above our 5.1% forecast (largely due to an upward revision of Q309 growth) While this is the lowest annual growth rate since the 4.8% posted in 1999, it still compares favourably with Vietnam’s emerging markets peers, both in Asia and globally However, the recovery from the 3.1% y-o-y real GDP growth nadir in Q109 has been largely due to the stimulus policies of the government, which has seen M2 money supply growth

at 28.7% and credit growth rise to 38% in 2009, at the same time as the budget deficit widened to an estimated 8.9% of GDP

Policy Tightening Needed To Stabilise Economy

While successful in reviving growth, the strong fiscal and monetary stimuli has aggravated Vietnam’s already precarious balance-of-payments position, with the monthly trade deficit widening to US$2.1bn in November The 3.0% devaluation of the dong on November 25 only helped the trade deficit correct from US$2.1bn in November to US$1.9bn in December, and we believe the traction from the February

devaluation will be equally poor This is because the devaluations have not been coupled with any serious

efforts to quell domestic demand, which continues to expand at a markedly higher pace than the rest of the global economy

Indeed, the State Bank of Vietnam (SBV) has decided to keep the benchmark base rate on hold at 8.00%

in January and February after having raised it by 100bps on December 1 This was in spite of inflation rising to a nine-month high of 7.6% y-o-y (1.4% m-o-m) in January, with significant upward pressure noticeable in the leading food and foodstuff categories The authorities have instead opted for asking commercial banks to restrict lending for imports of cars, mobile phones and other high-value consumer goods and to support import-substituting industries in order to keep the trade deficit within the

US$14.5bn target set up for 2010 However, the efficacy of such measures is highly in doubt, and we believe that a sharp tightening of fiscal and monetary policy will be needed in 2010 to bring the economy back onto an even keel We are expecting the SBV to raise the Vietnam base rate by a further 400bps in H110 to 12.00% by mid-year while curbs on fiscal spending are imposed to bring domestic demand into line with external demand (exports grew by 9.8% y-o-y in Q409 as compared to a 29.7% expansion in imports) and thus reduce the trade deficit

Double Dip Still Core Scenario

We expect the fiscal and monetary tightening to lead to a double dip in growth after the tentative rebound seen in the last three quarters of 2009 We are expecting real GDP growth to come in at 4.4% in 2010, as weak growth in G3 markets will weigh on exports and prevent a marked improvement in net exports in spite of the devaluations of the dong This will mean that the slowdown in domestic demand will be harder felt With inflation expected to average roughly 9.0% in 2010, we expect government consumption

to decrease by 3.5% in real terms, which will shave 0.3 percentage points (pp) off headline growth A more marked effect will be coming from a slowdown in private consumption growth as credit conditions are tightened We expect private consumption growth (in real terms) to slow to 2.3% from an expected 4.9% in 2009 and 9.2% in 2008 This should see the contribution to growth from private consumption decrease to 1.6pp in 2010 from 3.3pp in 2009 and a massive 6.0pp in 2008 This would bring a double dip for Vietnam, with annual real GDP growth dipping again to 4.4% in 2010 after the policy-induced

recovery in Q209-Q409 before recovering to 5.5% in 2011

We are, on the other hand, expecting an increase in the contribution from gross fixed capital formation from 0.4pp to 1.1pp as FDI disbursements, down 12.1% y-o-y to US$8bn in January-October 2009, recover and state-and aid-financed projects gather pace However, the precarious state of the property market, where activity and prices have been supported by the loan-subsidy programme, is a risk to this forecast While only a minority of property purchases are financed through bank lending, higher interest rates should still have an impact on the market and on commercial and residential construction

We expect the slowdown in growth in 2008 to 2010 to make economic policy the main matter of debate