Vietnam commercial banking report q2 2012

12 Table: Commercial Banking Business Environment Ratings .... 12 Table: Asia Commercial Banking Business Environment Ratings .... 25 Table: Asia Commercial Banking Business Environment

Business Monitor International

85 Queen Victoria Street

© 2012 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 Q2 2012

INCLUDES 5-YEAR INDUSTRY FORECASTS TO 2016

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: March 2012

CONTENTS

Executive Summary 5

Table: Levels (VNDbn) 5

Table: Levels (US$bn) 5

Table: Levels At March 2011 5

Table: Annual Growth Rate Projections 2012-2016 (%) 6

Table: Ranking Out Of 59 Countries Reviewed In 2011 6

Table: Projected Levels (VNDbn) 6

Table: Projected Levels (US$bn) 7

SWOT Analysis 8

Vietnam Commercial Banking SWOT 8

Vietnam Political SWOT 9

Vietnam Economic SWOT 10

Vietnam Business Environment SWOT 11

Business Environment Outlook 12

Commercial Banking Business Environment Ratings 12

Table: Commercial Banking Business Environment Ratings 12

Commercial Banking Business Environment Rating Methodology 12

Table: Asia Commercial Banking Business Environment Ratings 14

Global Commercial Banking Outlook 15

Asia Banking Sector Outlook 20

Three Threats To Asia's Banks In 2012 20

Asia Banking Sector Forecast Overview 25

Table: Banks' Bond Portfolios 25

Table: Asia Commercial Banking Business Environment Ratings 26

Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP ratios 27

Table: Anticipated Developments in 2012 28

Table: Comparison of Total Assets & Client Loans & Client Deposits (US$bn) 29

Table: Comparison of US$ Per Capita Deposits (2011) 30

Table: Interbank Rates and Bond Yields 31

Vietnam Banking Sector Outlook 32

Banking Sector Reforms Positive For The Economy 32

Economic Outlook 35

Table: Vietnam – Economic Activity 37

Company Profiles 38

Bank for Foreign Trade of Vietnam (Vietcombank) 38

Table: Vietnam Stock Market Indicators 39

Table: Vietnam Balance Sheet (US$mn) 39

Table: Vietnam Key Ratios (%) 39

VietinBank 40

Agribank 42

Table: Vietnam Balance Sheet (LCYmn) 43

Table: Vietnam Balance Sheet (US$mn) 43

Table: Vietnam Key Ratios (%) 43

Asia Commercial Bank 44

Table: Vietnam Stock Market Indicators 45

Table: Vietnam Balance Sheet (LCYmn) 45

Table: Vietnam Balance Sheet (US$mn) 46

Table: Vietnam Key Ratios (%) 46

Eximbank 47

Table: Balance Sheet (VNDmn, unless stated) 48

Table: Balance Sheet (US$mn, unless stated) 48

Table: Key Ratios (%) 48

Vietnam Technological and Commercial Joint-stock Bank (Techcombank) 49

Table: Vietnam Balance Sheet (LCYmn) 50

Table: Vietnam Balance Sheet (US$mn) 50

Table: Vietnam Key Ratios (%) 50

Viet A Joint Stock Commercial Bank (Vietabank) 51

Table: Vietnam Stock Market Indicators 51

Table: Vietnam Balance Sheet (LCYmn) 52

Table: Vietnam Balance Sheet (US$mn) 52

Table: Vietnam Key Ratios (%) 52

Housing Development Commercial Joint Stock Bank (HDBank) 53

Sacombank 54

Table: Stock Market Indicators 55

Table: Balance Sheet (VNDmn, unless stated) 55

Table: Balance Sheet (US$mn, unless stated) 56

Table: Key Ratios (%) 56

BMI Banking Sector Methodology 57

Table: Commercial Banking Business Environment Indicators And Rationale 59

Table: Weighting Of Indicators 60

Executive Summary

Table: Levels (VNDbn)

Date

Total assets

Client loans

Bond portfolio Other

Liabilities and capital Capital

Client

March 2010 2,342,752.9 1,935,790.0 159,117.9 247,845.0 2,342,752.9 336,053.0 1,771,242.5 235,457.4 March 2011 3,092,978.4 2,584,860.0 225,505.0 282,613.4 3,092,978.4 479,064.0 2,220,589.1 393,325.3 Change, % 32% 34% 42% 14% 32% 43% 25% 67%

Source: BMI; Central banks; Regulators

Table: Levels (US$bn)

Date

Total assets

Client loans

Bond portfolio Other

Liabilities and capital Capital

Client deposits Other

Source: BMI; Central banks; Regulators

Table: Levels At March 2011

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 2012-2016 (%)

Source: BMI; Central banks; Regulators

Table: Ranking Out Of 59 Countries Reviewed In 2011

Local currency asset

Source: BMI; Central banks; Regulators

Table: Projected Levels (VNDbn)

Total assets 1,747,335 2,286,321 2,953,154 3,720,973 4,614,007 5,536,808 6,644,170 7,973,004 9,567,605 Client loans 1,339,260 1,869,260 2,475,540 3,119,180 3,867,784 4,641,341 5,569,609 6,683,530 8,020,236 Client

deposits 1,341,143 1,680,717 2,209,896 2,651,876 3,076,176 3,506,840 3,997,798 4,557,489 5,195,538

e/f = estimate/forecast Source: BMI; Central banks; Regulators

Table: Projected Levels (US$bn)

SWOT Analysis

Vietnam Commercial Banking SWOT

Strengths ƒ Rapid growth in the sector has been seen in recent years, and this is unlikely to slow

significantly over our forecast period

ƒ Untapped potential means there is room to grow; the market is nowhere near saturation

ƒ High savings rate among Vietnam residents

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

ƒ The financial accounts of many banks are still opaque

Opportunities ƒ The Vietnamese population is underbanked, offering an opening to commercial banks

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

Threats ƒ Macroeconomic instabilities threatens the credibility of the government and could

potentially bring economic policy away from further liberalisation

Vietnam Political SWOT

Strengths ƒ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the next five years The one-party system is generally conducive to short-term political stability

ƒ Relations with the US have witnessed a marked improvement, 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 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 Macroeconomic instabilities in 2012 are 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

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 over recent years 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 wide-scale environmental damage

Vietnam Economic SWOT

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

GDP growth averaging 7.1% annually between 2000 and 2011

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 9.5% in 2010

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

the economy vulnerable to global economic uncertainties in 2012 The fiscal deficit is dominated by substantial spending on social subsidies that could be difficult to withdraw

ƒ The heavily-managed and weak currency reduces incentives to improve quality of exports, and also keeps import costs high, 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 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

ƒ Urbanisation will continue to be a long-term growth driver The UN forecasts the urban

population rising 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 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 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 According to Transparency International's 2011 Corruption Perceptions Index, Vietnam ranks 112 out of 183 countries

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 know-how

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 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 Ratings

Table: Commercial Banking Business Environment Ratings

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

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

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

Market Structure

Country Structure Market Risks Country Risks Rating Ranking

Global Commercial Banking Outlook

Europe Is Still The Main Event

With BMI's core macroeconomic forecasts pointing toward a sustained if weak economic recovery, the eurozone crisis remains the biggest risk to the global banking sector Looking at the outlook region-by-region, there are none that would be unaffected by a major deterioration in the European crisis We covered this closely in the Q1 2012 report ('Europe On The Brink'), but some questions have been

addressed since that time, namely whether the European Central Bank (ECB) would intervene to stave off

a short-term credit crunch and expand support to peripheral bond markets (it has, in increasingly bold fashion) We retain our core view that the eurozone is set to 'muddle through' the current crisis, with the monetary bloc surviving, albeit only after significant zone-wide macroeconomic and fiscal reforms However, a renewed escalation to the crisis would pose significant risks to our regional banking outlooks

Developed State And Emerging Market Commercial Banking Overview

US: While the US banking sector recovery remains tentative, there are several reasons why we believe

the US banking sector has turned the corner, and we continue to project fairly robust lending and asset growth in 2012 Among other positive factors: lending growth is picking up, loan standards continue to ease, and banks are looking increasingly to profit-making opportunities, rather than merely ensuring their survival However, the European crisis poses a major threat to the US banking sector; the long end of the yield curve is set to remain low-yielding for years, which will hurt profitability, and the regulatory regime

is increasingly restrictive

Signs Of Life, But Real Estate Lending Still Trailing

US – Loans By Category, % chg y-o-y

Source: BMI, Federal Reserve

Eurozone: From an aggregate level the eurozone banking sector would seem to be recovering well from

the turmoil of 2008 and 2009 However, this masks increasing disparity between the relatively prosperous core and crumbling periphery, as well as stresses in traditional bank funding markets across the region

We cannot discount the possibility of a major credit crunch should the debt crisis reach its meltdown moment While we expect continued industry growth in aggregate, this masks deep divisions at the national level Going forward, growing stresses in the banking system will require the ECB to intervene still further This will likely take the form of additional cuts to the refinancing rate, an expansion of the Securities Market Programme (which has already purchased EUR213bn in government debt) and a reduction in collateral requirements for securities repoed at the ECB We still expect the central bank to have to significantly ramp up its intervention in the sovereign debt markets from 2012 given the

enormous refinancing demands of the region's issuers

Emerging Asia: In 2012 we expect weaker earnings, hampered by foreign funding constraints, slower

credit growth, and higher non-performing loans One corollary of the surge in credit growth seen in 2010 and 2011, and the inevitable slowdown in 2012, will be a resurgence in non-performing loans (NPLs) Our core view is for a sharp slowdown in real GDP growth across the board this year, lead by a hard landing in China and a slowdown in trade growth driven by a recession in the eurozone These factors alone are likely to lead to an uptick in NPLs However, when we combine this with the impact of

weakening housing markets across the region and tighter availability of credit, the impact on NPL is likely to be exacerbated We look for the likes of China, Hong Kong, and Australia to see a surge in bad debts in 2012

Leveraged On FX Loans

Asia – Foreign Exchange Loans Of Asian Banks

Source: BMI

Emerging Europe: We maintain our wary view towards Central and Eastern European (CEE) banking

sectors on the back of continued macroeconomic and financial headwinds emanating from the eurozone sovereign debt crisis We also hold to our preference for the Czech Republic and Poland's banking sectors

on the grounds of stability and growth potential, respectively, while reaffirming our negative outlook for the Hungarian and Ukrainian banking We also caution that Southeastern European banking sectors are showing some worrying risk indicators

CE Generally Better Placed Despite High Foreign Claims On Assets

CEE – European Banks' Claims, % of Total Assets

Source: BIS, BMI

Latin America: We believe asset and loan growth will remain strong in 2012, driven by stable

fundamentals and the use of monetary stimulus in those markets where credit cycles are slowing In addition, we do not view the prevalence of European banks operating in the Latin American region as a risk to regional banking sector stability Indeed, those sectors which have greater foreign participation tend to be the most attractive from a growth perspective, with any serious threats to sector stability coming mainly from domestic factors

Sub-Saharan Africa: The outlook for the South African, Nigerian, Kenyan and Ghanaian banking

sectors is mixed We see Nigeria and Ghana as having the strongest growth potential over the coming year, while South Africa should see slow but stable expansion, and Kenya will likely struggle amid various macroeconomic challenges

Diverse Regional Picture

Africa – Total Banking Sector Loans, % chg y-o-y

Source: Central Banks; BMI

Middle East And North Africa: The outlook for banks across the Middle East and North Africa

(MENA) continues to diverge, with oil-fuelled spending in the Gulf facilitating a slight improvement in lending conditions, whilst risks of currency devaluations and a spike in non-performing loans tempers our outlook on financial institutions in Egypt and the Levant Although the region is by no means

homogenous, the recent spike in interbank lending rates from Saudi Arabia to Jordan would suggest that risks of a broad-based tightening in credit conditions cannot be ruled out, particularly given rising

regional tensions and ongoing concerns surrounding the fate of the eurozone

Credit Conditions Improving For Some

MENA – Banking Sector Credit, % chg y-o-y

Source: BMI/Respective Central Banks

Asia Banking Sector Outlook

Three Threats To Asia's Banks In 2012

BMI View: In 2011 Asian banking stocks weakened substantially as earnings multiples collapsed amid

record earnings In 2012, we expect the reverse, as weaker earnings, hampered by foreign funding

constraints, slower credit growth, and higher non-performing loans (NPLs), to be offset by multiple expansion On balance, we retain our bearish bias, although we highlight key technical areas to watch

Asian banking equities suffered a difficult year in 2011 The Bloomberg Asia Banking Index recorded a 13% fall, taking prices back to mid-2009 levels While the index is heavily weighted towards Chinese banks, equity losses were recorded across the board As the accompanying chart shows, only Indonesian financial equities gained in 2011, with the rest posting varying degrees of losses, led by India

Only Indonesia In The Black

Asia – 2011 Returns For MSCI Financial Indices, %

Source: BMI

This weakness in equity prices came despite an impressive earnings display on the whole The Bloomberg Asian Banking Index saw its earnings increase by an impressive 27%, with the price fall coming entirely via a collapse in multiples In fact, the vast majority of countries saw banking sector earnings hit a new high, accompanied by new highs in book values, taking P/E and P/B multiples to very low levels This is most starkly shown in the case of the MSCI India Financials index While the market lost 29% thorough

2011, earnings were actually up 25%, with the loss coming from a staggering 10.7 percentage point

Earnings Up, Prices Down

India – MSCI India Financials Index, P/E Ratio & Earnings Per Share

or continue their slide from the April 2011 peak, when we voiced our concerns surrounding Asian banks

On the whole, we believe that another price low in on the cards this year in the Bloomberg Asia Banking Index, although this is contingent upon a continued deterioration in the regional economy, led by China, and further global economic dislocation, which would both hit earnings and raise equity risk premiums

Foreign Funding Difficulties To Continue

We recently articulated the risks faced by Asian financial systems from the reduced availability of

overseas funding amid growing global risk aversion and deleveraging in the European banking system Asian banks have rapidly expanded their foreign currency-denominated loan books in recent years, with the FX loans-to-deposit ratio now in excess of 100% as corporates and speculators have looked to take advantage of low US dollar interest rates versus local currency rates With US dollar funding conditions tightening over recent months (despite easing somewhat following the ECB's measures to improve funding conditions), this is likely to have negative implications for Asian banks Firstly, it will reduce net interest margins (NIM) on FX-denominated loans as funding costs increase Secondly, the recent increase

in the value of the US dollar in Q411 will have raised the local currency value of borrowings, making it more difficult to meet loan repayments We could perhaps see the lagged impact of this show up in greater non-performing foreign currency loans in the coming months Our expectation of another bout of US$ strength suggests this problem is also likely to reoccur later in the year

Leveraged On FX Loans

Asia – Foreign Exchange Loans Of Asian Banks

Source: BMI

Shrinking Credit Growth

One major supportive factor for banking sector earnings in 2011 was the rise in the amount of credit banks extended, with growth hitting new highs in the likes of Hong Kong and Singapore In 2012 we see credit growth falling across the board, with not a single country in the region expected to see an

acceleration in credit This will act as a clear and direct drag on earnings growth Net interest margins are also unlikely to offer much help as, despite our expectations that short-term interest rates will fall, long-

term interest rates should also fall With credit growth weakening and NIMs potentially falling, we believe these dynamics are sure to hurt banks' bottom lines in 2012

Malaysia Leading The Way

Asia – Foreign Exchange Loan Growth By Country, % chg y-o-y

Source: BMI

Rising NPLs

One corollary of the surge in credit growth seen in 2010 and 2011, and the inevitable slowdown in 2012, will be a resurgence in NPLs Our core view is for a sharp slowdown in real GDP growth across the board this year, led by a hard landing in China and a slowdown in trade growth driven by a recession in the eurozone These factors alone are likely to lead to an uptick in NPLs However, when we combine this with the impact of weakening housing markets across the region and tighter availability of credit, the impact on NPL is likely to be exacerbated We look for the likes of China, Hong Kong, and Australia to see a surge in bad debts in 2012

Technical Levels To Watch

The technical chart of the Bloomberg Asia Banking Index shows tough resistance lies ahead in the near term at the 150 level, and a break of this level could trigger a run at the 2011 high However, should prices approach this level, we would turn outright bearish given the prospect of weaker earnings in 2012

In the event of weakness, we identify the 115 level The gap left by the break-out in 2009 is a potential downside target, and a region-wide recession could see prices return to this level Given our bullish long-term outlook on regional growth, however, we would see any move to this area as a long-term

opportunity

Right On Resistance

Asia – Bloomberg Asia Banking Index

Source: BMI

Asia Banking Sector Forecast Overview

Table: Banks' Bond Portfolios

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

Table: Asia Commercial Banking Business Environment Ratings

Market Structure

Country Structure Market Risks

Country Risks Rating Ranking

Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP ratios

Source: Central banks, regulators, BMI

Table: Anticipated Developments in 2012

Loan/Deposit

Loan Growth, US$bn

Deposit Growth,

US$bn

Residual, US$bn

NB Incorporates estimated economic data and projected banking data Source: Central banks, regulators, BMI

Table: Comparison of Total Assets & Client Loans & Client Deposits (US$bn)

Total Assets Client Loans

Client Deposits Total Assets Client Loans

Client Deposits

Table: Comparison of US$ Per Capita Deposits (2011)

GDP Per Capita

Client Deposits, per

capita

Rich 20% Client Deposits, per capita

Poor 80% Client Deposits, per capita