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Last updated: Friday, October 19, 2018


How Can Vietnamese Banks Enter the International Banking Industry?

Posted: Tuesday, October 03, 2017

Vietnam has built a domestic banking industry adequate to support the economic development in this country. Now it is the time to look beyond the national boundaries and into the international banking industry. Are Vietnamese banks ready and prepared to enter the international banking market in which “the sky is the limit”? We will examine the question.

Banking development in the last 25 years
Some 25 years ago a California trade mission visited Hanoi and Ho Chi Minh City in an effort to establish potential trade ties between Vietnam and California while the trade embargo upon Vietnam was still in effect. When visiting the Ho Chi Minh City branch of State Bank of Vietnam, at the location of the former National Bank of Vietnam before 1975, they saw mountains of Vietnamese Dong bills put on huge tables at the centre of the big hall of the State Bank. A State Bank official explained that the money was to pay to the government workers in Ho Chi Minh City. Vietnam’s economy was then a cash economy and the few banks in operations at that time were functioning just like money shops where the people came to deposit and withdraw money. Contemporary banking services were not in existence then.

Now 25 years later, the Vietnamese banking industry consists of roughly 100 banks including state-owned banks, commercial joint stock banks, wholly owned foreign banks, joint venture banks, and branches and representative offices of foreign banks. The banks offer modern banking products and services. They accept both domestic and foreign currency deposits and lend in Vietnamese Dong and multiple currencies. Like their counterparts in other countries, they offer internet banking services. International banking is the norm for all commercial banks in Vietnam. Domestic banking industry is booming.

How are Vietnamese banks seen internationally?
Internationally, Vietnamese banking has enjoyed an increasing recognition, as evidenced by upgrading by international rating agencies based on the on-going modernization of the Vietnamese banks towards international norms and standards. Every year more and more Vietnamese banks have received awards and recognition for their services and products by international banking associations from around the world.

Vietnamese banks have also established correspondent banking relationships with many international banks, and vice versa. Money transfer, international settlement and trade finance between the banks around the globe have been conducted through the correspondent banking relationships. A few state-owned banks have established their branches and representative offices in neighbouring countries such as Laos, Cambodia and Myanmar and some countries in Europe. But that’s all. Some large Vietnamese banks have submitted their applications to open rep. offices in New York for years but so far none was approved. In many other international banking places such as Singapore, Hong Kong fully operating banking branches of Vietnamese banks are still absent.

It is not public knowledge, how money and banking authorities approve license for foreign banks to enter their respective banking markets. But one thing for sure, they are very keen to see whether foreign banks are meeting the tests for anti-money laundering. Not only banking authorities are looking into the matter, but also reputable international banks are looking into this matter to determine whether they would accept a correspondent banking relationship with other banks. Talks with international banks operating in Vietnam reveal that they are most careful in opening a vostro foreign currency account for Vietnamese banks. The reason is Vietnamese banks are rated at the highest risk level in money laundering. The scale is 1-4 with 4 being the highest level of risk for money laundering. Most Vietnamese banks are rated “4”. If that is the risk assessment of many international commercial banks concerning Vietnamese banks, then the assessment of the money banking authorities and central banks in Western countries may not be very far from the assessment of their commercial banks. Their main concern is perhaps not only that risk management of Vietnamese banks is still not appropriate to prevent and discover very sophisticated criminal activities, but also some Vietnamese banks may be abused by criminals for their money laundering activities.

Of course, the State Bank of Vietnam has introduced a long time ago the anti-money laundering law and commercial banks have established their internal regulations and procedures and installed compliance units and hired personnel to safeguard against money-laundering and criminal activities. But it is obvious the comfort level of many international banks and banking authorities is not high enough.

The foregoing is just reflective of one of the hurdles Vietnamese banks are facing in endeavouring to enter the international banking community.

What are the other main hurdles that keep Vietnamese banks from entering the international banking scenario from a systemic standpoint?
The National Assembly of Vietnam has adopted a resolution on June 21, 2017 to resolve the country’s bad debt. In the wake of the debate concerning the resolution many deputies discussed the shortcomings and deficiencies in the laws and banking practices. The other main issue that has drawn huge attention, concerns the weak and failed banks.

The two issues of bad debt and weak banks have virtually weakened the banking system to the brink of a financial crisis or even collapse if not resolved. The recent actions of the State Bank to rescue the three technically failed banks, Vietnam Construction Bank, Ocean Bank and GP Bank by “buying” them for VND0 and absorb them as the State Bank-owned subsidiary has prevented the banks from a collapse and, therefore, a possible “bank run” due to public concern about the bank insolvency. But those actions have a limit and may cause a tremendous financial burden for State Bank that directed two state-owned banks to manage and patronize these banks by pumping in money to help them to survive. So far the acquired banks are still operating but the prospects of these banks to overcome the difficulties and get back to “normal” is very dim unless rescued by further merger and/or investment. Worst comes to worst, weak banks may be allowed to be eliminated by the market through bankruptcy proceedings.

Besides the three “0 Dong Banks” there are some banks that were once the leaders among the joint stock commercial banks, such as Dong A Bank, Eximbank and Sacombank, and are now under watch or special supervision (Dong A Bank) by the State Bank. Further, there may be some other banks that are operating at a loss or barely at a “survival level”. These banks are burdened by bad loans that force the banks to raise lending interest rates to compensate for operating costs due to loan loss reserves. Criminal activities, bank embezzlements and unsafe banking practices continue to cause a negative impact on the banks’ profitability and soundness.

Bad debt and potential bad loans may reach VND600 trillion (approx. US$26 billion) accounting for approx. 10.08 per cent of all outstanding loans as per State Bank. Further, as of March 31, 2017 total shareholder’s capital of all the banks amounted to approx. US$26 billion, and the capital adequacy ratio (CAR) was calculated to be 12,6 per cent, according to State Bank’s statistics. As a rule of thumb, assuming 50 per cent of the bad debt may become ultimate loss to the banks, the US$26 billion bad debt may become US$13 billion real losses that may reduce the shareholder’s capital of all banks to approx. US$13 billion. If it is the case, CAR is now estimated to be just over 6 per cent, far below the minimum level of capital adequacy and safety of currently 9 per cent. A further delay in resolving the bad debt will threaten banks’ solvency and financial health.

The resolution passed by the National Assembly on June 21, 2017 will become effective August 15, 2017 and will be good for 5 years. The decree is considered a quick fix to find a way out of the labyrinth of bad debt in Vietnam. For sure, a quick fix for bad debt is imperative, but a long-term resolution is far more critical and vital to bring the Vietnamese banking system closer to the international banking industry.

How about the sovereign ratings of Vietnam? Does it represent an impediment for international integration?
Investors normally look into sovereign ratings of a country to determine the country risk level before making an initial determination on whether or not investing into a bank of that country. Unfortunately, the three leading rating agencies, Moody’s, S&P and Fitch currently rate the sovereign risk of Vietnam at B1, BB- and BB- (non-investment grade/speculative). The agencies cited, among others, large fiscal deficit, rising public debt and weaknesses in banking sector as reasons for low ratings.

As a rule, no companies or institutions can be rated higher than the country itself. Therefore, all Vietnamese banks are rated no better than the country’s ratings. Low credit ratings are the first barriers for international players to welcome their counterparts into the international banking community. The government has endeavoured to improve the sovereign ratings to attract foreign investors, but it requires a vigorous efforts and, of course, time to do so.

How about the banks themselves? Any improvements are mandatory to facilitate their integration into international banking industry?
Undoubtedly, the banking industry in Vietnam has tremendously improved and renovated over the last two decades. The industry has gone through many changes and it is now sounder and stronger than before. However, for Vietnamese banks to enter the international scenario, following issues need to be looked into:

Shareholder’s capital:
The banking industry in Vietnam is led by four state-owned banks, among which Vietcombank and Vietinbank are truly commercial banks. These banks have a potential to expand into international banking industry, but none of them has a shareholder’s capital more than US$3 billion. In the banking world the asset size and size of shareholder’s capital are indicative of strength and competitiveness. Within South and South East Asian region a bank may be considered sizeable if its assets and shareholder’s capital reach approximately US$50 billion and US$5 billion, respectively. State Bank of Vietnam wants to have a few banks to compete internationally within the next few years. So shoring up the bank’s capital is the first step in this direction.

However, capital resources for banks are drying up at this time as bank shares are not as attractive as they were some ten years ago. The way out of this situation is to attract money from overseas investors. Currently, a foreign investor may not acquire more than 20 per cent and all foreign shareholders not more than 30 per cent of a bank’s common shares, except for weak banks that the government may allow foreign investors to purchase up to 100 per cent the bank’s shares. The 30 per cent limit is relatively low for foreign investors to be in a position to participate in the bank’s decision making process at the highest level. To increase the “room” seems to be imperative to attract foreign investors. However, at this time there seems to be a resentment by the banking authority and the government to lift the limit.

Transparency of the bank’s financial reports:
All banks’ annual reports are audited by independent auditors. A few banks that are listed in the stock exchange are required to meet the standards for financial accounting, reporting and disclosures. Other banks that are not subject to strict accounting and reporting standards are more liberal in this regard. For example, there not enough disclosures in the form of footnotes to explain inter-company transactions, bad loans and pending court cases and litigations in their annual reports.

Further, many bank’s financial reports are not translated in English that makes a financial analysis and due diligence by foreign investors and market participants very difficult.

Corporate governance and risk management:
All banks are organised in the form of a corporation with the general meeting of the shareholders as the top decision making body, the board of directors in charge of supervising and planning and management in charge of running the bank. The primary principle of corporate governance is a strict separation between governing the bank by the board and managing the bank by management team. This rule is not always adhered to by many Vietnam banks that are controlled by some rich individuals and families. Many recent bank trials have shown a chairman of the board was able to direct his management or credit committee to fund projects of his own companies and, consequently ruined his bank’s finance. Another corresponding issue is the issue of “interest groups” in the Vietnamese banking industry. Interest groups, formed formally and informally and even unlawfully by related parties, were able to manipulate the banks to their own benefits. Group interest remains a major concern to the banking authority and public. A directive of State Bank to ultimately eradicate this phenomenon remains to be seen.

Corporate governance and risk management are the two sides of a coin: the one is the pre-requisite for the effectiveness of the other, and vice versa. Both are weak in some Vietnamese banks when major shareholders are in control of a bank, from planning to managing and to supervising it. Even the board of supervision, that is supposed to report and is accounted for to the general meeting of the shareholders, in some cases is totally subject to the will of major shareholders. Circular 41/2016 issued by State Bank on December 30, 2016 that regulates the capital adequacy ratio with strict rules and accounting, will be effective on Jan. 1, 2020. The circular is an important step towards implementation of Basel II to all banks in Vietnam. But generally in terms of risk management, Vietnam is still far behind international banking norms. For sure, this continues to hinder the integration of Vietnamese banks into the international banking industry, unless State Bank of Vietnam accelerates the implementation of the regulations concerning corporate governance and risk management.

Dr Hieu Tri Nguyen

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