VietNamNet Bridge – Vietnam banks have been in a restructuring mode lately as part of their attempt to get the banking system in shape for the Association of Southeast Asian Nations (ASEAN) economic integration at the end of the year, say leading industry analysts.


Under the ASEAN Banking Integration Framework (ABIF) agreement, which was signed earlier this year — by 2020 members are required to have banking arrangements in place with regional neighbours.

Further, the agreement mandates the establishment of banking services within that neighbour’s borders operating on the same terms as domestic financial institutions opening the ASEAN region up to unrestricted free flow of capital, labour, goods and services.

Given the resultant intense competition that will emanate throughout the Southeast Asian region, it is therefore of uppermost importance for Vietnam to ensure that it allows a much greater foreign-banking presence within its borders as rapidly as possible.

As well, it is equally important for Vietnamese banks to quickly establish a greater foreign presence within the borders of other ASEAN member countries.

It has been the Vietnam government’s official policy to encourage FDI as part of a development strategy to improve its business and investment landscape as well as support its businesses to compete in the regional and global marketplace.

Along this vein it is important for Vietnam to continue being viewed as receptive to foreign direct investment (FDI) because it attracts not only business but foreign banks to Vietnam, say leading industry analysts.

More foreign ownership required

There are currently just over 45 different banks operating in Vietnam, comprised of a diverse mix of large, state-owned commercial banks, smaller private banks and a handful of foreign banks.

At present the nation has six banks that have full foreign ownership – Standard Chartered Bank, HSBC, ANZ, the Republic of Korea’s Shinhan Bank and Malaysia’s Hong Leong Bank Berhad and Public Bank Berhad.

Moreover, the banking system contains a further 49 representative offices and 43 branches that have been opened by foreign banks, four joint venture banks, 17 financial firms, 12 financial leasing companies and nearly 1,100 credit funds.

However, Vietnam currently limits the degree of foreign ownership in any domestic bank to 30%, and places a limit of 20% on strategic investors in domestic bank ownership, and 15% on non-strategic investors.

The country is gradually increasing its exposure to foreign banking, with the government expected to issue a decree prior to the end of the year that will lift the 30% limit for overseas ownership.

Most recently, in a move viewed as a giant step towards the eventual opening of a wholly foreign-owned domestic bank, the government has recommended that the SBV issue a licence to Singapore’s United Overseas Bank (UOB).

Given that Singapore is among Vietnam’s prime trading partners, the Ministry of Planning and Investment (MPI) has been pushing the government to provide UOB the license to expand its operations within the country.

This would include allowing UOB to be actively involved in the country’s financial-restructuring process by taking over domestic banks, clearly a positive move for the banking system.

Lenders with a sizeable proportion of state ownership are probably in the best position to immediately benefit from the integrated ASEAN free market region, as they already have a presence in neighbouring countries and are the largest banks in the country in terms of total assets.

The country’s biggest lender, state-owned Agribank, which has nearly US$35.16 billion (VND763 trillion) in assets, has retail branches in Laos and Cambodia and Vietinbank already has well-established operations in Myanmar and Laos.

In addition, the Bank for Investment and Development of Vietnam (BIDV) has a visible presence in Laos, Cambodia and Myanmar, with stated plans to expand activity in all three countries through insurance, microfinance and investment operations.

Addressing underbanked cross sections of society

Although Vietnam’s bank restructuring has been regarded positively on the whole, the overwhelming majority of the population still has little access to financial services provided by banks.

Data from the SBV show that only 20% of Vietnam’s 90 million citizens have bank accounts and only 3% of the population have credit cards. Meanwhile it is generally agreed that small businesses on the whole are also underbanked.

The Asian Development Bank’s director for Vietnam, Tomoyuki Kimura, believes that the problem originates with the lack of appropriate infrastructure in both the banking industry and small businesses themselves.

Kimura underscored the point that he does not believe there is any liquidity shortage in the banking industry in Vietnam.

Banks “lack the capacity to assess the risk of investment into small businesses and find bankable projects”, said Kimura, while “small businesses are deficient in the capacity to propose a bankable project.”

Vietnam’s lending market has also been characterised by an overreliance on collateralization as a requirement to obtain a loan.

This banking industry has had a very steep learning curve, amid a process of rapid liberalization. However, domestic banks still lag far behind their foreign counterparts and regulatory standards are not yet in line with the rest of the world.

Clear challenges exist for the future of banking in Vietnam, and there are unquestionable weaknesses to be addressed, particularly concerning non-performing loans.

Most notably however is the risk associated with small Vietnam lending banks having a disproportionately large exposure to real estate and risky business and individual loans and this is why larger more seasoned foreign banks are needed in Vietnam.

Should these problems be resolved and Vietnam successfully attract foreign banks to set up shop within its borders the nation’s business community will be in a much stronger position to handle the aggressive competition brought about by ASEAN integration.