Effective restructuring is vital for local commcercial banks to survive the coming tough competition after the market is fully liberalised in line with ASEAN Economic Community commitments.

Vietnam is now home to five state-owned commercial banks, 33 joint stock commercial banks, six wholly-foreign invested banks, and four joint venture banks. The country is accelerating its bank restructuring process through a wave of bank mergers and acquisitions (M&As) in an effort to reduce the number of banks to around 20 in the next few years.

According to Ho Chi Minh City-based chief economist Alan Pham at VinaCapital Group – the country’s largest fund manager – despite the huge number of banks, the range of services offered is quite limited and local banks are heavily reliant upon lending as the main source of revenue.

“Vietnam is presently ‘over-banked’, and yet customers are under-served,” Pham told VIR.

Given the size of the market, some banking experts claim that Vietnam only needs about 10 large-scale banks over the long-term. These banks would be able to compete regionally, and offer a diversified range of products and services. Additionally, the country would also need some smaller banks to serve its niche and particular markets.

“Smaller banks are necessary to serve the rural areas and the niche markets in Vietnam. In fact, large urban areas have too many bank branches and transaction offices, while the number of banks in the country’s rural and remote areas is too sparse,” noted Saigon-Hanoi Securities head of research Do Quang Hop in an interview with VIR.

“Some 12-15 primary banks are suitable for Vietnam over the next 15 years or so. Too many or too few banks might take away the healthy competition that currently compels banks to continuously improve their products and services,” said Ho Chi Minh City-based CIMB Securities senior bank analyst Quan Trong Thanh.

He added that this number, however, could gradually be reduced to about eight banks after the 15-year period to ensure the healthy reform of the financial system.

He also said in order to build a sturdy banking system to cope with the ever-increasing competition with local and regional banks, especially in light of the ASEAN Economic Community's (AEC) formation at the end of this year, Vietnam would need to continue forcing – while also supporting – its banks to become bigger and bolder via M&As.

“Banks within the ASEAN community, like Malaysia, Thailand, and Singapore are well ahead of Vietnamese banks in terms of scale, experience, and their operational platform,” he said.

Keith Pogson, a managing partner over Asia-Pacific financial services at Ernst & Young shared the view: “M&As are good for private banks in Vietnam. When banks become bigger and stronger, their operations become more stable, allowing them to invest in new technology and offer better services to customers.”

As part of its bold determination to reform the banking sector in 2015, the State Bank (SBV) has acquired two troubled banks in recent months, namely Ocean Bank and Vietnam Construction Bank. It has also given in-principle approval for the merger of Maritime Bank and Mekong Development Bank, as well as the second-largest state-owned bank – Vietinbank – and Petrolimex Group Commercial Bank. The country third-biggest lender, BIDV, is also expected to complete its union with Mekong Housing Bank later this month.

In addition, other M&A deals on the way include Eximbank merging with NamA Bank, DongA Bank joining with ABBank, and Vietcombank merging with SaigonBank.

Earlier in March, the SBV gave the go-ahead for Malaysia’s Public Bank Berhad to take a 50 per cent stake in BIDV’s VIB Public joint venture.

“Vietnam urgently needs a thorough reform of its banking system to compete effectively with the influx of banks coming in from neighbouring countries. 2015, as such, is just the beginning of the reform process, not the end,” said Pham.

VIR