Mr. Badrinath Ramanathan, Partner at McKinsey & Company, discusses matters from McKinsey's eighth annual review of banks with VET.

■ How do you view the development of Vietnam’s banking sector at this time?

Overall, asset growth was relatively high at ~17 per cent over the 2012-2017 period while the profitability of the banking system has improved, with return on equity (ROE) increasing from 13 per cent to 15 per cent over the same period. However, this has been driven by one-off effects and declining equity capital in the system. If you look under the hood, there are challenges to core profitability as revenue margins have declined, risk costs have deteriorated slightly, and costs have increased. In order to continue to perform well going forward, banks need to continue to innovate and leverage digital technology / advanced analytics to enhance their business models. 

■ In McKinsey’s eighth annual review of the global banking industry, Vietnam’s ROE was reported to have moved upwards due to an increase in other items and leverage. How do you think this will affect the country’s banking sector?

The ROE increase was due to different effects. The change in other items involved one-off non-performing loan (NPL) collection and also a provision reversal at one of the larger banks in the country. The increase in system leverage was due to the faster growth of banking assets compared to the equity capital in the system. Banks should be watchful of their capital base vs. requirements going forward. 

■ The review looks at two forces - technological (and data) innovation and shifts in the regulatory and broader socio-political environment. How would you comment on the development of these dual forces in Vietnam’s banking sector?

Vietnam has a very high degree of digital adoption. For example, smartphone penetration is well above 80 per cent in the major cities and above 70 per cent overall, and the country has more than 55 million active social media users. Therefore, the Vietnamese market is ripe for digital disruption. We are already seeing a number of leading banks building out digital business models both to better engage the customer and deliver a superior customer experience, as well as to digitize operations and service-related processes. 

We are also seeing the entry of a number of players on the non-bank side with a digital-led proposition. This is most visible in the digital payments space, but we are also starting to see examples in the lending space. In contrast to technology, regulations have not yet had the same degree of impact. For example, measures such as open banking have not yet been implemented in Vietnam. As a result, the opportunity for new players is not as attractive on this front compared to other markets.

■ What should local banks do to thrive in this new world of financial intermediation?

Local banks in Vietnam have a number of strategic choices, as outlined in the report. There is no one-size-fits-all solution, and different banks will need to embrace different strategic postures depending on their starting position. Larger banks can opt to fully optimize and digitize as traditional players, whereby they embrace technology to drive revenues (for example through advanced analytics) and bring down costs (such as through process automation). Other banks can opt to focus more narrowly on specific segments and/or focus on a narrower set of products or specialized capabilities, for example with a payments-led play or a digital SME-focused play. Finally, some players may opt to become end-to-end ecosystem orchestrators and try to occupy center-stage on the customer journey. An example of this is a leading bank that has an embedded relationship with a large property developer and has greatly simplified the process of home buying for customers. 

McKinsey released its eighth annual review of the global banking industry on November 7, “New rules for an old game: Banks in the changing world of financial intermediation”, based on data and insights from Panorama, McKinsey’s proprietary banking research arm, as well as the experience of clients and practitioners from all over the world. Regional highlights for Vietnam include:

• Despite a moderate deterioration in revenue margin, risk cost and cost efficiency, ROE moved upwards due to an increase in other items and leverage.

• The price-to-book is higher than emerging market counterparts while the valuation gap is marginally lower than the global average.

VIR