VietNamNet Bridge – Keith Pogson, senior officer of banking and financial services of Ernst&Young Asia Pacific, spoke with the media last week in Vietnam about the banking situation in the country.

Mr. Keith Pogson.

- Vietnam has 90 million people and with only five major banks, how can they meet the needs of capital of the economy and the people?

- I highly appreciate the State Bank of Vietnam (SBV) for aggressively reducing the number of banks from the current 40 to 15-17. But from my personal standpoint, I think five is enough and they must be really big banks, at regional-scale level. Of course, Vietnam should still maintain other forms of credit grant as consumer finance companies, financial leasing ... to serve rural areas and branch markets. Let the big banks  do big tasks to save in technology, capital and personnel.

If you look around the world, most of the most successful banking markets have only two to five large-scale domestic banks in each country while Vietnam has too many. It was similar in countries experiencing a waves of mergers in previous years. In Malaysia, 20 years ago they had 45 banks, now they have only 10. In the next five to 10 years, investment in infrastructure development is the greatest need of all nations, so if Vietnam does not have big banks able to arrange these funds, it will be disadvantageous for the country and economic development will be difficult.

- To assess the feasibility, we must see the operator's goals. If only to solve the cross-ownership story, I think it's no hurry. Recently, we helped Sri Lanka to work similarly. The Governor asked to have three different banks with the same owner and EY did it in only three months. With Vietnam, you still have nine months, so I think it's not too difficult to fulfil if it is the target.

Naturally, after the merger, to operate fully from the system, personnel to workflow, it can take several years.

- Foreign banks are longing to penetrate the Vietnam market, especially as the establishment of the ASEAN Economic Community (AEC) is about to come in 2015. What should local banks prepare to welcome these guests?

- Vietnamese banks must have large scale to compete with foreign banks. Simply, when you are big, you can afford huge investment on technology, products ... to expand operations across the border. Therefore, the dynamics and determination of SBV in consolidation and merger to create big and stronger banks is correct.

Malaysia has two major banks at regional level. It is the same for Singapore. When AEC becomes a reality, Vietnamese banks must prepare to compete with them. According to the roadmap, by 2020, Vietnam will have to completely open its doors in the banking sector. In my opinion, you should do some work in these five years. For example, you should take measures to support VAMC to be capable of handling bad debts, not just buying in and holding. In addition, it is necessary to improve the performance standards of the local banks.

- The State Bank plans to acquire weak banks at the cost of zero VND instead of letting them go bankrupt, similar to the case of the Vietnam Construction Bank (VNCB). What do you think about it?

- SBV almost has no other choice. I think this is the right step because it is in accordance with market conditions. The characteristic of Vietnam is the amount of savings of the people. It is very large but the trust of the banking system is not high. Therefore, if a bank collapses, it will have a significant impact on the faith in the entire system.

I think under your conditions, SBV needs to have an active intervention to support the market. Over time, as the market develops slowly, let the market decide how to deal with weak banks. China recently passed a major program on deposit insurance; even when banks collapse, depositors are still guaranteed. If Vietnam can do the same, SBV will have to intervene little more.

* Keith Pogson has 20 years of experience in commercial banking, investment and 17 years as manager of EY’s Financial Services in Asia - Pacific. He has extensive experience supporting legislatures and management agencies of many governments in the region in creating regulations and reform initiatives in financial markets.

Ernst & Young is a leading firm providing assurance, tax, transaction and advisory services. In Vietnam, the company was licensed in 1992. In April 2014, Pogson and senior experts from EY led workshops with leaders of Vietnamese banks on how to have a successful merger.

VNE