Cracow University of Economics Money & Banking

THE BANKING SYSTEM IN VIETNAM

THE BANKING SYSTEM IN VIETNAM

As one of fastest grown economies in Asia with annual economic growth rate around 5 to 7% (5.98% in 2011), almost 70% of Vietnamese inhabitants are in the working age from 15 to 64 years old,Vietnams economy has become an attractive market for investors worldwide as a tiger in South East Asia. Investing in Vietnam generally and in its financial market as well provides investors diverse benefited opportunities. Thats the reason why I chose the subject to give the readers some comprehensive information about this new opened potential financial and banking system. 1. History of the Banking System in Vietnam The development of the Banking System in Vietnam has closely linked with its national history. Before the August Revolution 1945 Vietnam was under the French colonialists rules. The banking and credit systems was founded and protected by the French colonial Government through the Indochina Bank, which acted as both the central bank of the whole Indochinese region (Vietnam, Laos and Cambodia) and a commercial bank. After the establishment of the Democratic Republic of Vietnam in September 1945 the new elected Government attempted building a monetary and banking system independently from French. In the second Congress of the Vietnam Workers Party (February 1951) President Ho Chi Minh signed decree on establishment of the Vietnam National Bank (Ngn Hng Quc Gia Vit Nam). On 21st January 1960 the Vietnam National Bank was renamed as the State Bank of Vietnam (Ngn Hng Nh Nc Vit Nam). After the fall of Saigon and the capitulation of South Vietnams Governors the two parts Vietnamswere officially united. With the founding of Socialist Republic of Vietnam, administrations and institutions of North and South Vietnam became unified. The National Bank of Vietnam (the central bank of Republic of Vietnam South Vietnam) was merged into the State Bank of Vietnam.

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THE BANKING SYSTEM IN VIETNAM

In the iMi1 liberalization era, the banking system in Vietnam was reformed. New banks were created, starting with the Industrial and Commercial Bank of Vietnam and the Vietnam Bank for Agriculture. Nowadays the State Bank acts as the Central Bank of Socialist Republic Vietnams banking systems, which consists of 5 state-owned credit institutions, 35 joint-stock commercial banks, 50 branches of foreign banks, 4 Jointventure banks, 5 wholly foreign-owned banks, 18 finance companies, 12 leasing companies and 50 representative offices of foreign Banks. 2. The main regulatory bodies and their powers in Vietnam banking system The State Bank of Vietnam (SBV) As in most other countries, the State Bank of Vietnam is on the top of Banking System in Vietnam, acts as central bank of the country, being the money issuer, the bank for credit institutions and providing monetary services for the Government. The SBV is a ministerial agency directly under the administration of the Government. The bank governor is a member of the cabinet, equivalent to a minister in the cabinet, who is nominated by the prime minister subject to the approval of the National Assembly Parliament. In addition to being the central bank, the SBV has the power to issue legal instruments on currency and banking operations, issue and revoke licenses of credit institutions, authorize the dissolution, division or merger of credit institutions, inspect and control operations of credit institutions, and deal with offences. The Ministry of Finance (MOF) The MOF is a Government ministry, responsible for State administration in finances including managing the national budget, tax revenue, state assets, national financial reserves and the finances of state-owned corporations. The ministry also directly owns and controls some state companies such as Bao Viet insurance with 71%. Managing the

iMi: Renovation the economic reformation Vietnams 1988

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THE BANKING SYSTEM IN VIETNAM

work of national accounting, state borrowing, the activities of stock markets and the Department of Customs is furthermore MOFs responsibility. The State Securities Commission (SSC) SSC was created early 1990s by Vietnams Party and Government as a new channel of fund raising for development investment. At first it was the project of research and establishment of securities market, which purposely carried out under the management of the SBV. It was then set up in 1996 as a Governmental agency, responsible for State management of securities markets, including licensing of securities issues, trading and services, inspection of companies involved in securities activities and dealing with securities offences. The SSCs leadership includes Chairman and Vice-Chairmen are appointed by the Prime Minister.

3. Current Structure of Banking System in Vietnam and overview of major banks The credit institutions system in Vietnam currently consists of: No Types
1 State-owned commercial banks (SOCBs) 2 Policy Bank 3 Development Bank 4 Joint-stock commercial banks (JSCBs) 5 Joint venture banks (JVBs) 6 Branches of foreign banks 7 Banks with 100% foreign capital (FBs) 8 Financial companies 9 Financial leasing companies 10 Central people's credit fund 11 Local people's credit funds 12 Small-sized financial institution 13 Representative offices of foreign banks

2010
5 1 1 37 5 48 5 17 13 1 1057 1 48

2011
5 1 1 35 4 50 5 18 12 1 1095 1 50

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THE BANKING SYSTEM IN VIETNAM

Figure 1: Credit institutions system in Vietnam2 Reflecting Vietnams socialist history, 5 large State owned commercial banks (SOCBs) are still dominating the banking sector, though their market share has significantly shrunk during the period 2005 2010 from around 70% - 75% of market share in loans and deposits3 2007 to around 50% in 2009 and 20104. SOCBs are banks that 100% owned by the Government or partially equitized but the Government is still the largest shareholder. Most of these banks have advantages of large capital size5, reflecting in VND 64,037 billionof of chartered capital owned by four lar largest gest SOCBs in 2010. 2010 Their traditional customers are state owned enterprises (SOEs), which have higher exposure to non-performing performing loans than other enterprises. According to SBVs statistics, 60% of 2010s non-performing performing loans were from SOEs.
Deposits market share
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Credits market share

74.5% 68.9%

49.7% 47.7% 58.1% 56.1%

74.2% 67.0%

49.3% 57.1% 55.8% 54.1%

17.8% 23.0%

43.4% 33.1% 35.9% 42.8%

16.4% 23.7% 9.5% 2005 9.3% 2006

33.9% 33.8% 36.7%

37.1%

7.9% 8.1% 8.8% 8.1% 7.5% 8.9% 2005 2006 2007 2008 2009 2010 JVBs & FBs JSCBs SOCBs

9.0% 10.5% 9.1% 13.6% 2007 2008 2009 SOCBs 2010

JVBs & FBs

JSCBs

Figure 2: Market rket sharing under Credit institution groups

2 3

SBVs annual report 2011 Vietnam Primer III at a Crossroad Deutsche Bank AG/HongKong April 2008 4 VCBSs information sources 5 See table 1

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THE BANKING SYSTEM IN VIETNAM

Join Stock Commercial banks (JSCBs) are growing quickly, operating more actively and have gradually grabbed market share from SOCBs. 2002 there was no JSCB listed on Vietnams stock exchange. Currently 5 of them are playing along with the largest SOCBs on the Vietnam Hanoi Exchange Stock Equity (HNX) as well as on the Ho Chi Minh City Stock Exchange (HOSE). JSCBs have diversified shareholders composition and focus on retail banking and lending to small and medium enterprises. Market shares of these banks increased dramatically in the last few years, reaching peak at 43.4% for deposits nearly as much as its of SOCBs and 37.1% for credit in 2010.

However, the capital size of this banks group is still much smaller than of SOCBs6. Eximbank (EIB) leads the JSCBs with chartered capital of VND 12,355 billion even not just a half of one largest SOCBs chartered capital, followed by Sacombank with VND 10,740 billion, SCB with VND 10,508 billion and MB with VND 10,000 billion. ACB, Maritime Bank and Techcombank are belonging to the group biggest JSC Banks7, which comprises the chartered capital above VND 8,000 billion. Most of the other JSCBs have chartered capital of around VND 3,000 5,000 billion. Accordingly many banks have faced liquidity problems and this ignited the interest rate racing among banks.

Joint Venture Banks (JVBs) and (wholly foreign owned banks) FBs have some advantages in compare with domestic ones especially in term of retail banking, quality of services and sophisticated products. Large FBs like HSBC, Citibank, ANZ, Standard Chartered and Deutsche Bank have found their residents and attempted to expand their operating network in Vietnam. Many other foreign bank branches of Huanan, Chinatrust8 and Mizuho9 in Vietnam also increased its capital provide by their mother banks. In addition, some FBs are still holding stakes in domestic JSCBs.

6 7

See Table 2 See Table 3 8 Chinese banks 9 Japan most powerful commercial bank

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THE BANKING SYSTEM IN VIETNAM

F Domestic banks i ACB Sacombank Eximbank F F F Foreign banks Standard Chartered ANZ Sumitomo Mitsui HSBC SocitGnrale UOB BNP Paribas Common Wealth Deutsche Bank Figure 3: FBs shares in domestic banks10 Despite of several advantageous factors, FBs market shares as well as their operating networks are relatively small compared to that of the domestic banks. Nevertheless opportunities for foreign participation in Vietnam banking system are still provided by Vietnamese Government in an attempt to obtain additional capital for its debt-ridden banking system. Via the SBV, the Government announced the issuing of a draft decree, which would allow foreigners on a case-by-case basis to obtain stakes of over 30% in Vietnamese banks instead of 20% currently. Stake 11.47% 9.78% 15% 20% 20% 19.99% 15% 20% 10%

Techcombank i SEABank F Southern Bank i Orient Commercial Bank g VIB u Habubank r

4. Banking sector efficiency and stability Vietnam banking sector is one of the most profitable banking systems in Asian. With ROE around 18.25% Vietnam is ranked just right behind China and Hong Kong11in term of this profitability index. When revenues have been flat or shrinking in Western markets, the banking institutions Vietnams recorded a revenues growth rate of 30% the highest level among Asian countries12. In Asia Pacific area HSBC Vietnam, ACB &
10 11

Vietcombanks Statistics The future of Asian Banking Volume 2- Oliver Wyman Financial Service (2012) 12 The future of Asian Banking Volume 2- Oliver Wyman Financial Service (2012)

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THE BANKING SYSTEM IN VIETNAM

Techcombank are placed among 50 best performance banks related to returns on assets indicator13. HSBC Vietnam occupied the 9. rang with ROA of almost 30%, ACB and Techcombank were dedicated to 14 and 18. Places for their ROA indicators of 27.5% and 26% respectively. In the same period of time according to IMFs data, the total assets of banking sector have doubled from VND 1,097 trillion (USD 52.4 billion) in 2007 to VND 2,690 trillion (USD 128.7 billion) in 2010. Vietnam was ranked second after China in the top ten countries having the highest asset growth of the banking sector by The Banker.

Figure 4: Growth of credit, deposits and GDP during 2000 - 201014 Nevertheless the high asset growth is not increasing proportionally with the level of credit growth and GDP growth. Average credit growth during 2000 2010 was 32%, while the average growth of deposits and GDP were 29% and 7.15% respectively. That might have negative impacts on the health of the economy. Additionally credit growing faster than deposits in most of the years also caused the liquidity problem for the banking sector. Especially in segment of small banks, liquidity problems are frequently reported. High interbank interest rate in addition to collateral requirements of strong capital based banks make small banks harder in handling with liquidity risks.

13 14

Asia Pacific Banks Performance Rank Highes Return on Assets The Asian Banker Vietcombanks Statistics

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THE BANKING SYSTEM IN VIETNAM

5. Challenges of Vietnamese Banking System Financial crisis 2008 has apparently not showed its impacts on the banking and financial system Vietnams. During the period from 2008 till 2010, Vietnamese Banking sector still reported furthermore high profit growth.

However the challenges, which Vietnamese Banking System is now facing with, are more likely coming from its internal structure. The domination of SOCBs and their bad loans to some unhealthy SOEs majorly contributed making turbulent in Banking sector Vietnams. According to SBV the ratio of bad debt of total loan was 8.82% as of the end of September 2012. Because of a lack transparency and week accounting practice, this amount should not be completely trusted. Moodys Investor mentioned of at least 10%, Fitch Ratings Co. estimated that the figure is as high as 15%; among smaller banks some say it might be as high as 50%. In any case that level of non-performing-loan ratio is highest among the South East Asia countries.

Lack of transparency is also one of struggling questions for the Banking System in Vietnam. Except some big listed banks, there are almost impossible for outsiders to gain an access to the real financial situations especially of the small banks. Even annual financial reports are scarcely published. Indicators of domestic institutions typically showed higher profitability and better banks performance than the one in the reports of foreign institutions. The above mentioned non-performing-loan ratio is just one example of numerous cases of non-transparency in the Vietnamese banking system. Such antagonistic sources of information confused investors and are preventing the development of a healthy financial system.

But the todolist of Banking System in Vietnam will not only stop at just handling with bad debts or improving international standardized accounting practices in banking system. End of 2012 SBV has had to inject VND 28 trillion into the state-owned Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank), helped it dealing with massive
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cash withdrawals after its chairmans resignation. Sacombank was then forced to merger with Eximbank. That was the second time in last half ending of 2012 the central bank has pumped money in this kind of state-owned credit institution. Its first capital injection in Asia Commercial Joint Stock Bank (ACB) was undertaken in August 2012 after Nguyen DucKien, co-founder of Vietnams five-most valuable banks, was arrested. Mismanagement of state-owned banks and of SOEs is increasing many troubles not only for Vietnams banking and financial system but for the economy as a whole. The banking sector ties closely to giant state-owned enterprises, which are themselves addled with high level of bad debt. They seized the opportunities to expand, moving into sectors where they had no expertise. The Vietnam Electricity Group, known as EVN, is the countrys sole power supplier. Even when the country suffers from power cuts because the government does not allow it charge enough to recapitalizes generation costs, EVN expanded into building property, telecoms, banking & stock brokerage. Vinashin, the state-run ship builder, nearly collapsed in 2010 after defaulting on GBP 400 million of debts. Nine executives were jailed for the mismanagement of state resources.

6.

Improving legal environment With issuing legal regulations for the banking sector, for instant Decree 141/2006/NCP regulating required legal capital levels of credit institution Circular 13 and 19 regarding the safety ratios in operations of financial institutions, the Vietnams authorization attempts to establish a legal basement for banking and financial activities in system. SBV is working on strengthening banking law enforcement in banking and cooperating with other international institutions such as World Bank, IMF, and CIDA15 in improving the legal framework.

Improving and modernizing the countrys banking system and financial regulations in accordance with international standards are what Vietnamese Government aiming at, in order to maintain the attractiveness of Vietnams economy for investors.
15

Canadian International Development Agency

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State-owned credit institutions

No Name of Banks Securities Code/ Charter Total Assets Government's Stock Exchange Capital (2011) Stake Market Joint Stock Commercial Bank VCB/HOSE16 23,174 333,73517 90.70%18 for Foreign Trade of Vietnam (Vietcombank) Vietnam Bank for Industry CTG/CTS19/HOSE 26,281 414,98620 64%21 and Trade (Vietinbank) Bank for Investment and BSI/BIC22/HOSE 23,011 398,58323 100%24 Development of Vietnam (BIDV) Vietnam Bank for Agriculture AGR25/HOSE 29,154 560,00026 51%27 and Rural Development (Agribank) Housing Bank of Mekong 3,055 47,28128 68.1%29 Delta (Unit: VND Billions) Table 1: State-owned Credit Institutions

16 17

Ho Chi Minh City Stock Exchange Vietinbanks Statistics 18 Reuter - 17.05.2011

19 20

Vietinbanks subsidiary Vietinbanks Statistics 21 Bloomberg - 27.12.2011

22 23

BIDVs subsidiaries BIDVs Prospectus for IPO 2011 24 BIDVs Prospectus for IPO 2011 25 Agribanks subsidiary 26 Argribanks General Information - http://www.agribank.com.vn 27 http://www.zbc.co.zw 26.02.2013 28 Housing Bank of Mekong Deltas Annual Financial Report 2011 29 Reuter 24.06.2011

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Listed Joint Stock Commercial Banks

No Name of Banks Securities Code/ Charter Stock Market 1 2 Asia Commercial Bank (ACB) ACB/HNX 9,376 10,000 281,019 138,831 269,060 128,533 Exchange Capital30 Total Assets31 Total Debts32

Military Commercial Joint MBB/HOSE Stock Bank (MB)

Nam Viet Commercial Joint NVB/HNX Stock Bank (Navibank)

3,010

22,496

19,280

Saigon

Thuong

Tin STB/HOSE

10,740

141,468

126,921

Commercial Joint Stock Bank (Sacombank) 5 Viet Nam Export-Import EIB/HOSE 12,355 183,567 167,264

Commercial Joint Stock Bank (Eximbank) (Unit: VND Billions) Table 2: Joint Stock Commercial Banks

30 31

SBVs Information - http://www.sbv.gov.vn http://www.cophieu68.com 32 http://www.cophieu68.com

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Other unlisted remarkable JSCBs

No Name of Banks Securities Code/ Charter Stock Exchange Capital33 Market 1 Maritime Commercial Joint 8,000 Total Assets Total Debts

Stock Bank (Maritime Bank) 2 Saigon Joint Stock Commercial Bank (SCB) 3 South East Asia Commercial Joint Stock Bank (SeAbank) 4 Vietnam Technological 8,848 5,334 10,508

Commercial Joint Stock Bank (Techcombank) (Unit: VND Billions) Table 3: Some other important JSCBs

33

SBVs Information - http://www.sbv.gov.vn

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