After rapid expansion, banks in Vietnam settle into stability

As a senior international banker who has spent years overseeing Vietnam’s economy and financial sector during a period of break-neck development, Dennis Hussey, the Greater Mekong Region head and CEO of ANZ Vietnam, has accumulated a deep understanding of Vietnam’s banking system. He shares his impressions on how the banking sector has evolved from a state of turmoil to its present relative stability, and what the sector should do to take off into bigger markets. Trang Nguyen reports.

An industry reborn

So much has changed in the local banking sector since Hussey first worked in Vietnam in 2000. Lenders, during a decade of rapid expansion since the mid-1990s, were set up liberally to cater to the country’s gigantic credit growth in the real estate sector, despite their insufficient expertise and inadequate infrastructure. The system, as a result, produced an alarming number of non-performing loans (NPL), which are still a significant problem to this day.   

Changes in the sector, according to Hussey, are the result of structural reform to the banking system over the past three years. The number of domestic banks has been cut back to 35 from 44 in 2011, as weak and poorly managed banks were merged with stronger ones in a bid to strengthen and clean up the banking sector. 

“In looking just at the past two years, good work has been done in improving the governance and oversight of the banks by the State Bank of Vietnam (SBV),” said Hussey.    

To reinforce the restructuring process, the Vietnam Asset Management Corporation (VAMC), was set up in 2013, with a remit to handle the prevailing NPLs at credit institutions in Vietnam. By the end of 2015, the ratio of bad debt had been reduced to 2.55 per cent from the dangerous level of 17.21 per cent just three years earlier.     

In addition, the size of total assets across the entire banking system was reported at roughly $325 billion in December 2015, a swell of over 12 per cent compared to the same period a year earlier and an average growth of some 15 per cent during the past three years.

“Many banks here have emerged much stronger from the NPLs crisis, with better risk management practices, improved systems, and stronger management,” said Hussey. “Several banks have developed their products and services to a very high standard, so Vietnam’s consumers are benefiting.

“The country is once again in a period of rapid credit expansion, and I am cautiously optimistic as the better banks will have learned lessons from the past. It is very important that banks be cautious in their risk concentrations to cyclical industries such as real estate.”

As one of the first international banks to enter the Vietnamese market, ANZ Vietnam has helped lead the way in the banking sector’s evolution

Integration begins

The transformation of the banking industry allowed it to stand ready to integrate into regional markets when Vietnam became a member of the ASEAN Economic Community (AEC) late last year. As part of AEC integration, a single-functioning financial market will be created to connect capital markets across the region, as well as paving the way for easier cross-border financial services.

Given the AEC lists capital market integration as a key goal, it will benefit ASEAN countries in facilitating long-term capital investment, and Vietnam, as noted by Hussey, should be a net beneficiary of regional investment flows.

“Indirectly this will benefit banks, as more long-term financing will move out of bank markets to capital markets, freeing up banks to grow their lending portfolios in other sectors of the economy.”

However, Hussey believes the Vietnamese banking sector would be fragile under AEC and is not likely to be fully liberalised as there is a recognition that banks in the ASEAN region are not uniformly ready to compete with each other within AEC.

The path for local banks, as pointed out by the CEO, is to make its transition to Basel II, or possibly even move directly to Basel IV, strengthen their capital base as needed, and continue improving their operations. “Further consolidation of local banks, in addition, is to be expected,” Hussey said.

AEC will not simply profit the local banking sector or financial market, but also open up a wide range of opportunities for Vietnam. Hussey believes the country will play an increasingly important economic and socio-political role within the ASEAN region in the years to come.

Vietnam, according to the banker, has the human and political capital to emulate the development paths of Korea and Japan, and it is encouraging to see more high-value manufacturing and technology companies choosing to be based here.

Modern manufacturing is increasingly reliant upon logistics and supply chain, so we can expect to see components being manufactured across ASEAN, but finished and exported from Vietnam. 

“It is essential that Vietnam continues investing in efficient customs procedures to allow for AEC to truly work,” he said.

Challenges, and opportunities ahead

According to Hussey, among the ASEAN markets, Singapore, Malaysia, and Thailand have already developed sophisticated modern banks, and over the years have gone through their own banking crises. This has allowed them to build stronger governance, regulation, and capital adequacy. Vietnamese banks, meanwhile, are playing catch up in terms of systems, products and overall management. 

“Competition is already intense in Vietnam, with very tight margins to the best borrowers compared to other regional markets,” said Hussey.

The country, in addition, already has plenty of foreign banks from all over the world. “But yes, we are already seeing new entrants this year from ASEAN and I know that there is interest from East and North Asian banks to further participate in this growing market,” he noted. 

Hussey’s bank, ANZ, was one of the first to enter Vietnam, an astute move which has allowed them to build a long and successful history in the country. Their head start gives them unique connectivity in the region, sector expertise, and stable leadership combined with a customer-focused and solution-based approach. With such firm foundations, the bank welcomes competition and continually strives to provide the best quality services to keep their clients.

Along with the increased competition, Hussey believes there are other challenges to be overcome if local banks are to stand shoulder to shoulder with their regional peers.      

“I see two possible challenges. The first is to meet the requirements of Basel II, ensuring capital adequacy,” said Hussey. “And the second is new technology. It is highly likely that in the years to come, new technology will displace traditional banks in retail payments, possibly also in consumer savings and lending.”    

Both challenges, if addressed appropriately through further improvements in the banking sector, will benefit the economy as a whole and support local companies in international competition.

ANZ is actively supporting Vietnamese companies expanding overseas through financing their businesses in ASEAN and in broader Asia. “We also have an active project and structured finance team who work to finance major infrastructure projects here and in the ASEAN region. Importantly, we facilitate foreign companies investing in Vietnam with access to our award-winning trade, cash, and FX services.”


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