Vietnam banking: Where credit is due

Investor interest in Vietnamese banking is on a high, which is good news for a booming macro picture that hangs on the sector’s stability. This interest does have its limits, however, and if a penchant for regulatory bureaucracy persists, there is a risk that one of Southeast Asia’s largest and most promising consumer markets may stall at the point of inflexion.  

Earlier this year, GIC Private and Mizuho Bank contributed to a VND6.2 trillion ($265 million) investment in Vietcombank, the first commercial lender from a 2008 pilot privatization program and generally considered the best performer among a handful of state-owned banks. The investors hold 2.5% and 15% stakes, respectively, and plan to help the bank continue diversifying its loan book and developing international best practice standards.  

Meanwhile, Vietnam has eclipsed Singapore as ASEAN’s most lucrative IPO market, with five floats in 2018 raising $2.6 billion, compared to 13 debuts for $500 million in the city-state. Banks, though still a nominal slice of overall investment activity, are a big part of this story, with VPBank, HDBank, TPBank, and Techcombank all listing last year. The latter raised $1.3 billion, making it Vietnam’s largest IPO to date. 

The sticking point is that banking investors remain subject to the strictest foreign investment ceiling in the region by far. Most of the major Southeast Asian economies allow overseas entities to take controlling stakes in banks. Even Myanmar and Thailand are comparatively flexible with 35% and 49% limits, respectively. 

Individual foreign investors are limited to 20% holdings in Vietnamese banks, and the combined foreign shareholding cannot exceed 30%. Ongoing efforts to loosen these rules may be entering a do-or-die phase as many longtime stakeholders are said to be losing patience with the restraint. Commonwealth Bank of Australia, HSBC, and ANZ Bank all made large Vietnam divestments in the past two years. Standard Chartered is perhaps the most recent, having ended a 12-year relationship with Asia Commercial Bank in January. 

“It threatens the growth of the country because it stops banks from raising capital they need to be Basel II compliant and businesses can’t access credit to grow,” Jeffrey Perlman, head of Southeast Asia at Warburg Pincus, a pre-IPO investor in Techcombank. “Vietnam has been strong on policy in the past five years, but if they wait until there’s a downturn to raise the limit, it may be too late to help. There has to be a recognition that now is the right time because there’s currently a lot of interest in the banking sector from foreign investors.”

Incremental change

In Vietnam, banking reform has correlated closely with the country’s macro fortunes, chronologically lagging its regional neighbors. While most ASEAN banking sectors mobilized modernization agendas in the wake of the 1997 Asian financial crisis, Vietnam had its wakeup call in the form of a local downturn in 2011, which saw inflation jump 28%. The government duly went to work stabilizing a resulting surge in debt, strengthening oversight of the central bank, and bringing in market discipline. 

This effort began to accelerate in 2016, when a raft of new regulations empowered banks to buy back non-performing loans they had recently sold to the government. The cumulative effect has been a reduction in bad debt, a consolidation of small, underperforming banks, and an erosion in state ownership of the sector. This has created a favorable environment for foreign direct investment (FDI), which has reached a new record level every year for the past six years, hitting $19.1 billion in 2018.  

The surge in FDI has fueled credit growth in the banking sector, which has in turn underpinned much of the consumer-themed GDP story attracting investors. GDP grew a record 7.1% in 2018, and Standard Chartered forecasts a 6.9% increase this year. “The Vietnamese economy will remain one of the fastest growing in Asia and likely the fastest-growing ASEAN economy in 2019,” says Nirukt Sapru, Standard Chartered’s CEO for Vietnam, ASEAN and South Asia markets.

FDI is often held up as the ultimate driver of this momentum, but an understanding is emerging that cash injections alone will not be enough. Banking in Vietnam still suffers from a lack of human resources and strategic vision. If these shortcomings are not remedied as well, continued investment will further increase the sector’s overall lending activity in an undisciplined way, which could result in a regression into trouble with non-performing loans.  

There is also a risk that unbalanced development will result in the sector failing to gain critical mass. Foreign professional investors and strategic veterans are beginning to trickle onto the boards of local banks, but the process is slow, inhibiting M&A and competitiveness. Even the largest banks in the country, state-owned Agribank and Vietinbank, which have about $1.5 billion in assets apiece, are considered thoroughly outclassed by their regional peers in terms of metrics such as return-on-equity and cost-to-income ratio.

“The top-10 banks are moving very fast in terms of growing assets, but having a bank that can be recognized at the ASEAN level and compete with Singaporean, Malaysian and Thai banks, that’s still a very long way away for Vietnamese banks,” says Duong Nguyen, financial services leader at EY Vietnam. “The local privately-owned banks are profitable, but because they grow organically, and they don’t want to acquire poorly performing banks, the challenge still rests with the state-owned banks.” 

Banking the unbanked

At the same time, Vietnamese banking’s relative immaturity is part of its appeal to private investors. There is an early opportunity to carve out market share from the government at a time when a new middle class is just getting started with consumer finance. Two-thirds of a population of around 100 million is unbanked. About 95% do not have credit cards and 98% are without any form of insurance. 

So far, this has been the core thesis for private equity investors helping commercial banks into more retail-focused services. In addition to the bevy of firms behind Techcombank and Vietcombank, early movers include VinaCapital, which has backed Eximbank and Orient Commercial Bank; Mirae Asset Global Investments, an investor in Eximbank and VPBank; and CVC Capital Partners, an investor in Asia Commercial Bank. 

Impact investment focused on lending to small to medium-sized enterprises or women-led businesses, for example, has proven a big part of the equation as well, although the lines separating the category are vague. Many banks classify mom-and-pops – the bulk of the domestic business sector – as retail customers. The World Bank, which began helping the government draft its regulatory reforms in 2012, is the biggest developer on this front, having backed at least six local lenders to date. 

“The concern right now is really moving to the next stage in reforms and how you can move toward more market-based banking with less interference and shareholding from the state,” says Alwaleed Alatabani, lead financial sector specialist at the World Bank in Vietnam. “I see things changing at the banks in Vietnam, and they have a dynamic government. But it goes back to this whole issue of what should be the role of the state in the economy, which is much broader than just what’s going to happen in the banking system.” 

Frustration around this issue is compounded by a local regulatory culture characterized by protracted pilot periods, and the incremental rollout of tentative statutes and circulars that add up to a sluggish modernization process, even by banking industry standards. The most recent developments could shake things up this year, however, with new rules requiring the entire banking system to put an end to longstanding cross-ownership protocols and meet the capitalization standards set out in the Basel II accord by 2020.   

“They’re going to come to many more crossroads and will have to realize that if the banking system is going to be a drag on the economy, they have to think about recapitalizing this institution somehow,” Alatabani adds. “That either means more forced M&A or opening up foreign ownership limits, but something has to give, and I would expect that to happen within five years’ time.”

Bao Tran Tran, manager for private banking and wealth management consulting at Accenture-owned financial services advisory Orbium, sees Vietnam’s regulatory momentum as reactive rather than proactive. Spot fires around issues such as bad debt or real estate inflation are handled on a crisis-management basis, and there is little groundwork in the way of the systemic efficiencies or preventative infrastructural measures that characterize developed markets. 

“A lot has changed in the last few years, but banking policies are still more or less politically driven,” says Tran, who previously served as Vietnam portfolio manager at Singapore’s Duxton Asset Management, one of the first foreign fund managers active in the country’s banking sector. “If you look at things like consumer finance or fintech, there isn’t enough regulation around those areas, and they’re not trying to create a sandbox. They just let them keep growing until there’s a problem, and that’s when they do something about it.”

Effective deal targeting in this environment means watching out for a number of operational variables, including competency in customer experience, diversification of income streams, and asset quality. It is common for banks to issue loans that are uncollateralized with extremely high interest rates and weak underwriting procedures.

Harnessing technology

In the year to come, economically viable banks will also be distinguished through sufficiently large branch networks, usually meaning hundreds, not tens, of locations. Vietnam’s dozens of small lenders are tipped to struggle as compliance standards tighten and M&A activity becomes more discerning. But even banks with large footprints can have deceptively limited reach. LienVietPostBank, for example, theoretically operates across 10,000 post office locations but is not considered to have enough manpower to leverage the advantage.  

Technology plays a large role in shoring up these areas since it cuts operating costs, reduces reliance on large teams, and improves efficiency in processes such as credit-checks and mortgage applications. But while Vietnam has seen rapid uptake of digital technologies in general, financial applications have lagged. Payment via cash-on-delivery, for example, is still customary in e-commerce. TPBank is often cited as the local digital leader, although Orient Commercial Bank was the first to launch an omni-channel platform last year. 

Timo, a front-end interface for VPBank that describes itself as Vietnam’s first digital bank, reveals the challenge may be mostly cultural. 

“The banks here still do a lot of things they don’t need to do, like paperwork, because they’ve always done it that way,” Cameron Warden, CEO of Timo, told AVCJ last year. “You can do it much quicker within the law, but in these big banks, who’s going to bother changing it? If we’re actually going to make a difference for the customers, we need to challenge why banks are doing things the way they’re doing them.”

Warburg Pincus weighted this factor heavily with its investment in Techcombank, noting that the vision required to make technology investments is a leadership issue. The GP, which has also backed several lenders across India and Indonesia, highlights the importance of identifying figures such as Techcombank’s CEO, who has 20 years of international experience in the sector, including in areas such as IT systems architecture. 

“Whenever you’re thinking about investing in a banking sector, it really comes down to the management team, and with Nguyen Le Quoc Anh, Techcombank is unique in the context of Vietnam,” says Warburg Pincus’ Perlman. “But operationally, the most important area where private banks can leapfrog and take more market share is technology. Very few banks have access to capital to make substantial digital investment, so if we do that now, we’ll see it pay off in 2-3 years when it starts to flow through the business.”   

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• Topics
• Southeast Asia
• Financials
• Regulation
• GPs
• IPO
• Vietnam
• Warburg Pincus Asia
• Financial Services