Vietnam banking a crowded sector

Asiamoney, March 2008

On first glance, Vietnam is a vastly overbanked market. In addition to five state-owned lenders there are 36 joint stock banks, 33 foreign banks, and several new licences approved for more. “By the end of the year, if all applications are approved, you’ll have in excess of 90 players for a US$75 billion economy,” says Charly Madan, CEO for Vietnam at Citi. “That’s a tad too many.”

But is it? The dynamics of supply and demand are tricky to predict. “Yes, it’s an overbanked market, but it’s still very underserved,” says Madan. “The products and services available in the marketplace, on both the consumer and the corporate side, are fairly basic. So there’s a lot of room for existing players to prove themselves by capturing new customers and improving product and service development.”

And there are plenty of customers to aim at. “We have 80 million people in Vietnam but only eight million bank accounts,” says Dam Van Tuan, executive vice president and head of strategic planning at Asia Commercial Bank, a joint stock bank. Credit penetration is low, and in foreign direct investment, 15,000 new enterprises were established last year with $20 billion of commitments, although not all will be taken up. “You will probably see continued double digit growth in banking assets for at least two to three years before things start tapering off,” says Madan.

Local banks are positive. “There are not enough banks to serve all these people,” says Tran Xuan Huy, chief executive officer of Sacombank, another leading joint stock bank. “I don’t see any competition here because the market is so huge in potential.” Retail’s the big appeal: Sacombank has put its corporate activities into a separate division in order to focus on the mass market, and plans to be present in all Vietnam’s provinces (it’s in about two thirds at the moment) by 2010. “80 million people are waiting for us to serve them.”

And it’s not all about people discovering bank accounts for the first time. Sacombank is launching a private banking division, starting out with a minimum entry level of $500,000. “There are lots of people with millions of dollars in Vietnam now,” says Tran. “We have a big base of customers already, all the entrepreneurs, the owners of businesses.” Tran aims to serve these customers as their needs grow overseas – sending children for study in America or Europe, or buying property in Hong Kong – using its links with foreign banks.

ACB, too, sees opportunity, though Dam argues that it’s really only the bigger banks – he considers Sacombank and Techcombank to be peers – that stand to benefit. “There are more areas for growth but in the long run I think there will be mergers and acquisitions,” he says. “New banks will have to try very hard to survive.”

This is not to say that there aren’t danger signs, though. In the short term at least, competition is going to cause challenges. “Definitely you’ll be seeing spreads compressing, new ways of fundraising for clients, and as the capital markets become more accessible and regulations become more streamlined, we’ll see a lot more capital raised in those areas,” says Madan. So long as the economy keeps motoring, things will be fine. “It the economy continues to perform at 7.5% to 9% levels, then as a rising tide lifts all boats the situation is more manageable,” says Madan. “But if it comes to much slower growth, we’ll start seeing issues come to the surface.” That said, Citi expects continued growth of 8 to 8.5%, although the country is clearly vulnerable to external shocks given the fact that international trade accounts for 150% of national GDP.

Bank practices tend to become more reckless in periods of intense competition too. “The terms at which consumer loans are being underwritten is a major worry,” says one banker. “If I was in the regulators’ shoes, that would be my biggest worry. My concern is with the regulatory capacity for looking after 90-plus institutions with limited monetary tools, alongside a problem of inflation.”

In light of that concern, Dam at ACB expects more constraints on banking businesses this year: greater supervision of rapid loan growth, and in particular of areas such as securities lending or real estate lending. That’s going to increase the pressure still further.

Despite the level of competition, many foreign banks have felt sufficiently impressed by the prospects of domestic banks to either incorporate locally – HSBC, Standard Chartered and ANZ are all in the process of doings so – or take stakes in local banks. The rules, which have gradually eased over the years, allow foreign shareholders to own 15% in a bank, which can in some cases be increased to 20% given one-off approvals from the regulators. The total aggregate foreign shareholding in a bank is capped at 30%. ACB is at that limit, with four foreign shareholders, Standard Chartered holding the largest stake; Sacombank, also at 30%, has three, with ANZ holding 10%; HSBC has a 15% stake in Techcombank, making it the first foreign bank to lift its investment beyond 10% following an additional purchase in October (it also holds 10% in insurance leader Bao Viet); and Deutsche has a stake in Hanoi Building Commercial Joint Stock Bank (Habubank), which should soon be boosted from 10 to 20%.

“We always believe that in this market, like in any other country in Asia, if you want to have wide access to that market you need to deal with a local or be with a local,” says ANZ’s Vietnam CEO, Thuy Dam. ANZ would happily increase its stake in Sacombank, but it’s at its foreign ownership ceiling.

These foreign houses generally get as involved as they can in their local counterparts. “They have the stake in the bank, they have representatives in the board of directors, they give technical assistance; they are involved in major decisions made by the bank,” says Dam at ACB of the involvement of its foreign shareholders.  That doesn’t, though, go as far as distributing Standard Chartered product, for example. ANZ and Sacombank have a joint venture to provide credit cards in the market, and several ANZ staff are seconded to the local bank, including the head of its treasury operations. Thuy says she plans to sell ANZ product through Sacombank but so far says ANZ has been able to do what it needs to through its own branches. Deutsche says it is building a “framework strategic cooperation and knowledge transfer agreement” with Habubank, which will include exploring partnerships in credit cards, affluent banking and investment products, as well as sharing expertise in treasury and risk management. HSBC has committed US$13.5 million to support technical service assistance to Techcombank over the next five years and says it “intends to explore joint business opportunities”.

Others are likely to follow. “ING is interested in Vietnam,” says Philippe Damas, the bank’s Asia CEO for private banking and retail. “You can clearly see the fast, growing, big population; it’s a nice wealth creation country, although it is far from being as open as Thailand,” where ING is increasing its stake in TMB Bank. “BIDV and Incombank will probably be in a process where they’re going to be looking for strategic partners and we’ve put our name on the list like many other banks to be involved in the process.”

Madan at Citi, which does not hold a stake in a local bank, expects the 30% overall cap to be relaxed in time. “When you take a 10% stake in a company your commitment is very different to when you have 51%,” he says. “Over the long run I think these limits need to be relaxed to enable more technology flows, and for the better health of the system.” He points out that, even if the impact a bank can have as a strategic investor with such a low stake is muted, the stock market performance has been welcome. “So if it works less well on a strategic basis at least it has made a financial return for the investing institutions.”

BOX: BROKERAGE

If mainstream banking is competitive, it could be worse: it could be brokerage.

A few years ago brokerage really just existed among the larger banks like Vietcombank and Bao Viet (whose Bao Viet Securities is the only local name frequently credited as an IPO bookrunner by Dealogic). Then, institutions and even private individuals were permitted to be owners of securities companies. “Then it moved up quite dramatically, to 40 or 45 very quickly,” recalls Kelvin Lee, whose own brokerage, Vina Securities, received in principle approval in December 2006 – roughly the 60^th to be licensed – and formally opened on July 1 2007. “One year on from our licence, there are 74. And we hear it will move up again.”

If Lee’s case is typical, a sizeable industry is evolving by the day: having opened with five people, he now has 80. “That,” he says, “is 10 people a month.” He started out focusing on institutional but plans to target retail in future, partly for branding and partly because he believes institutional clients want him to have the pulse of the market, which requires him to know what retail investors are doing.

Funds management represents a similarly crowded field. “The last two years has been a huge inflow of new funds,” says Chris Freund, managing director at Mekong Capital, which runs four funds and specialises in private equity. “We just updated our list of funds that are exclusively Vietnam-focused. It’s about 60.”

Dominic Scriven at Dragon Capital, one of the few investment firms to have survived the Asian financial crisis, adds: “To some extent one would say there has been an excessive profusion of institutions created, and that’s had all sorts of impacts on the skills market. In the short term that needs to iron itself out.” Dragon had $2.5 billion under management at the end of 2007.

It is often said that there is a multi-billion dollar wall of unallocated capital in funds outside Vietnam still trying to find a home. Local managers tend to regard this claim with some bemusement. “One reads and hears extraordinary figures being bandied around and I’m not sure what the basis for that is,” says Scriven. “There’s maybe a billion or two tucked away somewhere.” Don Lam, CEO of VinaCapital, another long-standing manager with $2.2 billion under management including a newly-raised $400 million infrastructure fund, agrees. “I think mostly it’s a myth,” he says. “If funds were offshore waiting to jump in and buy something, that was last year.”

That said, with every IPO that makes its way to the main boards, the market capitalisation in Vietnam becomes more worthy of attention. “Arguably you could say that supply is growing faster than demand, so many companies are preparing to be listed,” Freund says.

As Scriven says: “Vietnam is moving from the entirely peripheral to the compelling for international fund managers.”