After the economic crisis from 2008-2011, Vietnamese economy has showed signs of recovery since late 2013 until 2015. However, 1H2016 indicators have showed the slowdown of growth. Real GDP growth slowed to 5.5 and 5.6 percent (y-o-y) in the first and second quarter of 2016 respectively. CPI index fell to below 1 percent (y-o-y) before ticking upward in early 2016 due to higher food and administered healthcare prices. The Government passed a comprehensive economic reform, usually referred to as the Three-pillar Reform, including: (i) Public Spending Reform; (ii) SOE Reform and (iii) the Banking Restructuring.

1)     The Banking restructuring plan was officially approved by the Prime Minister in the Decision No. 254/QĐ-TTG dated on March 1st, 2012, which set various measures to restore the financial sector. The Decision covers all types of financial institutions with many general statements, however we have identified four main areas of the Banking restructuring plan including: (i) resolutions of NPL; (ii) operational efficiency improvements; (iii) restructuring of management and corporate governance at banks, and (iv) dealing with ownership issue.

2)     The most important target of the banking restructuring plan is to reduce NPL level to below 3%. As of 31/12/2015, this goal has almost been attained, as reported NPL ratio was reduced significantly from 4.08% in 2012 to 2.55% in 2015. However, reported NPL by banks is always significantly lower than NPL supervised by SBV or independent agency. NPL reported by banks was underestimated as it did not take into account the international practices of NPL recognition and other non-performing assets, while VAMC was slow in dealing with NPLs recently. VAMC has successfully purchased a large portion of bank’s bad debts at US$11.83bn by Q2/2016. On the other hand, the company has not developed its capacity to repackage and sales bad debts effectively, with total debts sold and restructured of only 8% of purchased debts.

3)     In Vietnam, financial sector is majorly dominated by banks. The Vietnamese banking system can be divided into three distinct tiers: (i) the state-owned banks, (ii) the joint-stock banks, and (iii) foreign-owned banks. Banking system’s asset are generally centric. Top 10 commercials banks already account for 66% total assets and 46% charter capital of the whole banking system.

4)     Credit growth of Vietnam Banking Sector in 2016 is estimated to be around 21.82% y-o-y, over 3 times higher than GDP growth. High credit growth with focuses on real estate lending might create NPL risk for the market. By industry, outstanding loans focus on Industrial/Construction and Trading/Transportation and Telecommunication Industries. Loans for Private Corporate clients always hold the leading position of market share with over 44% given their position as the key driving force of the economy. However, Vietnamese banks are switching from corporate banking to retail banking. This trend started in 2012, and continued to become dominant as loans to individuals over total loans outstanding increased gradually from 28% in 2012 to approximately 29% in 2015.

5)     Reported CAR of Vietnam Banking system gradually reduced since 2012, especially after the application of Circular 36 with higher weight over risky assets like real estate and securities loans. By Q2/2016, CAR of Vietnam Banking system is around 12.7%. The credit market of Vietnam has developed at a faster pace than many other regional peers. According to our calculation, the ratio of Loan to Deposit of Vietnamese baking sector reached 86.1% and 86.4% respectively in 2015 and 1H2016.

6)     The number of entities, asset sizes and operations of Consumer Finance (CF) and financial leasing companies are relatively small in comparison with the whole sector. Total outstanding loans of CF and Project Financing companies account for only about 4% of total retail lending in Vietnam Financial sector by YE2015. The market for consumer finance and finance leasing in Vietnam have great potential to grow as more than 80% of Vietnamese population is from Lower Mass to Upper Mass groups, who are the targeted customers of CF companies. Digital banking is also predicted to be the next movement in Vietnam banking sector. This is considered a logical movement after the development of consumer finance and banking infrastructure (including cards, e-payment channels) as well as increased tech-savviness of consumers.

7)     Besides the critical documents update on NPL resolution and improvement of prudential ratios, the Government has set up ambitious goals for period 2016 – 2020 in terms of reducing lending rate to 5%, consolidation to 20 – 25 banks and application of Basel II at 70% commercial banks by the end of 2020. However, to be able to apply the Basel II standards, local banks must improve their corporate governance and operation such as increasing their capital requirement. Banks, which have the CAR of around 9%, would have to increase capital to meet the Basel II standards.

In the next couple of years, Vietnam banks will not only have to face up with the challenges to consolidate illiquid banks and resolve NPL but also deal with stronger competition from oversea banks after the engagement in TPP and AEC agreements. 

Download Report Preview Here