Vietnam’s banks have $162 billion in outstanding loans on their books, hence mounting concern about the economy.
With a booming economy and foreign direct investment flowing in, Vietnam was the poster child for frontier markets in the early part of this century. But that status is being undermined by a banking crisis.
Vietnam has a GDP of $155.8 billion and the World Bank forecasts GDP growth of 5.4% this year compared with an average of 7.2% for east Asia and the Pacific. It is a far cry from 2000 to 2009 when annual GDP growth averaged 7.1%. Still, with a gross national income per capita of $1,550 by World Bank estimates, the country will remain a magnet for foreign investors looking to take advantage of low labour costs in the wake of China’s recent wage increases. According to Edit Hauszknecht of MSCI, Vietnam accounted for 2.29% of the MSCI Frontier Market Index at the end of 2013.
Bright spots remain, the most obvious that the government will be spurred into action to clean toxic debts in the domestic banking system. If everything goes to plan that might entice investors keen to grab a piece of the action from debt auctions and fuel M&A activity among Vietnam’s local banks. The ‘if’ is a big one.
Continued challenges
Moody’s Investors Service has had a negative outlook on the Vietnamese banking system since 2010 and still expects “continued challenges in the system over the next 12 to 18 months”.
Then there is the opaqueness of governance in Vietnam as well as deeply entrenched corruption. Questions have been raised over the accuracy of recent information provided by Vietnam’s prudential regulator, the National Financial Supervisory Commission.
Daniel Martin, Asia economist at Capital Economics in Singapore, says: “Its figures are not considered the most reliable and it consistently underestimates non-performing loans.”
Those doubts were recently highlighted when Moody’s calculated NPLs to be at least 15% of total assets. The NFSC claimed the actual figure was 9%. Moody’s previously noted that its NPL calculations were higher than those reported by the State Bank of Vietnam, the country’s central bank, because of the latter’s accounting policies. “The difference stems from reporting and accounting practices which systematically understate the extent of problem assets,” it said.
Eugene Tarzimanov, senior credit officer, at Moody’s in Singapore, goes further. “Our assessment is higher because it includes problem loans classified in other categories on the balance sheet, such as securities, receivables and interbank. We also add special mention loans and restructured loans to our calculation.”
That adds up to a big strain on banks’ capital adequacy ratios, with Moody’s predicting that even under the most optimistic projections (10% NPLs) tier 1 capital will fall below 5%.
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| Mark Mobius, executive chairman of Templeton Emerging Markets |
Mark Mobius, executive chairman of Templeton Emerging Markets, attributes Vietnam’s problems to what he calls reckless and excessive lending to state-owned enterprises during the credit boom. Uncertainty over economic stability is reflected in bond prices. In April, yields on the benchmark 10-year government bond were 9.5%, with a long-run average (2006-12) of 10.7%, according to Capital Economics. In emerging Asia only Pakistan has higher yields.
Peter Pham, managing director of Phoenix Capital in Ho Chi Minh City, says indecision over debt strategy is putting a brake on capital markets. “Bad debt has become a nightmare for the Vietnamese banking system in particular and the global economy in general,” he says. “Like the west we tried waiting for growth to return while keeping the interbank market liquid through central bank open-market operations and letting the banks fix themselves. The problem is too big for that and the banks have no incentive to reform anyway.”
According to data provider Dealogic, there have been 36 M&A transactions year to date, with a deal value of $114 million, compared with 174 in 2013 valued at $3.32 billion. It is a similar picture with the debt capital market, with one internationally marketed bond in 2013, with a value of $198 million.
Discussions about attracting foreign capital have yielded little and a 20% cap on foreign investments in banks precludes control of domestic banks by foreign investors; foreign ownership is capped at 49% elsewhere in the economy. Mobius says it is crucial there are reforms: “One of the key problems in getting strategic investors in the banks is the 20% cap on foreign investment, which means any foreign bank investing would not have an opportunity to control the destiny of its investment.”
Moody’s Tarzimanov is downbeat on the scope of the M&A opportunity. “We remain concerned there is no cross-border M&A because of the cap on foreign ownership at Vietnam banks,” he says. “New foreign capital could improve the risk profiles of Vietnamese banks as domestic capital is scarce.” He also calls into question the logic of consolidation: “The acquirer does not become a stronger entity after the merger because there are few cost and revenue synergies created through these consolidations.”
Aaron Russell-Davison, head of capital markets, southeast Asia, at Standard Chartered Bank, is more bullish: “There are many potential issuers who would be well received by the international bond markets. The DCM product has a significant future in Vietnam’s financial future.”
Regulation in Vietnam has a long way to go to reach internationally accepted norms, but it is an issue policymakers will have to address quickly.