Vietnam deals with its problem banks

Dozens of bankers and company officials in Vietnam have been jailed or sentenced to death for financial crimes including fraud and mismanagement recently. The sweep is part of a government crackdown on corruption and poor lending practices that led to a surge in non-performing loans.

Back in 2012, Vietnam’s malfunctioning banking sector was mired in all manner of misery, with some lenders’ finances stretched perilously thin after years of unsustainably high credit growth and lax regulatory oversight.

At first, the authorities pretended nothing was amiss, but as the bad debts grew and more scandals came to light, the state stepped in with bailouts and handcuffs. Among the many bankers arrested and incarcerated in the intervening years were Nguyen Duc Kien, the businessman and co-founder of Asia Commercial Bank (ACB), and Pham Cong Danh, the head of privately owned Vietnam Construction Bank (VNCB), who was sentenced to 30 years in jail and accused of embezzling $400 million.

If anything, the crackdown on errant bank executives has intensified in the last few months.

In July, Dang Thanh Binh, a former central bank deputy governor, was blamed for causing losses of up to $654 million at VNCB and jailed for three years. A month later, a trial at the Ho Chi Minh People’s Court ended with 46 executives packed off to jail, including Tram Be, a former deputy chairman of Saigon Thuong Tin Commercial Bank. Though at least they avoided the fate reserved for former Ocean Bank general director Nguyen Xuan Son, who was charged with embezzlement and fraud in September 2017 and sentenced to death.

What lies behind this reprisal? After all, none of Wall Street’s chief executives were prosecuted in the wake of 2008, although $150 billion in fines were levied on financial institutions. In Britain, the only senior banker to see the inside of a court was John Varley, and criminal charges against the former Barclays chief executive, stemming from the bank’s £11.8 billion ($15.3 billion) emergency cash call at the height of the crisis, were dropped in May.

The root cause of Vietnam’s reaction – some would say over-reaction – to the events of 2012 can be summed up by two words, embarrassment and fear, according to bankers and analysts in Ho Chi Minh City and Hanoi.

Embarrassment, because this was a crisis – or, to be precise, a near-crisis, as the financial calamity never quite happened – all of its own making. The government’s decision in 2009 to prime the pump of its economy by making vast sums of new credit available to state-owned enterprises led to a borrowing binge. When SOEs invested badly, lost money and failed to repay their loans, the banks buckled. This was an internal crisis and there was no one for the state to blame but itself.

Hence the fear.

“The people knew exactly what had happened,” says the chief executive of a Ho Chi Minh City-based investment fund. “They knew how the collusion worked between government and the state banks. When the economy was OK it was overlooked, but now it was in trouble, and people were out of a job. They were angry, and the leaders of one-party states get scared when the people get angry.”

And there was another problem.

“At the time, most people didn’t trust the banks – a lot of them were still buying property in US dollars or gold,” adds the fund chief. “So, if you have even one bank going under, that distrust will be reinforced, and you’ll end up with a run on all banks.”

Hanoi’s reaction to this triple threat – a wobbly economy, a teetering bank sector and a restless public – was, in hindsight, startlingly astute and mature. It set out, quietly but resolutely, to fix its banks and to ensure that nothing of the kind could happen again.

The State Bank of Vietnam (SBV) in effect used two consecutive five-year plans to coincide with those in the political schedule. The first, which ran until the end of 2015, aimed to restructure or forcibly merge bad or troubled lenders, and resolve the bulk of the industry’s failed or soured loans.

On the surface, it worked.

The central bank took over the worst lenders: VNCB, Ocean Bank and Global Petro Bank, and restructured nine lenders, including Saigon Commercial Bank. Several mergers took place in 2015: among these, Maritime Bank fused with Mekong Development Bank, and Sacombank joined forces with Phuong Nam Bank.

Not all the deals stuck. In April 2018, VietinBank, the second-largest lender by assets, called off its attempted merger with PG Bank, a unit of the Petrolimex conglomerate, after failing to agree on the best way to resolve the latter’s historical debts.

But by and large, the central bank achieved its primary objectives: to get the industry back on a level footing and to clear the decks of most of its legacy bad loans. After peaking at 17% in 2013, the non-performing loan ratio for the sector fell steadily, hitting a low of 2% at the end of 2017 – although earlier this year, Fitch Ratings reiterated its view that NPLs are under-reported.

And so to the second phase, which takes us to the end of 2020. This is where the SBV’s goals start to look more ambitious – and thus harder to achieve. Its stated aims include ensuring lenders keep their bad-debt ratios below 3%, boost capital reserves by issuing convertible bonds and long-term debt instruments, and list shares (at least in the case of the better-run banks) on foreign bourses.

It also wants 10 of its commercial banks to meet minimum Basel II capital requirements, and for at least one of the country’s banks to be in the top 100 in Asia, based on assets, by the end of 2020.

“Of these targets, some are shoo-ins, notably NPLs. At least three lenders – VietinBank, Vietnam Prosperity Bank (VPBank) and BIDV, Vietnam’s largest by assets, have issued term loans since the start of the year, each raising between $100 million and $150 million.

By contrast, no Vietnamese lender has yet sold shares abroad, or is likely to do so soon, although Techcombank did complete its $922 million IPO on the Ho Chi Minh Stock Exchange in April, a sale that valued it at $6.5 billion.

Two other onshore lenders, VPBank and Ho Chi Minh City Development Bank, listed shares onshore in 2017, and more are expected to do so in 2019.

Maritime Bank, whose request to go public was rejected by its own shareholders in May 2017, is preparing to take another swing at a listing next year.

"Our IPO is on track for the middle of 2019,” Huynh Buu Quang, chief executive of the Hanoi-based lender, told Asiamoney in July. “The government is always encouraging lenders to list, and investors who want more access to the sector will soon have greater choice, as between four and nine banks plan to sell shares by the end of 2019.”

The bigger challenge is likely to be the SBV’s drive to ensure that, by the end of 2020, 10 lenders, including Vietcombank, VietinBank, ACB, VPBank and Maritime Bank, meet the minimum requirements set out under the Basel II accords, by holding capital equivalent to at least 8% of their risk-weighted assets.

Currently, only Orient Commercial Bank, a small Ho Chi Minh City-based joint stock lender, is Basel II-compliant, and that institution is not even on the central bank’s rota.

The problem isn’t that leading lenders do not hold enough capital on their books. SBV data shows that the average state-run bank’s capital adequacy ratio was 9.69% at the end of 2017. Rather, the issue is that ratios will plunge below 8% when Basel II standards are applied, with the IMF tipping full implementation of the accords to reduce capital adequacy ratios by between 200 and 400 basis points.

Financial institutions recognize the challenge, and are raising capital and resolving soured debts as fast as they can.

Vietcombank, which won Asiamoney’s award for best domestic bank in 2018, said earlier this year that it would meet minimum rules by July. But when Asiamoney asked in September if it was now Basel II-compliant, it declined to comment.

In truth, few leading banks have much faith in hitting the 2020 target. Dam Van Tuan, executive director at ACB, doubts if many lenders will be able to meet the deadline.

“Some banks will [be able to] comply with Basel II rules and some will not,” he says.

“Most of them are struggling. The big three lenders – Vietcombank, BIDV and VietinBank – we know they need more capital to comply. Even for ACB, when we do gap analysis, if we apply Basel II demands, we find we will need more capital. We need to be at 8% and we are on 6% at the moment.”

This should worry the central bank. Despite the destabilizing events of recent years, ACB remains one of the country’s best-run financial institutions. It reported a 23% year-on-year rise in net interest income in 2017, with net profit up 59%. It has more than 350 branches nationwide, and when Standard Chartered sold its 15% stake earlier this year, the shares were quickly snapped up by a quartet of funds including Indianapolis-based Estes Investments.

If ACB is struggling to make itself Basel II-compliant, it does not bode well for the smaller private lenders or the state-run giants.

The banking system faces an array of other challenges. All lenders are under government pressure to raise capital, cut bad debts and boost provisioning. They are also compelled, of course, to lend wisely and well – but this is a harder task than one might imagine.

Every year, the central bank sets a blanket target for credit growth that lenders are expected to hit exactly. Commercial banks were told to increase total lending by no more than 17% on an annualized basis in 2018, a single percentage point below the previous year’s figure. If those figures look high – and credit growth is a concern to analysts who fear another surge in non-performing loans – it’s because the state itself is under huge pressure to maintain a high level of economic growth.

In developed countries, where the burden of keeping an economy financially well-oiled is shared by the capital markets, companies can turn to any number of institutional investors in search of capital. That isn’t the case here.

According to SBV data, banks accounted for 96% of financial sector assets in 2017, or 194% of GDP, against 3% for insurers and 1% for fund managers. That means that, six years on from the last banking crisis, Vietnam’s lenders are still too big – and too important – to fail.

To their credit, they know that all too well.

Speak to chief executives in Hanoi and Ho Chi Minh City and a picture emerges of an industry under almost intolerable strain. State-run lenders feel pressure to favour state-owned enterprises, while all banks are strongly encouraged to disburse capital to small and medium-sized enterprises.

This makes sense.

The government is selling stakes in leading SOEs, but the process is slow, and these large, capital-hungry firms still dominate entire sectors. SMEs are the life-blood of the economy, accounting in 2017 for 97% of all businesses and 41% of GDP.

Some banks focus overwhelmingly on SMEs. VietinBank alone banks 186,000 smaller enterprises, or 37% of the nation’s total, according to its director of SME lending, Nguyen Thu Hang.

Many allocate at least half of their annual credit to small firms. In 2017, 60% of the capital disbursed by Saigon-Hanoi Bank was channelled to SMEs, according to company data. This leaves little capital free to fund the dreams and aspirations of the country’s best young private firms at the upper end of the SME spectrum. And that’s a problem.

“We are struggling with it,” he says. “We have X amount of capital to give out to everyone, and the biggest share has to go to SOEs and SMEs. Some of it goes to agriculture, because government wants to support that too. And whatever’s left, including credit we want to lend to our best private-sector clients, we have to be really careful with.”The chief executive of one state lender told Asiamoney he felt “crushed” by the burden of keeping the economy ticking over.

Bank chiefs have very little say in how their institutions are run, according to a Ho Chi Minh City-based investment manager whose main equity fund is an investor in two locally listed lenders.

“The flexibility on action is very limited,” he says. “The central bank controls everything. It is in total charge, telling them how much or how little they can grow and to which sectors they need to allocate their portfolios. And this means that leading bankers are more or less simply executors.”

Are the country’s banks any better than they were at the height of the 2012 banking crisis? And are they fit for their primary purpose, which should be to drive an economy brimming with potential forward in the 21st century?

The answer to the first question is yes, but probably not by much. Vietnam’s big banks are certainly profitable enough. In the first half of the year, net profits rose 52% year on year at Techcombank, 53% at Vietcombank and 25% at BIDV, as the banks benefited from a booming economy, rising fee income and a growing urban population that is keen to take out loans, rent apartments, and open accounts.

“Banks’ balance sheets and income statements have improved overall” since 2012, says ACB’s Tuan. “Bad debts are down, provisioning is up, there’s better oversight, internal risk management and transparency, and the central bank is already looking at implementing Basel III” requirements further down the line.

“The SBV is also preparing to adopt a risk-based approach to bank supervision, so in the next three to five years, the sector will be even sounder and safer than it is now,” Tuan adds.

The data, though, suggests that Vietnam’s banks could and should be doing far better. According to the SBV, the sector reported mean returns on assets and equity of 0.25% and 3.35% respectively in 2017. The comparative figures are 1.05% and 7.72% in Thailand and 1.4% and 10.7% in Malaysia. In Singapore, the average ROA and ROE of the three big lenders – DBS, OCBC and UOB – was 1% and 10.4%.

Yes, Vietnam is still a frontier state, smaller than all those regional economies. But it also shows how much further the sector has to go.

Analysts praise better-run lenders like Techcombank, which is focusing on retail lending in the wake of its IPO, and VPBank, which dominates consumer finance via its FE Credit unit.

“VPBank is very sophisticated and very clever when it comes to collecting and analyzing data,” says Barry Weisblatt, head of research at Viet Capital Securities.

But there are still too many cookie-cutter outfits that lack scale and which have not invested in digital or set out to distinguish themselves from the rest of the herd.

One investment banker points to the merger of two smaller commercial banks in 2015 and sighs.

“When you have one pile of garbage and you add another, all you end up with is a larger pile of garbage,” he says.

And so to the key question: are the banks fit for purpose? There is no doubt that Vietnam has an incredibly bright future. Growth is forecast at a sustainably high rate of between 6% and 7% until at least 2023, according to the IMF. Foreign direct investment is pouring in at a record pace, and index provider MSCI is expected to elevate the country to full emerging-market status by 2020.

“Vietnam is well on track to becoming a mainstream Asean market,” notes Nirukt Sapru, Vietnam chief executive at Standard Chartered. “The size, proximity and geography of the market mean it is poised for very significant growth over the next five to seven years.”

As foreign capital flows in, ambitious SMEs will be plugged into regional and global supply chains, creating national champions in every sector.

“These companies will need the kind of services we can provide,” Sapru adds, “from foreign exchange to letters of credit, cash management, project finance and M&A.”

It’s a good point. Foreign lenders can see Vietnam’s potential very clearly. Over the coming decades, the country should be transformed into a manufacturing hub on a par with the likes of Taiwan and, perhaps in time, South Korea. But to get to where it needs to go, Vietnam needs better, bigger and probably fewer banks.

When asked if Vietnam’s lenders, six years on from a crisis that nearly toppled the industry, are fit for purpose, analysts in Hanoi and Ho Chi Minh City offer variations on the same answer.

They want the banks to succeed, and believe they can, but are also painfully aware that too many shortcomings have yet to be addressed.

The most upbeat response comes from ACB’s Tuan, who asks and answers the question, editing himself as he goes. “Are Vietnam’s banks fit for purpose,” he wonders aloud. “I think so. The answer is likely yes. Well, the answer is hopefully yes.”