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Southeast Asia

Banking: Uncertainty plays to Vietnam’s strengths

Banks in the country have much more to be optimistic about than their counterparts elsewhere. There are risks on the horizon – but there are also big opportunities.

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Few countries are better placed to endure – and perhaps even prosper from the myriad uncertainties of 2020 than Vietnam.

The country’s experience of the coronavirus has been much better than the rest of southeast Asia, with just 1,040 cases by August 31 – at least, if you believe the official numbers. Compare that with neighbouring Thailand, which has three times the number of cases despite a smaller population.

Vietnam’s government has won plaudits from international analysts for its policy response to the pandemic. That includes a stimulus package worth D271 trillion ($11.7 billion), equivalent to about 3.6% of GDP.

The spending drive will push up government debt, but since that was only 37% of GDP at the end of 2019, rating agency Fitch says there is wiggle room.

[Covid] has accelerated the use of electronic payment and transactions
Henry Nguyen, Timo
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The trade war also looks likely to hurt Vietnam much less than other developing economies. Vietnam has become a manufacturing hub, particularly in the textile industry, where it enjoys strong demand from US companies.

US president Donald Trump’s 25% taxes on Chinese goods, levies on steel and aluminum and work-in-progress assault on technology companies is far from the only reason Vietnam is doing so well – but it certainly doesn’t hurt.

In 2019, Hanoi’s trade surplus with Washington jumped to $11.2 billion from $6.8 billion in 2018. A recent free trade agreement with the European Union is another a plus.

It comes as little surprise that when economists survey the wreckage of 2020, Vietnam is one of the few countries that offers something even slightly positive. Whether the country manages to steer clear of an economic contraction this year is an open question – the government has promised to do it all it can to avoid that – but economists agree the damage will be far less than in other Asian countries.

Does that mean Vietnamese banks can be expected to come out of the coronavirus crisis in good shape?

There are certainly reasons to worry, and bankers in the country are not so bullish that they are ignoring the risks. But they are following the old adage: never let a good crisis go to waste.

“We’ve got our foot down on growth,” says Nirukt Sapru, chief executive of Standard Chartered Bank Vietnam. “We think this is a great opportunity to invest in the right places. We see this as a great long-term opportunity.”

Much depends on the political will to effect change, particularly whether prime minister Nguyen Xuan Phuc’s team accelerate Vietnam’s move upmarket into higher-value niche industries. Sapru says the government should look to peel back some of the regulatory burden facing banks and corporations, but he also thinks the country can raise its ambitions.

“The best advice I would give is to tier up the investment you’re trying to get,” Sapru says. “Don’t remain the garment factory of the world. Move up the food chain in terms of technology and data.”

Waking up

Those are his words of advice to government officials and corporations, but they apply equally to banks. Vietnam has achieved its startling macroeconomic transformation despite a banking system that largely remains stuck in the past. There are signs, however, that the country’s entrepreneurs are starting to wake up to the opportunities in the financial system.

Henry Nguyen, chief executive of Timo, Vietnam’s first digital bank, is one of them. His firm appears, on the surface, nothing like a traditional bank, combining elements of a café and a mobile app. But it is the best example of a true digital bank in the country.

Like digital banking evangelists elsewhere, Nguyen thinks the coronavirus pandemic will encourage a shift away from legacy brick-and-mortar banking models.

“None of us want to be in this situation, but it does accelerate what we think would have eventually happened,” Nguyen says. “And it’s not just us. It’s obviously other services, as you’ve seen with e-commerce. That’s grown probably faster than what was even projected for the next three to five years out within this year so far. Anything that has required digital transaction services… this has accelerated the use of electronic payment and transactions.”

Banks are facing rising pressure from non-performing loans
Nguyen Hong Nam, SSI Securities
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It is not just foreign banks and digital upstarts that see opportunity in this moment of crisis. There are few banks more ingrained in the financial system than the 57-year-old Joint Stock Commercial Bank for Foreign Trade of Vietnam, better known as Vietcombank.

Vietcombank began as the foreign currency counter of the State Bank of Vietnam before being spun off as the exclusive bank for foreign trade in 1963. Although Vietcombank diversified greatly in the decades to follow – becoming a mass-market commercial lender – it is generally seen as the most progressive and customer-centric of the big four state banks.

Pham Quang Dung, Vietcombank’s CEO, counsels calm.

“VCB has taken early steps toward credit risk management, while tightening credit-granting policies and enhancing portfolio management practices” as per global norms of prudent behaviour, he says.

The plan, Dung says, is for Vietcombank to become the biggest bank in the country within five years, as well as ranking among the biggest banks in the region. Like other bankers in the country, Dung is trying to make the most of the crisis.

He says that Covid-19 credit risks and fierce competition in digital banking will “encourage Vietcombank to keep transforming and investing in every aspect of its operation to maintain a leading position in the sector.”

Greatest risk

The biggest risk for Vietnamese banks at the moment is not that their country’s economic boom comes to an end but that a short-term blip in growth leads to longer-term problems with non-performing loans.

“For a developing country with a rising population, like Vietnam, slower growth is still a big problem for the economy, and the Covid-19 pandemic might exaggerate the issues inherent in traditional business models,” says Nguyen Hong Nam, CEO of SSI Securities.

“Given a rising unemployment rate, a conservative approach to consumption, and disruption to the service sector, banks are facing rising pressure from non-performing loans.”

Between January and March, there was a 45% rise in past-due loans at Vietnamese banks rated by Fitch, the credit rating agency says.

Fitch analysts point to signs of “surging overdue loans from the pandemic-induced economic fallout” across the industry.”

That, they warn, could cause capital shortfalls and “threaten Vietnamese banks’ earnings and capital accretion momentum.”

The regulators are clearly aware of the risk. In April, central bank governor Le Minh Hung said Vietnam’s financial system is bracing for a big increase in bad loads. Data from the big state-owned lenders is also clear. Vietcombank’s non-performing loans jumped 11% in the first half of 2020. At Bank for Investment and Development of Vietnam, Vietnam’s biggest bank by assets, NPLs rose 17% between January and June.

The central bank is allowing commercial banks to restructure loans as a means of supporting small and medium-sized enterprises and consumers.

“In the longer term, however, rising NPLs would become a big issue across many banks in Vietnam, some of which are undercapitalized,” says Nam.

There is also a paradoxical benefit of decades of minimal reform in the banking system: it gives Vietnam’s regulators much more freedom to make sweeping changes in the future. That in itself might be enough to give foreign investors comfort.

Marshall Mays, director of Emerging Alpha Advisors, says: “Since [regulators] have been approaching market reforms in the financial sector at a glacial pace for the last 20 years, they have more discretion than many economies of similar size to throw in the kitchen sink, PRC-style, if need be. But it does not look like they will need it.”

EAA first started investing in Vietnam in the 1990s.

The bankers interviewed by Asiamoney betrayed little panic about Vietnam’s prospects. They say the national government has done a solid job addressing Covid-19. They are also reassured by the fact that many of the attributes that had multinationals pivoting to Vietnam before the pandemic hit will be largely intact once a vaccine arrives, or when global containment efforts succeed.

“We’re still in the very, very early part of the story,” says Timo’s Nguyen.

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