Banking still a hot ticket

Despite a few bad eggs, banking still offers rich potential

State Bank governor Nguyen Van Giau said the central bank had received 53 applications to set up new banks and branches, of which only 23 applications came from domestic investors.
“The State Bank is considering and to continue granting licences if these applications meet requirements,” Giau said, adding that the central bank had granted licences to two domestic banks, Lien Viet and Tien Phong.

Market observers said despite the country’s banking industry facing several difficulties during the first half of this year due to the tightening monetary policies to fight inflation, investors remained optimistic.
Vietnam’s banks are benefiting from rapid credit growth. In 2007, loan growth for the sector was 53 per cent while economic growth was at 8.5 per cent. But rising inflation, which saw a 26.8 per cent on-year increase in June, prompted the government to tighten its monetary policy, aiming to cap loan growth below 30 per cent in 2008.

Nevertheless, despite the challenging economic environment, the country’s growth is to benefit from continued economic reforms and strong foreign direct investment inflows. Vietnam’s gross domestic product growth (GDP) is expected to rise by 7 per cent this year.

Vietnam Garment and Textile Group (Vinatex) is one local firm applying to set up a bank. “We are applying to set up bank which will benefit our business,” said Vinatex chairman Le Quoc An. Despite accelerating inflation making it difficult for bankers to secure profits, the sector is still seen as attractive in the long-run. Vietnam’s retail banking service turnover is expected to enjoy 25 per cent annual growth over the next five to 10 years, one of highest rates in Asia, according to McKinsey’s recent survey.

Vietnamese banks are principally corporate lenders with state-owned commercial banks dominating. Consumer banking remains underdeveloped and only 10 per cent of the population holding bank accounts.
“Overall, the low level of market penetration provides potential for expansion into small and medium-sized enterprises and the consumer banking sectors,” said Karolyn Seet, an analyst at Moody’s Investors Service.
Economist Huynh The Du, who is also Fulbright Economics Programme lecturer, said with many banks, competition would be tougher. Du said South Korea had an annual GDP of $1,000 billion, but there were only 13 domestic banks. “Vietnam could set up criteria to limit the number,” said Du.

Dam Thuy, ANZ Vietnam general director, said: “The competition in the Vietnamese banking industry will be between bigger and stronger ones only. More small and weak banks might be forced to merge.” By the end of May, Vietnam had five state-owned commercial banks, including Vietcombank which has just shifted to operate as a joint stock bank, 34 joint stock banks, six joint venture banks, 44 foreign bank branches, 10 finance companies, 13 finance leasing companies and 998 credit funds. Under Vietnam’s World Trade Organization commitments, the country allowed the establishment of wholly, foreign-owned banks from April last year.

In related development, the industry outlook for Vietnam’s banks over the next 18 months is negative, although not drastically so, according to Moody’s Economy.com’s recent report.