Banking: survival of the fittest

banking stocks are being viewed as the most attractive on the local stock market

At present, there are more than 20 application forms for establishing new banks sitting on a State Bank desk.
If each bank has the required VND1 trillion ($62.5 million) in minimum chartered capital, there is around VND20 trillion ready to be poured into the market. The trend to set up new banks obviously stems from increasing commercial banks’ profits and banking stocks are being viewed as the most attractive on the stock market.
However, things are not totally rosy. Some 17 banks have stopped operating due to excessive losses or bankruptcy. The movement to set up banks includes rural banks transforming into urban branches (Ninh Binh and Kien Giang joint stock banks), localities establishing their own banks (Nam Dinh and Bac Ninh provinces), economic groups creating banks (Oil and Gas Group (PetroVietnam), Post and Telecommunications Group (VNPT), FPT and Bao Viet Group).
Racing to raise the chartered capital helps meet State Bank regulations. On the other hand, as the stock market is developing, banks’ capital expansion has favourable conditions. Most commercial banks have worked out plans to raise their chartered capital this year. These include ABBank (VND3.87 trillion), Sacombank (VND2.36 trillion), ACB (VND1.5 trillion and VIB (VND1.5 trillion). The 20 banks’ capital expansion this year could have a face value of VND30 trillion and this amount could be several times higher when banking stocks are issued onto the market.
In August, Vietcombank will make its IPO, while BIDV and Vietinbank plan to follow suit in this year’s fourth quarter. Their stocks’ high liquidity and impressive business performance in 2007’s first quarter will encourage investors at home and abroad to join in the IPOs. Since state-owned commercial banks play a dominant role in the banking system, their IPOs will strongly affect prices of banking stocks being traded such as ACB and Sacombank. Given the IPOs of many state commercial banks this year, the establishment of new banks and chartered capital expansion of the existing ones, investors will not be worried about a lack of commodities. Instead, they have a wide range of choice for good banking stocks. Experts suggest they should prioritise A-class banks and carefully take into account B, C and D-class ones.
From a capital demand aspect, although the State Bank agrees on the establishment of all the new banks and the capital expansion of the existing ones, this demand cannot be fully satisfied. However, the State Bank should lengthen the licensing time because reality shows the banking sector is coming under pressure from a number of issues.
As many banks are established and expand, they need a source of labour, especially at high-class levels, to meet with the effective utilisation of capital. While foreign banks always have better labour policies than local ones, a shortage of skilled labour could hurt new banks.
Most domestic banks have a small market share and lack professionalism. One example is the existing ATMs which are separately built by banks, causing high costs to banks and a low level of convenience to customers.
The banks’ businesses strategies come under control of big shareholders. For example, An Binh Bank enjoyed a strong rise in capital due to several electricity projects and the Electricity of Vietnam holds about 30 per cent of the bank’s capital. Therefore, banks’ operations are strongly affected by the business situation of big shareholders or the financial, stock and property markets.
Hotter competition among domestic banks for capital and strategic partners is expected. However, when the country’s big economic groups each have a bank for themselves, there is no space for other banks. For example, Eximbank has opened transaction places through the Kinh Do Group and they will be strategic partners.
Domestic banks have four more years before Vietnam fully opens the financial and banking sector under its WTO commitments. This factor will have a large impact on newly-established banks as they will have a relatively short time to establish themselves before big foreign competitors arrive.
The banking network remains insufficient and weak and few banks focus outside of Ho Chi Minh City, Hanoi and Danang. As a result, banking networks concentrated on these cities may become redundant while demand for capital in other urban areas is still high. The newly-established banks could exploit the situation.