Expert analyses banking sector restructuring

Member of the National Assembly Economic Committee and National Financial and Monetary Advisory Council Tran Hoang Ngan believes the goals of sufficient capital supply and healthy banking sector can be achieved even by reducing the number of banks from more than 60 at current to only 30-40.

The number of local banks has fallen commensurate with banking sector restructuring. Will this impact the capital supply?

Vietnam is currently home to 62 banks. Apart from state-run Vietnam Development Bank, Bank for Social Policies and Cooperative Bank of Vietnam, there are 39 commercial joint stock banks, 14 foreign banks and branches and 6 joint venture banks. It is hard to put a number on how many banks are needed to sufficiently supply capital for the whole economy as the scope and scale of the banks and the overall system play major factors in this calculation.

If banking sector shake-ups continue, the country would only need around 30-40 strong banks with expansive networks to service the capital needs of businesses, organisations and individuals.

On the other hand, if there were a hundred banks smaller in scale and only concentrating on particular regions the economy may not get the supply it needs.

Vietnam’s GDP rose from $104 billion in 2010 to $176 billion in 2013 with an estimated $186 billion in 2014. Do you think that rather than mergers there should be comprehensive measures to push bank growth to meet the capital demands once the economy reaches $250-300 billion in size.

When Vietnam’s economy hit the $100 billion mark for the first time in 2010 there were nearly 100 banks. Many of these were underperforming, resulting in the government looking to reduce the number to boost efficiency.

The banking sector restructuring process has created an environment where the government isn’t obligating banks to merge or sell but has rather created a transparent and impartial market where they are forced to compete and pay close attention to their shake-up plans.

M&A [mergers & acquisitions] is only one measure of many being used to restructure banks. But based on current conditions, the government may encourage state banks such as Vietcombank, BIDV, Vietinbank, Agribank and MHB to buy stakes in underperforming banks or even buy-out weak banks to push forward restructuring and cut down on the total number of banks.

In the near future, once GDP is 2-3 times its current level, only 30-40 banks with nationwide networks will be needed to satisfy customer demands.

But currently bank branches and transaction offices are nearly all located in urban centres with very few in rural areas, right?

Urban areas host a slew of banks, but with 5-7 per cent GDP growth a year, they will likely have to open up even more offices.

In the near future, most payment services will have to go through banks and card and other non-cash payments will likely become increasingly popular. Banks will play the role of cashiers for the economy as whole and the individuals therein. By that time the current system of bank branches and ATMs may not be able to keep up with rising demand.

Some experts say that M&A does not always produce a healthier banking system but rather is a way for ‘two feeble banks to support each other’. Do you hold this same view?

I don’t think so. Realistically, banks in the post-merger period will likely be stronger in terms of capital sources and network, the two most important factors in a bank’s operation. Stronger entities will drive competition and strengthen weaker institutions. 

For example, before a merger an area may have two different bank branches and transaction offices that compete with each other as well as personnel at their headquarters. After merging the costs will be halved and operations will be efficient on the back of lower operating costs.