Foreign banks banking on reforms

The State Bank has recognised foreign banks’ contribution to Vietnam’s economy

Phung Khac Ke, deputy governor of Vietnam’s State Bank, opened the courtesy event by praising the contribution of foreign banks and international financial institutions (IFIs) to the banking sector in particular and the country’s economy in general.
“Foreign-invested credit institutions have made a significant contribution to the development of Vietnam’s banking system and to the economic achievements of the country in 2003,” Ke said.
Kieu Huu Dung, acting head of the banking and non-banking department of the central bank agreed, saying the high growth rate of foreign banks both in gross assets and capital mobilisation was a very good signal of foreign banks’ development in Vietnam.
“With two new branches and four new representative offices of foreign banks opening last year, it can be said that the operation of the foreign-invested credit institutions in Vietnam continues to develop in a stable and safe manner,” Dung said.
“It reinforces the trust of foreign investors in Vietnam’s monetary and financial market.”

Skin-deep
There are 27 foreign bank branches, four joint venture banks, three finance leasing companies under joint-venture or wholly-foreign investment, and 42 representative offices operating in Vietnam.
To look at the operating results of these financial institutions provided by the State Bank, it appears true that to a certain extent, 2003 was a successful year for the foreign banking sector in Vietnam.
In 2003, gross assets of foreign bank branches increased by 4 per cent with mobilised funds rising a mere 9 per cent. Total outstanding loans made a dramatic increase of 21 per cent, accounting for 7.56 per cent of total banking loans.
The credit quality of foreign banks was considerably improved with the ratio of overdue debts, out of total outstanding loans down to 0.26 per cent as of October 2003, compared to 0.43 per cent in the same period of last year.
Obviously, as Dung said, “a high increase of outstanding credits and better use of mobilised capital helped reduce the money dispatched abroad [down from 33 per cent to 25 per cent of gross assets this year] and as such raised the pre-tax profit of the whole sector by 15 per cent”.
Joint-venture banks made even more remarkable progress with a growth of 40.5 per cent in the total assets and 50.7 per cent in capital mobilisation. All four banks made a profit in 2003, bringing the profit of the whole sector up 23 per cent compared to the year 2002.
“These encouraging results are partly due to an improved legal environment offered by the Vietnamese government, such as easing the restriction on the mobilisation ratio of local and foreign currency and allowing branch network expansion,” said VID bank’s representative.

Facts behind figures
While highlighting the achievements of the foreign banking sector during 2003, the State Bank officials appeared to overlook a fact which was of concern to most of the attendees: the market share of foreign-invested credit institutions in Vietnam is on a continuously downward trend.
Given some small increases, foreign banks’ total assets accounted for as little as 8.34 per cent of the total banking sector, mobilised funds for 7.24 per cent and outstanding loans for 7.56 per cent.
That compared to corresponding levels in 2002 of 11.5 per cent, 10.7 per cent and 8.9 per cent, while in 2001 those figures were 12.5 per cent, 11.3 per cent and 10.2 per cent.
Foreign bankers blamed their decreasing market share on the difficulties they are facing during the process of mobilising the local currency.
“The interest rate for the mobilised local dong is fairly high, besides which we are only allowed to raise a maximum of 50 per cent of the total legal capital in the local currency,” a representative of BNP Paribas bank said.
“This explains why our ratio of local currency mobilisation always lags far behind that of foreign currency.”
In 2003, local currency mobilised by the whole foreign banking sector accounted for only 37 per cent of total mobilised funds.
Dung said that, despite already having loosened some restrictions, there still remained several hindrances to the activity of foreign banks in Vietnam, mainly relating to the limitation on dong mobilisation.
“We acknowledge that a cap of 50 per cent [ratio of local currency mobilisation of legal capital] for a foreign bank is fairly low and below the bank’s mobilisation capability,” he said.
According to Dung, the State Bank has agreed to raise the cap on dong deposits for European banks to 250 per cent in 2004, while the cap for US banks would be 350 per cent according to the Vietnam-US bilateral trade agreement.
The decision is aimed at levelling the playing field for US and European banks in Vietnam. But it leaves non-US and non-European banks still subject to a 50-per-cent cap, an uncompetitive position.
In a reply, State Bank officials promised to consider loosening some restrictions on dong mobilisation, offshore deposits and placements with overseas banks and the ratio of short-term capital used for financing long-term loans.
“The State Bank will accelerate the process of adjusting, adding and issuing regulations in order to perfect the legal environment for operations of foreign-invested credit institutions,” Dung said.

Action better than words
In the corridor outside the meeting, World Bank country director Klaus Rohland said the promises from the central bank were an inevitable move if Vietnam wished to join World Trade Organisation on schedule in 2005.
“The more efficiently and quickly the banking reform takes place, the easier it will be for Vietnam to integrate into the world economy,” Rohland said.
However, he shared the Vietnamese concern that the reforms should not be too fast, “otherwise it may affect the domestic banking environment”.
Representatives from foreign banks, meanwhile, seemed not to put much store in promises.
“A promise would be a good sign, but delivering such promises would be much better,” said one foreign banker.
Foreign bankers have reason to worry. At this time last year they were promised that an official State Bank website, carrying up-to-date information on the Vietnamese monetary and financial market, would be launched soon.
Despite many efforts by the central bank, that website still exists only on paper. It is not known when the website plan will be realised, but at least it is something foreign bankers expect for the year 2004.