Moving on track to keep banks in good health

Amid the world’s financial volatility and accelerated restructuring of Vietnam’s banking system, Louis Taylor, CEO of Standard Chartered Bank (Vietnam) Ltd, shares insights into the process with VIR.

Now eyes are all on the problematic eurozone. From a foreign banker’s view, can you gauge its potential impact on Vietnam’s banking system?

As far as the Vietnamese banking system as concerned, I don’t think the impact from the eurozone will necessarily be huge. Obviously European banks are finding it much more difficult to have enough liquidity for international lending, meaning fewer dollars to finance global trade. More money is being deposited at central banks and less is put into circulation through the interbank market.

The policy rates in the US may stay low, but the premium lenders charge will increase. So the cost of borrowing dollars for Vietnamese borrowers will go up. But I think other facts around in Vietnam are making people reasonably nervous of lending already.

Thus I am not sure an incremental impact on Vietnam will be that big. Certainly there are domestic issues already in Vietnam.

What are the issues concerning the banking system?

I think the Vietnamese government and the State Bank governor are absolutely right in adopting the policy on restructuring banks. There are too many banks in Vietnam and it is important the restructuring is not only to reduce the number of banks but also to increase banks’ quality.

The State Bank has started to adopt strong regulations of risk management framework for banks, but what needs to happen is more lending need to be done on the basis of borrowers’ cash flow analysis, not just on the value of their collaterals.

The second thing is banks need to rely less on other assets like real estate and securities and rely more on genuine client driven business. I think these two things will quickly help improve the banking system’s quality.

Discussions nowadays seem to underline the big number of banks that need to be lessened. So how many banks do you think are sufficient for Vietnam?

I am not sure about the proper number, but more than 25 banks are probably too many for an economy the size of Vietnam. However, as I said, it is not the size of the banks, but the quality is more of concern. The State Bank's Inspection Department has a very clear view on what is really going on with the balance sheets of banks, and is in a good position to direct banks towards better management.

Restructuring banks is one of the government’s prioritised tasks given the need to correct internal problems and strengthen the system. At the same time, most banks are reporting hefty profits while the economy in general and a lot of businesses are facing with severe difficulties. Is this unreasonable?

Banks making money is a necessary part of the solution to the banking system's issues. Unless the banks are profitable they will not generate capital, and capital will be needed to cover bad loans and other losses. So it is important that banks make some money, but they absolutely should not make super profits. The State Bank has helped to make sure the balance between companies and banks is made fairer by enforcing the 14 per cent deposit rate cap, so banks can lend at a rate of 17-18 per cent. Things maybe then will come back into line.

How long do you expect things will come back in line?

I think it is going to be a little while and I always say firstly it is critical to support the government in cooling down inflation and achieving stability in the currency. But confidence is not symmetrical - it is very easy to lose confidence and very difficult to get confidence back. It needs time. The policy the government is pursuing is right, and they have to pursue it for a long time so they can convince the market that they really have inflation under control. I will be surprised to see material interest rate reductions in the first quarter of 2012.

I think it will probably come in the second quarter. Once inflation cools down it will give room for interest rate cuts. But the situation means the State Bank has to convince everybody that they have got inflation under control, because over the last four years you have seen inflation with huge amplitude, from top to bottom. That is what people cannot cope with. Inflation has to be stable, even in a range of 8-9 per cent, so people can live with it, and this has to be achieved.