ASIA FOCUS

Foreign banks busy on two fronts

NOLAN CRAWFORD, HANOI

In the past week, Vietnam's banking sector began its first steps in liberalising under World Trade Organisation commitments that were signed and ratified at the end of last year, and already foreign financial institutes are knocking at the door.

The legal reform has been, like many other issues relating to the country's transformation from a command to market economy, met with a mixture of optimism and concern.

Under WTO commitments, foreign banks as of April 1 were allowed to fully incorporate locally, and will in theory receive the same treatment as domestic banks. Foreign banks currently offer limited service through branch or representative offices.

The new fully foreign-owned, local financial institutes are allowed to provide nearly all the same services as domestic banks with market regulations easing over the next four years. There are also certain financial requirements.

Foreign bankers must have a minimum of US$10 billion in assets to be eligible to set up a Vietnam subsidiary, and in order to set up additional branch, the parent company must have at least $20 billion in assets and inject at least $15 million into each branch.

Already, HSBC and Standard Chartered Bank have voiced interest in the past month of setting up fully owned local subsidiaries under their own names, despite having substantial stakes in other Vietnamese financial firms.

HSBC is tied up with Vietnam Technological and Commercial Joint Stock Bank (Techombank), holding a 10% stake, while SCB is in bed with Asia Commercial Bank with an 8.56% stake.

In a March 30 press briefing, Standard Chartered chairman Melvyn Davies was quoted by local media as saying the bank would incorporate "as soon as the paperwork is ready".

Analysts argue banking sector liberalisation is generally a good thing - increasing competition forces local and foreign players to offer better and broader services to attract customers.

"The new rules certainly open up a lot of opportunities for banks that want to set up a local company especially considering the growth opportunities," said a Calyon Vietnam spokeswoman.

To highlight the "growth opportunities", only 6% of the local population has a bank account versus 14% who own a mobile phone, according to a November 2006 HSBC report.

Admittedly, in a developing economy such as Vietnam, a large portion of the population has no need for a bank account or large loans given the low level of disposable income.

Though as Ayumi Konishi, country director for the Asian Development Bank (ADB) in Vietnam, points out, economic growth requires substantial support from the financial sector and will likely result in greater demand for consumer banking.

In the ADB's Asian Development Outlook 2007 released on March 27, Vietnam's economic growth was estimated at 8.3% this year, and 8.5% next year.

"Commitments given to liberalise the financial sector should speed up bank restructuring," ADB economists wrote in the report.

"Anticipated reforms to state banks, partnerships between foreign and domestic banks, and the boost to equity capital for joint-stock commercial banks likely will mean a strengthened banking system, a broader range of products for customers, and better access to finance, particularly for small and medium enterprises."

The problem, as in any economy, is credit risk - can banks get enough information to accurately assess credit ratings for consumer and SME loans?

Even with large state enterprises there are concerns over transparency, accounting practices and auditing that makes the decision to offer funding difficult.

"Disclosure of financial information remains a challenge," HSBC wrote in its report.

"Further, we found annual reports to contain limited explanation of accounts and the timeliness of release inconsistent with other markets in Asia," though senior government officials are pushing state-owned enterprises and companies listed on the stock market to improve transparency and accounting practices.

The inability to properly assess credit ratings, as a result, puts banks at risk of accumulating non-performing loans.

Second, but by no means a less bothersome concern, is whether market liberalisation under the WTO agreement will continue from now until 2011.

"Domestic risks to the [GDP growth] projections include a possible backtracking in the government's commitment to implementing reforms," said the ADB.

It seems unfathomable that Hanoi would change course, especially with growth so strong over the past few years and household incomes rising, but it is conceivable the government wanting to stray slightly from WTO commitments, especially if local banks come under too much pressure from foreign institutions.

Bangkok Post

Last Updated : Saturday April 21, 2007