With one of the fastest growing GDPs in Asia, Vietnam is looking to sustain its growth momentum by encouraging private business. Vietnamese banks, as key players to bridge the financing gap in the economy, are facing headwinds due to a higher capital requirement by Vietnamese regulators.
“Bank profitability normally gets hit with a higher capital requirement but we believe the profitability of Vietnamese banks can improve as banks will lend to high yield assets,” says Jonathan Cornish, head of APAC financial institutions at Fitch Ratings, at a Vietnam forum held in Hanoi by The Asset in association with Fitch Ratings.
The Vietnamese government has unveiled a development strategy for the banking sector from now to 2025 that would increase the independence of the central bank, the State Bank of Vietnam; restructure credit institutions to manage bad debt (to stay below 3%); and move banks to comply with Basel II norms.
According to Fitch analysis last year, the Fitch-rated Vietnamese banks would need US$4.1 billion of additional capital, of which 90% is accounted for by the state-owned banks.
To address the additional capital burden on the banks, Vietnamese authorities have agreed to a proposal from the State Bank of Vietnam that would allow state-owned banks to preserve internally generated capital by retaining dividends or paying them out in shares. The plan would still need to be approved by the National Assembly - Vietnam's legislative body - and would enable state-owned banks to follow a practice already in place for their private counterparts.
“We have managed to improve the liquidity ratio in the banking sector,” says Vo Huu Hien, deputy director of department of debt management and external finance at the Ministry of Finance.
Currently, Vietnamese bank loans are still largely concentrated on large local corporates. “Banks have huge exposure to large corporates. It is hard to predict what will happen if anything goes wrong,” says Dan Svensson, head of fixed income at Dragon Capital, “Vietnam has to have mutual funds and pension funds. Then big banks can lend to SMEs.”