Vietnam's banks: credit not capital

Credit growth is picking up again in Vietnam. Is the country on course for another bout of rising NPLs and can it develop better tools to manage the fallout?
BIDV: looking for a strategic investor
BIDV: looking for a strategic investor

What’s in a number?

Quite a lot if you are the Vietnamese government intent on achieving 6.7% GDP growth.

It did not manage to hit its target in 2016, but is well on course to do so in 2017, with third quarter growth hitting 7.5%.

The problem is that Vietnam appears to be achieving its ambitions by accelerating credit growth to levels many observers believe is too high.

In the first 10 months, the ratio hit 13.5%, which does not appear that high in the context of the historical averages, which have ranged in the high teens. However, in August, the government lifted its 2017 target from 18% to 21%.

Kevin Snowball, CEO of PXP Vietnam Asset Management in Ho Chi Minh sums up what many believe.

“The government has done a good job maintaining GDP growth, but has become fixated on the 6.7% number and the wheels are having to turn ever faster to achieve it,” he argued. “We fear that excessive credit growth may presage a return to the ever-decreasing economic cycles of the first decade of this century if allowed to persist.  

“That isn’t good for the country’s long-term macro-economic stability,” he added. “We think a slightly lower target makes more sense, particularly given global growth is relatively subdued anyway.”

Dominic Scriven, chairman and founder of asset manager Dragon Capital, largely agrees, while also pointing out that 2017 only represents the second year full year of real credit growth since the system was de-leveraging from the 2012 crisis before that.

“Right now, credit growth levels are fine,” he commented. “If they climb above 20% then we’d probably start to get concerned particularly about those parts of the economy, which are looking well supplied such as construction and consumer finance.”

Scriven also believes GDP growth is already much higher than 6.7% because government statisticians are not good at capturing private sector services growth, one of the most dynamic parts of the economy.

“We’re also concerned how the government is meeting its GDP target through loan growth,” said Marshall Stocker of Boston-based Eaton Vance. “Credit growth levels are not that unreasonable for Vietnam’s level of economic development, but the problem is Vietnam does not have a stellar track-record managing the fallout of excessive loan growth.”

Lack of capital

Indeed, maintaining high levels of credit growth would not be such a problem if the banking sector enjoyed strong capital ratios. However, it does not.

The Vietnamese government has consistently delayed implementing Basel II and many industry observers believe it is likely to shift its new 2020 target as well.

VietCapital Securities estimates that the banking sector’s Basel I capital adequacy ratio (CAR) stands at 12.8% and highlights that loans to GDP have hit 124%, putting the sector “well into the risk category.”

The local broker also calculates that the “recapitalisation requirement for banks on account of distressed assets is in the $30 billion to $40 billion range, representing another 15% to 20% of GDP as contingent liability.”

Accurate non-performing loan ratios are hard to come by. The figure spiked sharply as a result of the 2012 crisis, which was caused by a massive credit binge to poorly state-owned enterprises to combat the global financial crisis and Vietnam’s own 2007 bust.

Earlier this year, the State Bank of Vietnam admitted that NPLs were higher than reported levels and put the figure at 8.86%.

After the last crisis, the government set up a distressed debt agency called the Vietnam Asset Management Company (VAMC). It has helped defuse the problem, but holds little equity - VN2 trillion ($100 million), although it plans to increase this to VN5 trillion in 2018 and VN10 trillion by 2020.  

It is essentially an accounting mechanism for Vietnam’s better banks and impairment risk remains with the banks themselves.

The sector’s problems are all the more pressing because it accounts for such a high proportion of the country’s economic financing.

Citi’s Vietnam country officer, Natasha Ansell, told FinanceAsia: “Equity and debt capital markets are still underdeveloped and the country’s deposit insurance scheme is very small relative to the savings deposited with the banks, which are there because the population has very few alternatives.

“But there’s full awareness of the situation at the government and regulatory level,” she added.

How can the government resolve the situation?

It could recapitalise the seven state-owned banks. One of their main problems is the requirement to up-stream dividends to the government, whose financials constraints mean it is not ploughing capital back.

In recent years, the government has been encouraging banks to find strategic partners, but this has been complicated by a number of factors including its reluctance to cede control, a different view about how much they are worth and a diminishing pool of potential investors, particularly foreign banks.

“BIDV has been trying to find a strategic investor for years,” said one banker. “But Vietnam is running out of Japanese banks to choose from.”

For example, Bank of Tokyo-Mitsubishi has a 19.73% stake in Vietinbank, while Mizuho has 15% of Vietcombank and Sumitomo-Mitsui 15% of Exim Bank. Standard Chartered also has a 15% stake in Asia Commercial Bank, while HSBC sold its 20% stake in Techcombank earlier this summer.

The changing nature of the global banking industry and the disruptive influence of fintech also means foreign banks are less willing partners than they were some years ago. The aftermath of the Asian financial crisis also taught many banks that minority stakes and the subsequent technology transfers only created more formidable domestic competitors.

And as Rehan Anwer, managing director and head of frontier markets at Credit Suisse commented, “International banks are less likely to look at a minority investment in a local back because of the capital impact under Basel III.

“But there’s growing interest from private equity and sovereign wealth funds,” he added.

However, the messy issue of Vietcombank’s proposed strategic investment by Singapore’s Government Investment Corp (GIC) underlines the yawning gap, which can exist between the two parties. Shareholders approved a 7.7% stake sale at a roughly 30% discount to the bank’s then share price in the summer of 2016.

The central bank turned it down on the grounds that it was giving away equity too cheaply and a number of the bank’s current shareholder base agree. The deal is still “officially” pending.

Citi’s Ansell also says the government is well aware that the banking sector needs to be strengthened and consolidated. She notes there are 31 joint stock commercial banks in addition to the seven state-owned banks and two joint ventures.

“By far not all the banks will be able to demonstrate they have a credible strategy to compete in the traditional banking space, let alone the fast evolving digital,” she commented. “The government is figuring out a process to deal with them in a way, which isn’t too disruptive to the overall economy.”

VietCapital’s head of research, Barry Weisblatt, also points that in the meantime some of these weaker banks are still growing their loan books by about 15% o 20% per annum.

“The banking sector is my main macro-economic concern,” he concluded. “We’ll be fine this year and possibly next year, but I’d be worried about the time horizon beyond that.”

As FinanceAsia has previously reported, the government also needs to come up with a better mechanism for NPL resolution. Ansell says the government is taking advice from supranational experts to enhance the process enabling VAMC to sell the impaired at a discount. 

"There is interest from foreign and local investors," she concluded. "But they need to be able to realise the security value, including obtaining collateral ownership and the ability to sell on."

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