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Vietnam embarks on banking reform
With fears growing about the stability of the Vietnamese banking sector after years of rapid credit growth, the government has finally moved to begin restructuring some of the smaller, weaker banks.
Hanoi has often failed to match rhetoric on economic reform with action so investors have welcomed this first step on what is likely to be a long and bumpy road.
Nguyen Van Binh, governor of the central bank, said on Tuesday that after facing short-term liquidity problems, three small, unlisted Ho Chi Minh City-based banks would be merged into a new entity guided by the Bank for Investment and Development of Vietnam, a large state-owned lender.
He said the government would guarantee deposits at the three banks – First Joint-Stock Commercial Bank, the Tin Nghia Joint-Stock Commercial Bank and the Sai Gon Joint-Stock Commercial Bank. The trio got into trouble, like many other lenders around the world, by borrowing short to lend long.
Binh also indicated that the state would take a stake in the new bank, the size of which would be determined at a later date, and that the central bank would continue to push ahead with the restructuring process.
Rumours about liquidity problems at small lenders have been flying around for months after the central bank began hiking interest rates and restricting credit growth to try to control Vietnam’s surging inflation rate, currently 19.8 per cent a year.
Mark Young, a Singapore-based managing director at Fitch, the credit rating agency, said the merger was “a positive step towards strengthening the banking system”.
He wrote:
"The fact that these banks are being merged as a result of liquidity problems does, however, highlight the pressures being faced by the banking system as a whole.
Macro policies such as the deposit interest rate ceiling to bring down persistently high inflation have partly contributed to these pressures. Banks, and in particular smaller institutions, have increasingly relied on short-term price-sensitive funding and other inter-bank funding to support growth, increasing the liquidity risks.
This comes on top of the risks attached to rapid loan growth and asset quality issues already highlighted by Fitch, raising concerns at the adequacy of capitalisation."
While there were some suggestions in the Vietnamese press that the government would look to clean up the merged bank and sell it to the private sector or even foreign investors, bankers warned that the restructuring process was likely to be long and drawn out.
Despite the ongoing difficulties, Young said Vietnam’s banking sector remained an “interesting potential growth story for international investors”.
Japan’s Mizuho bought a 15 per cent stake in Vietcombank, a large state-owned lender, for $567m in September.
The next test of foreign investor appetite will be the upcoming IPO of BIDV, which is currently looking for a strategic foreign investor with the assistance of Morgan Stanley.
financial times
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