Reviewing Banking sector of Vietnam

After almost three years of bank restructuring, several gains have been made. Systemic risk in the banking sector has been contained and reduced; liquidity has improved significantly; and interest rates have fallen.

Banks’ Restructuring

Mergers and Acquisitions (M&A)

Several bank mergers and acquisitions (M&A) have taken place. In 2013, Western Bank merged with PVFC to form PVcomBank on September 8; HDBank acquired DaiABank on December 20th. In 2015, MHB was completely acquired by BIDV on May22nd; On the same day, VietinBank and PGBank signed an official merger document, bringing VietinBank to the leading commercial bank in terms ofcharter capital (an increase from VND 38,000 billion to VND 41,000 billion);Sacombank revealed its intention to acquired Southern Bank in June, and its shareholders have agreed to the bank's plan with 93.7% of those voting in favor at an unusual meeting on July 11th. Recently, on August 12th, the SBV has officially allowed the merger to take place; Another case is the acquisition of MDB into Maritimebank in August 2015. The SBV has set a target that up to 2017 the number of banks will be reduced to approximately 20 units with large magnitude and high competitive advantages.

“0-dong banks”

In addition, 3 banks with poor operation capacity including VNCB, GPBank, and OceanBank recently were bought at zero dong by the SBV and assigned to powerful state-owned banks to carry out the process of restructuring and reorganization. Specifically, Vietcombank is in charge of VNCB, which is now reformed in the new name of CB Bank. GP Bank and Ocean Bank were transferred to VietinBank. The bank is temporarily assisting these two in liquidity issues.

Besides, on August 14th, the local banking system saw another example of the state’s restructuring effort when the SBV placed DongA Bank under special supervision and dismissed a number of senior management positions. The SBV will designate representatives from Bank of Investment and Development of Vietnam (BIDV) to monitor the DongA Bank’s operations in order to safeguard its rights and interests of depositors and investors.

As a whole, these restructuring steps help stabilize the overall economy, lessen the administrative burden on the SBV. Nevertheless, these only help solve immediate problems. A comprehensive bank resolution strategy still needs to be clearly articulated. These plans should be based on thorough on-site bank examination which should reveal the true extent of non-performing loans (NPLs) and recapitalization needs. The plans should differentiate between illiquid and insolvent banks, force existing shareholders to take losses before receiving new capital injections, and dispose of bad assets.

Credit growth

The credit growth in 2015 has shown positive signs in the first 6 months, over 6% as compared to 2014, which is expected to reach 13 – 15% at end 2015. The SBV may adjust the target credit growth up to 17% to boost the economic growth. Besides, the SBV has strictly taken several solutions to deal with weak credit institutions by combining law together with ensuring the safety of credit institution system and stabilizing the money market and psychology of depositors. In addition, the SBV has speeded up the implementation of merging and acquisitionof credit institutions in parallel with encouraging the participation of the state-owned commercial banks and several large joint - stock commercial banks in order to extend the operational scale of the commercial banks.

Bad debt resolution

After initial preparations for the banking restructure process, the liquidity of Vietnamese credit institutions has improved remarkably, the NPL ratio has sharply reduced and the banking sector has gradually gained stability.Restructuring efforts at several commercial banks have been actively supported by the SBV, especially in NPL resolution and improvements in the legal framework in order to encourage the banking sector towards sustainable development.

Vietnam Asset Management Company (VAMC)

In the resolution of NPLs without resorting to the state budget, a scheme to issue special bonds from the Vietnam Asset Management Company (VAMC) has been decided on as the best solution. Until now, the VAMC has purchased total principal outstanding loans of over VND 121 trillion from 39 credit institutions and has recovered VND 4,100 billion. TheNPL ratio of the entire banking sector has been significantly reduced to 3.25%. In 2015, VAMC set the objective of purchasing NPLs up to VND 70-80 trillion by issuing special bonds. The plan has been already approved by the SBV.

Recently, the Government issued Decree No 43/2015/ND-CP, dated March 31st 2015, revising and supplementing several articles in Decree 53/2013/ND-CP of May 18th 2013. Accordingly, VAMC is allowed to issue bonds to purchase NPLs at the market price in line with the bond-issuance plans approved by the SBV. This is an important move, highlighting the enormous work by the SBV and relevant ministries and agencies in setting up a sound environment to resolve the assets of credit institutions. This new policy has been attracting much interest and has spurred plans by domestic and international investors to become more involved in the debt-purchasing market, contributing to speeding up NPL resolution with more transparency and confidence in the credit institution system.

Other measures

Moreover, the SBV has decisively directed credit institutions to proactively focus their resources on speeding up this process. In the last 6 months of 2015, commercial banks shall have to concentrate more on NPL resolution, specifically on classifying NPLs in accordance with applicable regulations, making sufficient risk provision, proactively selling debts for the VAMC… for the aim of reducing NPL ratio to below 3% by Quarter III of 2015. Supporting to these efforts, the SBV will take various measures to mobilize those banks that have positive solutions in dealing with NPLs and strictly handle with those credit institutions having high NPL ratio. The Governor also stated the banking sector well implemented program of connecting banks and enterprises, program of poverty release, the information and communication, creating public consensus and confidence in banking performance.

Outlook on the incoming days

In the final 6 months of 2015, the SBV will continue to manage the monetary policy in a proactive and flexible manner, closely combine with the fiscal policy for the aim of controlling the inflation, stabilizing the macro-economy, maintaining the economic growth at a proper level, ensuring the liquidity of credit institutions and the economy;furthermore, Continuing to stabilize the exchange rate within the set band; Focusing on operating credit measures in a flexible manner towards credit extension together with credit safety and quality, ensuring the supply of capitals to the economy, creating favorable conditions for getting access to bank loans; Continuing to accelerate the restructuring of credit institution system and NPL resolution, making the performance of credit institutions healthy, and ensuring the safe banking sector and reducing the NPL ratio to below 3% at end 2015.