VIETNAM'S UNHEALTHY BANKING SECTOR

UNCLAS SECTION 01 OF 04 HANOI 001047

SIPDIS

STATE PASS USTR FOR EBRYAN
STATE ALSO PASS USAID ANE
TREASURY FOR OASIA
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO
BANGKOK FOR USAID

SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON EAID ETRD VM FINREF
SUBJECT: VIETNAM'S UNHEALTHY BANKING SECTOR

REF: HCMC 294


1. This cable contains sensitive information and should not
be placed on the internet.


2. (SBU) Summary: Vietnam's banking sector is
underdeveloped and dominated by state owned commercial
banks, many of which would be insolvent by international
standards. Joint stock banks comprise the fastest growing
segment of the market, but their financial health varies
widely. The Postal Savings System offers convenience to
people in rural Vietnam, but also serves as a convenient off-
budget way to fund state-owned enterprises. Rapid credit
growth and an undetermined level of non-performing loans
could threaten the banking sector in the future. U.S. and
other foreign banks have been operating for some years, but
are constrained by branching restrictions, high capital
requirements, equity caps, limited access to the ATM system
and subsidized lending by state-owned banks. End Summary.

Vietnam's Banking Sector at a Glance
--------------


3. (U) Vietnam continues to be a largely cash-based
economy. Even the government still pays salaries in cash.
Few Vietnamese have a personal bank account, though this is
starting to change. One foreign banker estimated that about
two percent of the population have bank accounts. Instead,
they tend to keep cash at home, preferring dollars for large
amounts since they are deemed more stable and are much
easier to store. As the transition to a market economy
continues, the state continues to dominate Vietnam's banking
sector. Assessing the health of that sector is difficult
because the lack of transparency of financial records
persists and audits, while independent, continue to be of
poor quality and to use Vietnamese accounting standards.


4. (U) State-controlled banks account for three fourths of
lending and four fifths of deposits. There are three types
of banks in Vietnam: state-owned commercial banks (SOCBs)
which are "owned" by the Ministry of Finance, privately held
joint stock banks and foreign banks. The four largest SOCBs
account for 70 percent of loans and 75 percent of deposits.
They are the Bank for Foreign Trade of Vietnam
(Vietcombank),the Bank for Investment and Development of
Viet Nam (BIDV),Industrial and Credit Bank of Vietnam,
(Incombank) and the Vietnam Bank for Agriculture and Rural
Development (VBARD). Much of their lending goes to state-
owned enterprises (SOEs),often with little regard for the
quality of credit. While some SOEs such as Vietnam
Airlines, PetroVietnam and Vietnam Posts and
Telecommunications have healthy cash flows, many others do
not and find debt servicing difficult. As a result,
international observers such as the IMF opine that the four
largest SOCBs would be insolvent by international standards.


5. (SBU) The 33 joint stock banks (JSBs),which account for
11 percent of lending, are the fastest growing segment of
the banking market. They lend mainly to Vietnam's budding
private sector. While their credit quality is mixed, it is
generally viewed as somewhat better than that of the SOCBs.
At the same time, however, when blocks of what many regard
as the two top joint stock banks (Asia Commercial Bank and
Saigon Commercial Bank or Sacombank) went on sale, an
American bank decided to bid on only one of them as a result
of its due diligence. Only one of these sales has been
announced.


6. (U) The 27 foreign bank branches and the four joint
venture banks (between SOCBs and private sector) comprise
the remaining nine percent of the market. Leading foreign
banks include Citibank, JP Morgan Chase, Hong Kong Shanghai,
Deutsche Bank, Standard Chartered and Australia-New Zealand
(ANZ) Bank. Wachovia opened a representative office about a
year ago. Far East National Bank (FENB),which operates in
California, is a 100 percent subsidiary of the Taiwanese
holding company, Sinopac.


7. (U) Set up in May 1999, Vietnam Postal Savings Services
Company (VPSC) is a subsidiary of a monopoly
telecommunications SOE, Vietnam Post and Telecommunication
Corporation (VNPT). VPSC accepts saving accounts (both on
demand and for fixed terms),provides postal money transfer
services and payment services through postal saving
accounts. VPSC's nationwide network reaches remote and
mountainous areas through the telecom infrastructure. VPSC
now provides postal saving services in 64 provinces and
cities through 803 post offices. VPSC plans to upgrade its
online network and to expand its services to include money
exchange, payments (benefits, pension, telephone and
utilities bills),credit cards and e-commerce. It also aims
to increase its market share of international remittances
service from less than one percent currently to five to ten
percent over the next three years.


8. (SBU) One of VPSC's functions is apparently to provide an
off-budget funding source for the Development Assistance
Fund (DAF). The DAF is a specialized extra-budgetary
institution for conducting policy-based lending to large
scale, medium- and long-term projects. It was created to
shift the problems associated with policy lending away from
the financial sector. While the DAF is not included in the
state budget, it could create a significant burden on the
budget depending upon the quality of the lending and whether
final borrowers can service their debts. DAF appears to be
the GVN's current quasi-fiscal method to maintain SOEs. In
2004, VPSC took in about USD 730 million from the public and
transferred about USD 158 million to the Development
Assistance Fund (DAF). Since its establishment, VPSC has
transferred a total of nearly USD 538 million to DAF. In
2005, it plans to transfer about USD 177 million to DAF.

Rapid Credit Growth and Non-Performing Loans
--------------


9. (SBU) Vietnam's financial sector faces two key problems:
rapid credit growth and the unknown but significant amount
of non-performing loans (NPLs). Estimates of the amount of
credit growth are quite rough, but vary widely. One World
Bank economist claimed that for 2004 it was no more than 20
percent, where it has been in recent years, while another
stated it was probably higher, but did not provide a figure.
A State Bank of Vietnam (SBV) official said that there was
no exact figure, but estimated that it was over 30 percent
in 2004. He also stated that the State Bank had asked the
banks to "control lending." Another international economist
claimed that credit had grown by 28 percent in 2003 and 42
percent in 2004. This economist expressed concern that at
such a level, loan quality was probably quite poor.


10. (SBU) While there is no clear picture of the amount of
NPLs in Vietnam and estimates vary widely, all observers
agree that there is a problem and that the SBV must deal
with it soon. An SBV official said that there are no data
beyond 2000 and declined to give an estimate. He noted that
Vietnam is in the process of developing new definitions for
NPLs. The SBV recently stated that it had "settled" about
USD 1.24 billion in non-performing loans so far, but World
Bank experts dismissed this as old news. The SBV has said
that it "settles" NPLs in several ways such as transferring
them off-balance sheet (where they are monitored as off-
balance sheet items),selling them to asset management
companies, restructuring them, or settling them using
proceeds from the sale of mortgaged assets/collateral. The
SBV injected about USD 760 million in additional capital
into the SOCBs in recent years to improve their capital
adequacy ratios.


11. (SBU) Until March 2005, the World Bank had maintained
that NPLs comprised about 15 percent of total lending in
Vietnam, but local World Bank economists now acknowledge
that it likely exceeds 20 percent and could approach 30
percent, as the IMF has maintained for a long while. Noting
that the SBV is in the process of evaluating NPLs, a World
Bank financial sector coordinator Tom Rose said the SBV
should be able to estimate NPLs to within 10 percent in six
months. He predicted that the SBV would be shocked by the
total and hence would be unlikely to release the figures to
the public. The first step in addressing this issue is for
the GVN to get a clear picture of bad debt and then to
monitor lending trends, Rose said. When Vietcombank is
equitized and the GVN has to present a clear picture of its
books to attract foreign buyers, the public will become
aware of the NPL issue, he predicted.

Equitization
--------------


12. (SBU) The SBV has begun steps to equitize the SOCBs.
The World Bank financial sector expert provided some details
on the situation. SBV's governor recently signed the
proposal to equitize Vietcombank (VCB) and it has gone to
the Prime Minister for approval. The state would keep a
dominant share (not less than 51 percent) of VCB's chartered
capital. An international firm would value the bank and
determine share prices. The SBV has not yet decided how
many shares will be available to the private sector for
purchase or whether the usual 30 percent cap on foreign
equity will apply. The SBV has also completed a proposal
for equitizing Mekong Housing Bank (an SOCB) and will submit
it to the Prime Minister in the second quarter of 2005.
Equitization of other SOCBs will follow the VCB model.

Foreign Technical Assistance
--------------


13. (SBU) The World Bank and other donors are involved in
various projects to improve Vietnam's banking system. Most
observers here consider the bank payment system
modernization loan to be the key first step. IMF
representative Susan Adams says that this loan will provide
the "plumbing" for the banking system. Currently, the SBV
has no practical way to track transactions, she noted. SBV
receives about 60 documents monthly in hard copy from
commercial banks, but simply cannot analyze them fast
enough. With a computerized payment system, they could spot
problems more quickly and efficiently. Although this loan
does not currently include any private banks, the World
Bank, the IMF and other donors deem it "necessary" to laid
the foundation for a banking system.


14. (SBU) The World Bank also chairs the Financial Sector
Working Group which looks closely at the many issues in the
financial sector and seeks to coordinate donor assistance.
Up to now Tom Rose, the senior World Bank official on this
issue has been based in Washington and a lower level
official in Hanoi has handled most of the daily work. This
arrangement has yielded limited success while signaling a
lower priority to this issue. However, as a result of
concerted donor urging to raise the priority, a more senior
World Bank official is slated to move to Hanoi to assume the
management of this important issue this summer.

What Foreign Bankers Want
--------------


15. (SBU) A number of foreign banks have been operating in
Vietnam for some years. They have several concerns about
the current market that affect their ability to expand and
to prosper. The WTO market access negotiations offer an
excellent opportunity to handle some of these matters.


16. (SBU) U.S. banks would like to be able to establish an
unlimited number of branches in Vietnam without any
geographic restrictions. At present, they can only set up
branches in Hanoi and Ho Chi Minh City and must invest USD
15 million in additional capital for each branch. In
addition, banks would like to be able to operate their
branches in Hanoi and Ho Chi Minh City as a single entity,
which would reduce costs. Both the State Bank of Vietnam
and an international accounting firm confirmed to ECON/C
that there is no capital requirement for new branches of
Vietnamese banks. The Director of a Joint Stock Bank also
recently confirmed this to ECON/C, but noted that the SBV
intends to establish new regulations that would require
Vietnamese banks to put up capital for new branches.


17. (SBU) U.S. banks would also like to be able to link up
with the nation-wide automatic teller machine (ATM) network.
At this point, they can establish ATMs at their branches and
elsewhere but need to use a leased phone line to link to
their computer systems. In contrast, Vietnamese banks can
access the ATM system. There does not appear to be any
discrimination against foreign banks regarding access to the
ATM system, just a long waiting line for access.


18. (SBU) One often cited issue is the continuing cap on
foreign equity at 30 percent of any joint stock bank and 10
percent for each foreign investing entity. Such levels do
not attract active foreign investors who could provide the
capital, technology, expertise and training to help
Vietnamese banks and their staffs develop their skills.


19. (SBU) Another concern of foreign bankers is that the
limited terms of their licenses (often 20 years) preclude
them from making long term loans often needed for
infrastructure projects once they have been in business for
a few years. Vietnamese banks do not have similar
constraints.


20. (SBU) Foreign bankers also voice concern that the SOCBs
can offer loans at lower cost than foreign banks. SOCBs are
not required to make a profit and hold considerable amounts
of government deposits. This gives an SOCB an immediate
lending advantage so that it can undercut interest rates
charged by foreign banks. Moreover, foreign banks remain
subject to the regulation limiting the amount of capital
that can be lent to a single borrower to 15 percent while
the Prime Minister has granted exceptions to this cap for
certain borrowers to whom SOCBs lend.

MARINE