Banking Vietnam

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Banking Vietnam
Banking Vietnam

The banking sector of Vietnam has historically suffered from low public confidence, regulatory and managerial weakness, high levels of nonperforming loans, and an inability to mobilize private sector capital efficiently to support economic growth. Although the Banking Vietnam system has made progress in improving governance, risk management, and transparency in recent years, these issues remain critical as the Vietnamese government prepares to privatize commercial banks in 2016.

Vietnam Faces Challenges In Attracting Foreign Banks

One of Vietnam’s most attractive features as a market is also one of its greatest barriers to entry. A combination of low interest rates and lack of growth means banks are reluctant to take on additional risks to expand their geographic reach. Unless Banking Vietnam can address these issues, attracting foreign investment will remain difficult. Both Vietnamese and foreign owned banks face challenges in attracting consumers, who seem largely uninterested in opening accounts public confidence in domestic institutions remains low and a high level of non-performing loans means many people have other uses for their money.  

However, Banking Vietnam has not taken advantage of these opportunities. The majority of bank consumers are still uninterested in opening accounts, and domestic institutions have largely been unable to meet foreign demand for investment services. This lack of development is surprising given that Vietnamese banks face far fewer regulatory constraints than their peers in other emerging markets such as China and Brazil. Recent efforts to reform Vietnam’s financial sector indicate a new focus on Professional Banking improving public confidence by encouraging greater transparency in lending decisions, but it remains unclear how much effect these changes will have on domestic demand for banking services. Until local interest in banking increases significantly, attracting foreign investment will remain difficult.

Banking System Remains Under Stress

The Bank for International Settlements says that bad debts accounted for more than 3% of total loans at all Banking Vietnam as of late last year, down from nearly 5% four years earlier. Nonperforming loans have been rising as a share of total loans, although they remain relatively low by international standards. Vietnamese banks are also having to contend with significant increases in nonperforming assets associated with dud lending to state-owned enterprises and government organizations. The number of nonperforming loans at all state owned commercial banks rose by nearly between, according to recent data from Vietnam’s State Bank.  

Vietnam’s rapid growth over recent years, fueled by foreign investment and trade, has helped boost profits and, in turn, bank capital. But faster credit growth has been accompanied by increasing bad debt ratios. As a result of these developments, operating conditions at banks remain challenging. The State Bank recently estimated that profit margins would fall to around from roughly on average as rising bad debts eat into profitability. Meanwhile, long term interest rates have trended higher over recent quarters. This could put further pressure on asset quality at Banking Vietnam and make it more difficult for them to fund their balance sheets as economic growth continues to slow amid an ongoing political leadership transition.

Vietnam Economic Update

Vietnam’s rapid development in recent years has been accompanied by a rapid increase in bank lending, which has expanded faster than since 2004. Total loans grew at an average annual rate of 22 percent between 2008 and 2013, more than three times as fast as growth. The State Banking Vietnam curtailed credit growth to prevent a rise in inflation after it reached almost 20 percent in late 2012. As a result, credit growth slowed to 14 percent on average from 2013 to 2016, even though economic growth accelerated. Vietnamese banks have faced mounting nonperforming loans amid weak economic conditions that began in early 2015 and continued into 2016.  The weaker outlook for banks has resulted in Vietnam’s public confidence in its financial system remaining low by regional standards.

According to an annual World Bank survey of Banking Vietnam conducted in 2016, less than 30 percent of respondents rated their bank as trustworthy, and only 28 percent said they would buy products or services from a bank without knowing its reputation. Similarly, Vietnamese households are slow to adopt new technologies such as online banking and mobile payments, even though per capita internet penetration reached 37 percent by early 2017. A lack of consumer trust may have contributed to only 22 percent of Vietnamese citizens using credit cards the lowest share among all markets covered by Visa, while 44 percent said they preferred cash over all other payment methods. Because Vietnamese banks lack strong customer loyalty and face negative public sentiment, competition is limited.

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