Foreign banks, especially those from Asia, are strengthening their foothold in Vietnam to cater to a growing number of multinational companies and crowd out local lenders.
In March, Malaysia's Public Bank Bhd was allowed to acquire the stake owned by Vietnamese lender BIDV in their $62.6 million joint venture VID Public Bank.
After the deal, the Malaysian bank will turn the Vietnam-based venture into a 100 percent foreign-owned bank.
Singapore's United Overseas Bank (UOB) has also submitted an application for upgrading its branch in Ho Chi Minh City into a wholly foreign-owned bank in Vietnam. However, the request has not been approved.
The Ministry of Planning and Investment has recently urged Prime Minister Nguyen Tan Dung to ask the central bank to accept UOB's application.
Singapore is now the third largest investor in Vietnam, but there has not been any Singaporean bank in the country, the ministry said. Some other economies, whose investments in Vietnam have been smaller than that of Singapore, have already been allowed to open their banks, it added.
Banks from Japan and South Korea have also planned to enter Vietnam.
The country has some 10 representative offices of South Korean banks. Many Japanese banks have opened their branches and representative offices here, while dozens of others have recently come to study the market.
Economist Nguyen Tri Hieu said many foreign banks want to get into the market to serve an increasing number of foreign invested enterprises, which often use services provided by banks coming from their own countries instead of local lenders.
Vietnam received a total disbursement of $12.35 billion from foreign investors last year, up 7 percent from the previous year, according to the Ministry of Planning and Investment.
Lending of Bangkok Bank in Vietnam grew 10 percent in the first eight months of last year, Thai newspaper The Nation quoted Tharabodee Serng-Adichaiwit, senior vice president and general manager, as saying.
He said Bangkok Bank had seen an influx of foreign investment in Vietnam and it had participated in offering credit to foreign investors, which account for 90 percent of its new loans here.
"We will serve the flow of investment by using the bank's network, especially in China, as Chinese investors are coming here to set up production bases. Furthermore, we will increase the focus on local small and medium-sized enterprises that are supply chains of larger corporates in Vietnam," he was quoted as saying.
Keith Pogson, managing partner of EY’s Financial Services in the Asia Pacific region, said the country’s economic development and deeper international trade integration are also factors that help Vietnamese banking sector become more attractive to overseas investors.
The country has been chasing a series of trade pacts, including the Trans-Pacific Partnership (TPP) and the EU-Vietnam Free Trade Agreement, as part of its ambition to attract more investment and become a regional manufacturing hub.
Vietnam's $184 billion economy is expected to expand by 6.1 percent this year, and 6.2 percent in 2016, with the foreign-invested sector an important driver, according to a report from the Asian Development Bank.
The economy grew 6 percent last year, the highest rate since 2011.
David Hovenden, Southeast Asia of Strategy&, part of the PwC network, said Vietnam has been ranked third in the region for the attractiveness of its banking market.
Most of Vietnamese banks have seen Japanese lenders as their biggest competitors while others have considered European banks their key rivals.
However, Pogson said major threats to local banks could come from within Southeast Asia, which has many strong players in the field of retail banking.
They may break into the domestic market after the launch of the ASEAN economic community later this year and the removal of banking barriers.
Thai’s bank Kbank has opened two representative offices in Hanoi and HCMC. Its main target clients are Thai, Chinese, Japanese and South Korean companies that want to expand into Vietnam.
The president of the bank, Predee Daochai, said: “Vietnam is one of the most important investment magnets among Thai and foreign investors, given the country’s ample labor force with diligence, patience, and a positive attitude towards self-development. While Vietnam is a great source of raw materials, the country is also home to more than 90 million consumers, a high-growth potential market.”
Foreign banks are likely to attract most of foreign enterprises in Vietnam. These companies are without a doubt lucrative customers, with high demand for capital and banking services. They contribute to 70 percent of the country’s total export revenues.
Experts believe local banks have failed to tap this market segment because of their high interest rates and limited range of services.
Economist Bui Kien Thanh said foreign banks are very competitive because they can attract cheap funding sources in their home countries. Vietnamese banks, on the other hand, have to pay much higher interest rates on deposits, he said.
Thanh noted that multinational companies would typically use services of a particular bank or banks for many years, instead of switching to local banks.
Foreign banks know very well the financial situation of these companies and this can lower lending risks which in turn will lower borrowing costs, he said.
Thanh also said some foreign banks are more flexible than local banks in accessing credit applications because their main criteria is the feasibility of the business plan, while local banks focus on collateral.
"Foreign banks are often considered more reliable and professional. So it is not surprising that foreign firms prefer to work with them," he said.
Vietnam now has one state-owned bank, 37 joint stock commercial banks, six wholly foreign-owned ones -- HSBC, Standard Chartered Bank, ANZ, South Korea's Shinhan Bank, Malaysia's Hong Leong Bank Berhad, and Public Bank Berhad -- and nearly 100 branches and representative offices of foreign banks.