Vietnam wants 15 large banks by 2015 to strengthen system

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Vietnam's central bank unveiled plans to create a three-tiered financial industry dominated by 15 lenders as part of efforts to allay concerns over the nation's banking system.

The country aims to have 15 "big" banks by 2015 that make up about 80 percent of the local market, with two meeting international standards that will enable them to compete with regional lenders, State Bank of Vietnam Governor Nguyen Van Binh told lawmakers in Hanoi Saturday. There are currently 42 Vietnamese banks, including five state-owned commercial lenders.

Communist Party General Secretary Nguyen Phu Trong last month named financial services as one of three areas to focus improvements over the next five years to ease economic instability. Vietnamese banks face more challenges in funding and liquidity management than Asian counterparts because of depositor sensitivity, inconsistent and changing government policies, and inflation, according to Moody's Investors Service.

"The overall health of the banking system in Vietnam is weaker than that of its neighbors," said Karolyn Seet, a Singapore-based assistant vice president at Moody's. Lack of transparency, high corporate indebtedness and lax loan classification are also impeding Vietnamese lenders, she said.

The central bank will encourage mergers and acquisitions as one way to bolster weaker banks, Binh told the National Assembly. The 15 large lenders will serve as "pillars for the banking system," he said. The second category will consist of smaller banks that are healthy, and the third will include firms facing "financial difficulties" that need restructuring, the governor said.

Closures "˜overdue'

The closure of small, under-capitalized banks that are undisciplined lenders and heavy users of interbank funding is "long overdue," Credit Suisse Group AG said in August.

"There are points of weakness in the banking system which make it difficult for smaller, weaker banks to access liquidity," said Ashok Bhundia, a fixed-income strategist at Bank of America Merrill Lynch in Hong Kong. "Some smaller banks may have to be closed down" and others may merge, Bhundia said.

Binh said soured loans are set to climb. The bad-debt ratio at Vietnam's commercial banks is currently 3.3 percent and will increase to a range of 3.6 percent to 3.8 percent by the end of the year, he said.

More than 48,700 Vietnamese companies halted operations or dissolved in the first nine months of the year, Prime Minister Nguyen Tan Dung told the National Assembly Saturday. The number is 22 percent higher than in the same period last year, Dung said.

Developers struggling

Non-performing-loan ratios using Vietnamese standards "could easily rise" to 5 percent within 12 to 18 months, and may reach as high as 10 percent in a "stress-case" scenario, said Seet at Moody's.

"We have banks coming to us with problem situations, where they have lent to a local developer which now can't afford to service their debt," said Peter Ryder, Hanoi-based chief executive officer of Indochina Capital, a fund manager focused on property. "With increasing frequency in the past six months, banks have been coming to Indochina Capital and saying, "˜Can you buy the local developer out so they can pay us?'"

Binh also said ministries are closely monitoring domestic and global markets to "timely" adjust interest rates. Inflation has been slowing, creating conditions for the State Bank of Vietnam to cut rates, the governor told lawmakers.

Vietnam's credit growth is forecast at 13 percent this year, Binh said, adding that he will target credit expansion of 15 percent to 17 percent in 2012.

Faster privatization

Authorities should consider selling more shares of state- owned banks to improve efficiency and transparency, according to Alain Cany, the Ho Chi Minh City-based chairman of the European Chamber of Commerce in Vietnam.

The Joint-Stock Commercial Bank for Foreign Trade of Vietnam, known as Vietcombank, first sold shares in 2007 and Vietnam Joint-Stock Commercial Bank for Industry and Trade, known as Vietinbank, did so in 2008. The government will still hold a 77 percent stake in Vietcombank after the sale of 15 percent to Tokyo-based Mizuho Financial Group Inc., and also currently owns more than 80 percent of Vietinbank.

The other two of the four biggest banks, Vietnam Bank for Agriculture & Rural Development and Bank for Investment and Development of Vietnam, known as BIDV, have yet to sell shares.

"There needs to be an acceleration in the privatization of the big banks," said Cany. "Vietcombank should sell more shares, Vietinbank should find a foreign partner, and BIDV should restructure and sell shares."

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