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Banking & Finance

Foreign banks lack competitive pressure

Released at: 12:15, 16/09/2015

Foreign banks lack competitive pressure

SBV report states foreign banks unlikely to dominate local banking sector any time soon.

by Thanh Huong - Hung Khanh

According to the latest report from the State Bank of Vietnam (SBV), Vietnam now has 47 branches of foreign banks, five fully-owned foreign banks, 53 representative offices of foreign banks, and four joint venture banks between foreign banks and local banks.

In term of networks, the fully-owned foreign banks have 61 branches or transaction points, mostly in Hanoi and Ho Chi Minh City, while local banks have 2,472 branches or transaction points around the country.

Since the beginning of this year the SBV has agreed to the Public Bank Berhad (Malaysia) and Citibank (US) opening fully-owned foreign banks in Vietnam, while some existing fully-owned foreign banks have been given permission to increase their capital and expand their business activities.

Foreign banks, be they fully-foreign owned, branches, representative offices, or joint ventures, are clearly being more proactive in Vietnam and are adding to the competition in the domestic banking sector.

Modest market share

As at December 31, 2014, the total assets of foreign bank branches accounted for only 6.92 per cent of total assets in the banking sector, while fully-owned foreign banks held 3 per cent and joint venture banks 0.75 per cent.

Regarding improvements in foreign banks in Vietnam, although charter capital to capital provided by the parent bank increased significantly, from 13 per cent to 19.1 per cent in the 2009 - 2014 period, the share of their total assets in the banking sector only increased from 10.4 per cent to 10.67 per cent and the share of mobilized capital only increased from 7.9 per cent to 8.19 per cent.

The share of total loans of foreign banks fell from 9.2 per cent in 2009 to 8.28 per cent in 2014, with the share in loans from foreign bank branches falling from 6.3 per cent in 2009 to 4.16 per cent in 2014.

The SBV report said the reasons for these modest market shares include the difficult economic situation influencing foreign banks doing business in Vietnam. Another factor is that since the Law on Financial Institutions took effect in 2010, foreign bank branches have had to limit loans based on their own capital and not the capital of their parent bank, as previously.

Regarding business performance, as at December 31, 2014, foreign banks have recorded average return on asset (ROA) ratios of 0.8, which is higher than the average ratio in the sector of 0.63, and the average return on equity (ROE) ratio of foreign banks was 4.8 per cent, lower than average ROE in the sector of 6.87 per cent.

Little competitive pressure

The SBV wrote that foreign banks hold certain advantages such as financial resources, experience, and development, and so have been the pioneers in introducing new products and applying high technology such as e-banking, which have contributed greatly to the process of modernizing Vietnam’s banking sector.

The activities of foreign banks have also contributed to attracting foreign investment, increasing competitiveness and forcing local banks to reform, upgrade their technology, and increase their management capacity and the quality of their human resources.

However, with their modest market shares, small networks, and general inability to approach Vietnamese enterprises (especially small and medium-sized enterprises) and individuals, some foreign bank branches only focus on wholesale banking and conducting business based on their own capital.

Therefore, the SBV concluded that in the future there is little possibility of foreign banks dominating the market and putting significant pressure on Vietnamese banks. However, the SBV also noted in the report that the size and business strategies of foreign banks will be major challenges for local banks, especially in the context of many free trade agreements and other agreements being signed in 2015.

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