On
January 4, 2012, Vietnam’s government released Resolution 01/NQ-CP, on seven
key solutions for 2012.
The fact that third and fourth on this list
were to progress the quality of the workforce (3rd), and, to improve social
welfare through better healthcare and a reduction in poverty (4th),
demonstrates the importance being placed on finding solutions to macroeconomic
challenges at the highest levels.
The government lists curbing inflation as the
top priority for 2012, a mandate that the State Bank of Vietnam (SBV) has
already fully embraced through unprecedented monetary tightening. The second
priority is the restructuring of commercial banks and state owned economic
corporations.
With the SBV’s assistance and guidance, banks
will need to overcome their difficulties and look to merge with other banks,
trim costs and become stronger lenders. Vietnam’s central bank aims to create
two big lenders that are competitive within the region before 2014, and
additionally between 10 and 15 major banks that can become “pillars” to support
the country’s financial system.
This proposed transition will require the
banks of the future to address and reduce much of the uncertainty currently
surrounding their risk management frameworks. In addition to reviewing credit
risk processes, banks will need to reduce the negative effect of liquidity,
market and other operational risks through ongoing assessment.
#In 2008 when global credit markets froze in
what was a re-pricing of risk, central bankers around the world pumped
trillions of dollars of funding into the most needy banks. In addition to this,
official cash rates were swiftly marked down in an attempt to stimulate
borrowing and get banks lending to each other again.
The overall aim of this was to liquefy the
global financial sector which was facing total meltdown in late 2008. An
obvious externality of these actions is higher inflation, a risk that central
bankers were prepared to take in lieu of fostering a return to global financial
stability.
Liquidity risk: The World Bank recently
reported that banks in Vietnam are also reporting liquidity shortages, and
capital adequacy continues to be an issue. However, this is not a situation
unique to Vietnamese banks. Banks around the world have to manage the
asset-liability maturity mismatch, as most of the deposits are short-term,
while lending is mainly offered at medium or long-term durations. This can lead
to temporary liquidity problems, and banks need to manage their term funding
appropriately. Prudent management of the demand and supply of funding over
different time horizons can be a key contributor to banking profitability.
Credit risk: Tighter monetary policy has
already had a dampening effect on credit growth and raised the level of Non
Performing Loans (NPL’s). Necessary monetary action taken by the SBV has
reduced credit growth from 28 per cent in 2010 to 13 per cent in 2011. Credit
growth is expected to be between 15 per cent and 17 per cent for 2012. Prudent
banks will review and upgrade their credit policies, ongoing assessment
processes, and provision to reduce the risk that new lending will not
ultimately increase their level of NPL’s, and that the credit provision is
accurately stated.
The level of NPL’s reported by Vietnamese
banks is 3.39 per cent. However, many industry observers believe this
significantly understates the true quality of existing loans and that a 10 per
cent is a more accurate reflection of the true NPL level. The main cause of this
is deficient lending practices and assessment processes.
Basel and continuous improvement: While the
Basel accords (I, II and III) are aimed at ensuring banks have sufficient
liquidity and adequate capital to fund their business, these levels are in essence
determined by an overall assessment of credit, operational, liquidity, market
and other risks. The SBV is not a member country of the Bank for International
Settlements. Therefore domestic banks were not held to the same mandates as
member countries.
However, the SBV will reform the banking
governance system in 2012 in line with international practices, focusing on
executing risk management system in compliance with Basel principles and
standards. Basel II (2004) was originally seen by the global financial sector
as a compliance headache. But, the Basel accords are not just about compliance.
Adopting Basel as the minimum standard for assessing the risks banks face
increases overall operating efficiency.
Banks are realising that there are real
business benefits to be gained from implementing Basel, as well as potential
capital savings. Improving the bank’s reputation, rating systems and more
effective pricing are just some of the realised benefits.
Pervasive risk management: The SBV has
mirrored in part some Basel II content (such as part of the Capital Adequacy
requirements), but many domestic banks are still deficient in their overall
assessment of their risk profile. International banks are currently undergoing
assessment for Basel III, to be fully implemented by 2019.
In response to the SBV’s recent announcements,
operational risk assessments in some Vietnamese banks are now being considered
for the first time. Managing liquidity risk and market risk as part of the
overall effective ALM is gaining traction with bank senior management. As
discussed, enhanced credit practices are being considered. These recent actions
demonstrate Vietnamese banks have taken the SBV reforms seriously and are
prepared to act.
Different bank, different solutions: The
diversity of participants in Vietnam’s banking sector requires a tailored
approach for each bank. One size doesn’t fit all, and bespoke solutions are
required to put into practice the SBV’s recommendations. Consideration needs to
be given the practicality, timeliness and cost when assessing appropriate risk
mitigation solutions.
The SBV has “encouraged” the large SOE’s and
the larger joint stock commercial banks to seek merger and acquisition
opportunities among themselves as a precursor to strengthening the banking
sector. With the sector looking to consolidate from 42 domestic banks currently
to around 20, the restructuring may not be as swift as the SBV hopes. Tire
kicking the risk management framework of the targets will be a prime
consideration in determining the right partner. Given the central bank’s
objective of ultimately having two big lenders that are competitive within the
region, potential suitors for this role may require multiple tie-outs.
In addition, the ongoing “equitisation” of
large entities (BIDV will list in 2012) places additional reliance on senior
management to run effective risk management processes across all parts of their
business. Therefore the requirement to have robust risk management processes
affects both large and small domestic banks.
Looking forward: As Europe’s woes are yet to
fully play out, it’s the view of KPMG that banks globally need to be absolutely
committed to addressing all risks they face, and to develop appropriate
mitigation strategies. The Asian Development Bank commented recently that
Vietnam’s banking sector is showing signs of stress after a period of prolonged
instability.
The SBV’s primary concern with the banking
sector is liquidity and has put domestic players on notice. For the smaller
banks, it’s an opportunity to strengthen their business, provide greater
stability for their customers and to ultimately sell out at a higher price. For
the bigger banks, it’s an opportunity to promote their cause as one of the two
strategic and regional banks from Vietnam, but they run the risk of the weaker
partner affecting their claim.
KPMG believes that in 2012, the Vietnam
banking sector will commence a period of rapid transformation. Addressing risk
issues in banking is not simply a cost of doing business; it is a path to
greater understanding of your business and to achieving efficiency and
profitability.
Combining SBV oversight, advisory insight, and
proactive willingness within the sector to adapt, a stronger banking system can
be built in Vietnam.
Steve Punch
VIR
Business & Investment Opportunities
YourVietnamExpert is a division of Saigon Business Corporation Pte Ltd, Incorporated in Singapore since 1994. As Your Business Companion, we propose a range of services in Consulting, Investment and Management, focusing three main economic sectors: International PR; Healthcare & Wellness;and Tourism & Hospitality. We also propose Higher Education, as a bridge between educational structures and industries, by supporting international programs. Sign up with twitter to get news updates with @SaigonBusinessC. Thanks.
No comments:
Post a Comment