VIETNAM BANKING SYSTEM IN INTEGRATION PROCESS: OPPORTUNITIES, RISKS AND SUSTAINABLE DEVELOPMENT ORIENTATION INTERNATIONAL BANKING FORUM 2011 Brescia, 16-17 June 2011 Pro., PhD. NGUYEN THI MUI DIRECTOR VietinBank Human Resource and Training School VIETINBANK
VIETNAM BANKING SYSTEM IN INTEGRATION PROCESS: OPPORTUNITIES, RISKS AND SUSTAINABLE DEVELOPMENT ORIENTATION Pro., PhD. NGUYEN THI MUI DIRECTOR VIETINBANK HUMAN RESOURCE DEVELOPMENT AND TRAINING SCHOOL 2
CONTENTS I OPPORTUNITIES AND BANKING SYSTEM PROGRESS II RISKS AND REASONS III SUSTAINABLE DEVELOPMENT ORIENTATION 3
I. OPPORTUNITIES AND VIETNAM BANKING SYSTEM PROGRESS DEMAND SIDE 1. STRONG DEMAND FOR INVRESTMENT CAPITAL SUPPLY SIDE 1. INSTITUTIONAL FRAME OF MARKET ORIENTNED DEVELOPMENT FOR BANKING BUSINESS 2. STRONG DEMAND FOR PAYMENT SERVICES, INTERNATIONAL BANKING SERVICES 3. IMPROVEMENT IN PER CAPITA INCOME AND QUICKLY INCREASE IN PURCHASING POWER 2. REFORMING RISK MANAGEMENT 3. STRENGTHENING FINANCIAL CAPABILITY, ENLARGING BANKING ACTIVITY SCOPE 4. RESTRUCTURING BANKING SYSTEM NETWORK 5. IT APPLICATION; HUMAN RESOURCES DEVELOPMENT 4
investment structure by sectors total investment capital (% GDP) I. OPPORTUNITIES AND VIETNAM BANKING SYSTEM PROGRESS DEMAND SIDE 1 1. Strong demand for 2 investment Total social investment: un-precedented growth to highest level in term of percentage of GDP (42.7%/GDP in 2010) Private investment capital: a boom in recent years state sector non-state sector FDI total 100% 50 46,5 90% 42,7 41,5 41,9 45 39 40,7 40,9 41,6 80% 35,4 37,4 40 70% 35 60% 30 50% 25 40% 20 30% 15 capital 20% 10% 10 5 3 FDI: More and more inflow as soon as Vietnam became member of WTO in 2007 0% 0 Source : GSO, Vietnam 5
remittance (Mill. USD) return from foreign tourists (Mill. USD) Exp, Imp volume (Mill. USD) Exp, Imp performance (% GDP) I. OPPORTUNITIES AND VIETNAM BANKING SYSTEM PROGRESS DEMAND SIDE XNK performance Period 2006-2010 Exp (Mill. USD) Exp. (% GDP) Imp. (Mill. USD) Imp. (% GDP) 1 2. Strong demand for Export: increased 1.8 times Import: doubled 100000 50000 0 100,0 50,0 0,0 external payment, 2 exchange trading, remittances 3 Foreign currency from international tourists: increased 1.56 times Remittances: increased 1. 62 times 10000 8000 6000 4000 2000 0 Remittance and return from foreign tourists return from foreign torists remittances via banking system Total remittances 2002 2003 2004 2005 2006 2007 2008 2009 2010 7000 5000 3000 1000-1000 6 Source: Economy 2010-2011, Vietnam economic times
per capita income - USD Growth rate of per capita income - % I. OPPORTUNITIES AND VIETNAM BANKING SYSTEM PROGRESS DEMAND SIDE Per capita income - USD % growth 3. Demand for 1 banking services relating to a relatively large population size, young Population population structure, structure2 strong local purchasing power accompanied with considerable improvement 3 in per capita income Population size Population structure Per capita income: increased 1.6 time between 2006-2010, reached to 1.160 USD in 2010 Local purchasing power : quickly increase in scale, shifting structure from inferior goods to services 1.800.000 1.600.000 1.400.000 1.200.000 1.000.000 800.000 600.000 400.000 200.000 0 1400 1200 1000 800 600 400 200 0 16,09 15,48 13,71 11,8212,40 Source: GSO 24,79 9,87 1,14 2003 2004 2005 2006 2007 2008 2009 2010 19,6 22,8 24,5 31,1 10,4 1995 2000 2005 2006 2007 2008 2009 2010 120 100 80 60 40 20 0 30,00 25,00 20,00 15,00 10,00 5,00 0,00 Purchasin g power - Bill VND Purhasing power - Bill USD Growth rate of PP in USD - % 7 Source: Economy 2010-2011, Vietnam economic times
I. OPPORTUNITIES AND VIETNAM BANKING SYSTEM PROGRESS SUPPLY SIDE 1. LEGAL FRAME => Revised law of state bank; Revised law of financial institutions ( year 2010); law of independent audit (year 2011) => Ordinate of foreign exchange management => Circular No. 13 and Circular No.19 revising the circular No. 13: provisions on banking prudent criteria toward international standards/practices => Reorganizing and improving capability of banking inspection and supervision: setting up a department of banking inspection and supervision under the SBV => Legal frame for equitizing the state owned banks 8
I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS SUPPLY SIDE Other banks Building policy framework of risks management VIETINBANK Issued policies, documents on risks management; Consolidated operating risks management 2. RISKS MANAGEMENT Strategy on risks management Established policy frame and principles of risks management: determined risk taste Running risk management apparatus, assigning roles and responsibility of each department/office and of each individual in risks management Internal rating system ( Decree No. 493/NHNN) Application of IT into risks management: Fund transfer pricing, Internal rating system, MIS 9
I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS SUPPLY SIDE Other banks VIETINBANK 3. Strengthening financial capability Number of banks with charter capital less than 3000 Bill. VND (about 1.5 bill. USD): 11 Number of banks with charter capital from 3000 to 10 000 Bill. VND (about 1.5 4.9 bill. USD): 24 Number of banks with charter capital more than 10 000 Bill. VND (above 4.9 bill. USD): 07 Bank system structure by capital scale less than 3000 Bill VND (1.5 bill USD) from 3000-10000 Bill VND (1.5-4.9 Bill USD) Above 10 000 Bill VND (above 4.9 Bill USSD) Owned capital increased 2,6 time between 2006-2010. In year 2010: Vietinbank s charter capital was more than 5 times of minimum charter capital level provided by SBV 2010 2009 2008 2007 2006 Charter capital Minimum Charter capital level in 2011 (about 1.5 bill. USD) 3000 0 5000 10000 15000 20000 10
I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS SUPPLY SIDE Other banks VIETINBANK 4. Banking system network and bank organization Banking system network Year 2006 2007 2008 2009 Joint stock banks 35 36 36 37 Joint venture banks 5 5 5 6 Foreign bank branches 100% foreign capital banks 27 35 37 37 0 0 5 5 State owned banks * 5 5 5 5 Policy bank 1 1 1 1 Vietnam Development bank 1 1 1 1 Bank organization: departments/offices by customer groups; Inspection and exam. Office separated from operation machine; Risks management office separated from business offices; Bank model reform toward a financial group On 31/12/2010, Vietinbank network was the second large in Vietnam, after Agribank network, including: 150 branches and transaction center More than 1000 transaction offices 06 subsidiaries 03 services providing units Representative office in Frankfurt, Germany; ( it is planned to be in 7/2011) Building agency relationship with hundred banks around the world Signed 8 credit agreements frame with Belgium, Germany, Korea, Swiss, 11 *: including vietinbank and VCB
I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS SUPPLY SIDE Other banks VIETINBANK INFO and TECH HUMAN INFO and TECH HUMAN 5. Application of IT; Human resource development => Each bank: conducting online within bank wide scope ; => Applying IT into payment system; developing e-banking services; => Applying Modules into capital resource management, investment portfolio management; customer management => Recruitment policy: openness, examination regime/process; => Job management: performance evaluation => Wages and remuneration and reward regime: link with position and work performance => Overall system reorganization in line with the reform in IT: Implementing 19 modules on IT for banking governance and operation => Formal recruitment process; human resource management in close relation with wages, remuneration and reward regimes => Job management process: Job description; Job performance evaluation => Human resource restructuring 12
I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS 1. BUSINESS SCALE AND NON-PERFORMING LOAN 2. BANK SERVICES DEVELOPMENT AND FINANCIAL DEEPENING 3. BANKING BUSINESS EFFICIENCY 13
total assets - bill. VND growth rate of total assets - % total assets - Mill VND growth rate of total assets - % I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS BANKING SYSTEM PROGRESS Other banks VIETINBANK Total Total assets % growth 1. TOTAL ASSETS AND non- 3500000 3000000 State owned banks Joint stoc banks Joint -venture and 100% foreign capital bank Growth rate of total assets of the system 30,00 25,04 25,00 25,00 400000 300000 200000 100000 0 16,54 25,93 2008 2009 2010 60,00 50,8350,00 40,00 30,00 20,00 10,00 0,00 performing loan 2500000 2000000 1500000 1000000 18,40 20,00 15,00 10,00 2010 Market share - % 500000 5,00 2009 0 2008 2009 2010 0,00 2008 0,00 2,00 4,00 6,00 8,00 10,00 12,00 14 Source: SBV and author s calculation Source: Annual report and author s calculation
non-performing loan/total outstanding loan - % I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS BANKING SYSTEM PROGRESS 2010 1. TOTAL ASSETS AND nonperforming loan nonperforming loan 2009 2008 Vietinbank Total system 0 1 2 3 4 Source: Non-performing loan of total system SBV Vietinbank:Annual report 15
I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS BANKING SYSTEM PROGRESS Other banks VIETINBANK Customer orientation 2. Bank services Diversification Providing products/services for each targeted customer group Services development strategy for each specific period Services quality management with ISO 16
I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS BANKING SYSTEM PROGRESS 200,0 180,0 FINANCIAL 160,0 140,0 120,0 100,0 Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia DEEPENING M2/GDP 80,0 60,0 40,0 20,0-2005 2006 2007 2008 2009 Phillippines Singapore Thailand Viet Nam China Source: Asian Pacific key indicators, ADB, 2010 17
I. OPPORTUNITIES AND BANKING SYSTEM PROGRESS BANKING SYSTEM PROGRESS ROA ROE 2010 2009 2008 2010 2009 2008 total total 3. BANKING BUSINESS EFFICIENCY State owned banks Vietinbank Joint-venture and 100% foreign capital banks State owned banks Vietinbank Joint-venture and 100% foreign capital banks Joint - stock banks Joint - stock banks 0 0,5 1 1,5 2 0 5 10 15 20 25 18 Source: SBV and author s calculation
II. RISKS IN BANKING BUSINESS AND REASONS RISKS IN BANKING BUSINESS 1. CREDIT RISK 2. LIQUIDITY AND DURATION GAP RISK 3. INTEREST RATE RISK AND EXCHANGE RATE RISK 4. OPERATING RISK 5. OTHER RISKS 19
II. RISKS IN BANKING BUSINESS AND REASONS 1. RRTD RISKS IN BANKING BUSINESS Symbols of risks 1. Credit risk => Nonperforming loan: in increasing trend => Huge provision for bad debt. 2. Liquidity risk =>Using short term mobilized resources for long-term lending => Very high inter-bank rate => Dramatic lending growth, giving pressure on liquidity 3. Interest rate and exchange rate risks => Large spread between borrowing and lending rates => borrowing at high interest rate associated with very short duration => Volatile exchange rate 4. Operating risk => Low compliance with procedures/process => Some bad activities: systematical risk 20
II. RISKS IN BANKING BUSINESS AND REASONS REASONS BEHIDE RISKS IN BANKING BUSINESS CPI in Vietnam versus CPI in developed and developing countries group developed countries developing countries Viet nam 1. Reasons from economy s internality 1.1. The economy in transition period, low stability, high CPI 25 20 15 10 5 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 21 Source: World economic outlook, IMF, 2010 CPI in Vietnam: GSO, Vietnam
II. RISKS IN BANKING BUSINESS AND REASONS REASONS BEHIDE RISKS IN BANKING BUSINESS ICOR during period 2000-2010 1. Reasons from economy internality 1.2. Economy s Efficiency is not high Banking services coverage is limited (8% - 10% population have account at banks) Non-state sector: relatively limited access to banking services 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 6,17 6,58 5,50 5,05 4,84 5,22 5,31 5,28 5,14 8,03 2000 5,04 0,00 2,00 4,00 6,00 8,00 10,00 22 Source: Author s calculation based on GSO
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 annual growth rate - % import structure by importing goals II. RISKS IN BANKING BUSINESS AND REASONS REASONS BEHIDE RISKS IN BANKING BUSINESS GDP and export import performance Import structure GDP growth rate Materials consumtion goods others 1. Reason from economy internality 1.3. External sector: mainly in processing, accompaning with a large trade deficit during boom times 50 40 30 20 10 0 Import growth rate export growth rate 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 8,2 7,8 7,4 7,8 9,3 89,6 88,0 90,5 88,8 90,2-10 -20 0% 2005 2006 2007 2008 2009 23 Source : GSO, Vietnam
1 2 3 II. RISKS IN BANKING BUSINESS AND REASONS REASONS BEHIDE RISKS IN BANKING BUSSINESS 2. Reasons from banking sector internality 2.1. Legal frame Legal documents: Not comprehensive, not stable Lack a risk management strategy as a whole Changes in policies, regimes Transparence, inspection and supervision in financial sector is limited: Due to the shortages in info. infrastructure, accounting regime, assets/liabilities classification, not assuring information flow requirements of comprehensiveness, adequacy and in time Lack legal frame for some services provided with actual demand in the economy: Gold trading Derivatives 24
Credit growth rate /GDP growth rate -( times) II. RISKS IN BANKING BUSINESS AND REASONS REASONS BEHIDE RISKS IN BANKING BUSSINESS Multiplier between credit growth rate and GDP growth rate market capitalization of listed stocks (% GDO) 8 domestic credit provided by banks % GDP 2. Reasons from banking sector internality 2.2. Unbalance between capital market and monetary market 7 6 5 4 3 2 1 2010 2009 2008 2007 2006 0 2005 0 20 40 60 80 100 120 25 Source: Economy 2010-2011, Vietnam economic times Source: Asian Pacific key indicators, ADB, 2010 and author s calculation
II. RISKS IN BANKING BUSINESS AND REASONS REASONS BEHIDE RISKS IN BANKING BUSINESS 2.3. Risk management apparatus is not suitable with international practices/benchmarks. 2. Reasons from banking sector internality 2.4 2.5 2.6 Lacking tools for measuring risks, monitoring risks and managing risks in systematical view; some risks have been not yet quantified (market risk), post resolution rather than prevention and warning in advance Infor and Tech. Infrastructure: variance among banks because of very difference in financial capability Information: asymmetric information 2.7 Competition: in such a way that does not pay enough attention on risk management. 26
III. SUSTAINABLE DEVELOPMENT ORIENTATION 1. Regarding to commercial banks Increasing competition, consolidation and diversification via restructuring and merging Speeding up the equitization process Encourage merging, strengthening joint stock banks Review roles and functions of Vietnam development bank -I Improving efficiency of banking business Implementing banking governance in line with international practices (Assets/liability management, liquidity management ). Consolidating capability of recognizing risks and managing risks Improving information to market participators. Enlarging cooperation in grading up and updating infrastructure in banking system and IT. Building up criteria of warning in advance. Developing banking services to serve all potential customers in an efficient way Increasing public access to banking services in parallel with strengthening of banking system Building up infrastructure to facilitate universal provision of banking services (e-payment system) Safe and reasonable supervision of providers of financial services. 27
III. SUSTAINABLE DEVELOPMENT ORIENTATION 1 2 Improving legal framework to facilitate banking business Building prudent criteria for banking business, targeting on a sound banking system 2. Regarding to SBV 3 Consolidating inspection and supervision regime to ensure a safe and efficient bank system - Reassigning roles of SBV to be a safeguard for the health of bank system - Comprehensive approach, risk based inspection and supervision - Improving capability for banking inspection/supervision staff - Cooperation among management authorities - Cooperation and information sharing among SBV, DIV and commercial banks; consolidating CIC - Setting up an open dialogue among policy makers and market participators - Stabilizing and strengthening position of VND, mitigating dollarization, controlling CPI, let interest rate and exchange rate to be determined with supply and demand relationship. - Supervising monetary market in line with international practices 28
III. SUSTAINABLE DEVELOPMENT ORIENTATION 1 Restructuring the economy, quickly reducing economy sourced risks in banking business; reassigning role of state sector and non-state sector for social targets toward increasing role of market and minimizing state ownership, limiting administrative controls 3. Regarding to State 2 3 Restructuring financial market, especially stock market to be in compliance with the characters of the economy and requirements of a sound capital market Setting up rating agencies. 4 Building up country wide information system from local to central level. 29
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