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Viewing cable 07HANOI1151, Update on Banking Sector Reform in Vietnam

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Reference ID Created Released Classification Origin
07HANOI1151 2007-06-22 10:44 2011-08-25 00:00 UNCLASSIFIED Embassy Hanoi
VZCZCXRO3018
RR RUEHHM
DE RUEHHI #1151/01 1731044
ZNR UUUUU ZZH
R 221044Z JUN 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 5714
INFO RUEHHM/AMCONSUL HO CHI MINH 3292
RUEHGP/AMEMBASSY SINGAPORE 2411
RUEATRS/DEPT OF TREASURY WASHINGTON DC
UNCLAS SECTION 01 OF 02 HANOI 001151 
 
SIPDIS 
 
TREASURY FOR OASIA 
SINGAPORE FOR REGIONAL TREASURY ATTACHE BAKER 
STATE PASS FEDERAL RESERVE SAN FRANCISCO FOR DFINEMAN 
 
SENSITIVE BUT UNCLASSIFIED 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN VM
SUBJECT: Update on Banking Sector Reform in Vietnam 
 
REF: HANOI 1149 
 
1.  (SBU) Summary: State Bank of Vietnam (SBV) officials believe 
their efforts to reform the banking sector have put it on a firm 
path toward international standard supervision.  However, they tried 
to distance themselves from the equitization process (over which 
they should have at least supervisory authority) and have not 
developed good mechanisms for cooperation on supervision of 
non-banking financial services.  Banking supervisors pushed for the 
United States to allow Vietnamese banks to enter the United States, 
and asked for specific feedback on any shortcomings in their 
anti-money laundering regime. End Summary. 
 
2.  (SBU) This is one of five cables reporting on Regional Financial 
Attache Susan Baker's May 29-June 1 visit to Vietnam.  This message 
reports her findings and impressions of the banking sector. 
 
SBV'S REFORM EFFORTS 
-------------------- 
 
3. (SBU) SBV officials framed a discussion with FinAtt by explaining 
their role is both regulating and managing the banking system.  They 
acknowledge that credit growth is relatively high, but argue that 
high lending is needed to support strong GDP growth.  They expect to 
face the challenge of high growth by controlling risks, lowering 
non-performing loans (NPLs) and pushing for better compliance with 
stricter rules for loan classification and provisioning. 
 
4. (SBU) Indeed, some official sources argue that the VND 11 
trillion (roughly $700 million) that has been spent recapping the 
state-owned banks and the reduction in reported NPLs have put the 
Vietnamese banking sector on a much stronger footing than countries 
such as China.  Others remain concerned about the contingent 
liabilities presented by state-owned financial institutions and poor 
enforcement of asset quality classification standards. 
 
LENDING FOR SECURITIES 
---------------------- 
 
5. (SBU) One area the regulators clearly are concerned about is bank 
lending for securities trading, particularly stock market 
speculation.  Reacting to the run-up in the stock exchange, the SBV 
increased the risk weighting on securities lending to 150 percent 
(vs. 100 percent for corporate lending), meaning that banks would 
have to set aside capital equivalent to 12 percent of any securities 
loan (vs. 8 percent for corporate loans).  Furthermore, the 
regulators advised the banks to cap their lending for securities 
purchases at 3 percent of their overall lending portfolio.  Banks 
are also limited in the amount of loans and equity investments they 
can give to securities companies. 
 
6. (SBU) While relatively strict on the asset side, SBV officials do 
not seem to appreciate the operational risks that might be involved 
in allowing banks to operate securities businesses, especially those 
(such as order-taking businesses) that are not supervised by the 
State Securities Commission (SSC).  SBV officials and private 
bankers both acknowledge that the bank regulators and the securities 
regulators are not communicating about potential conflicts or 
undertaking a consolidated supervision approach.  Both local banks 
FinAtt met volunteered that they want to expand their non-banking 
financial services into securities and insurance. 
 
VIETNAMESE BANK ENTRY INTO THE UNITED STATES 
-------------------------------------------- 
 
7. (SBU) SBV banking policy officials made a clear request for 
approval of three applications for Vietnamese banks to enter the 
United States.  They recognize that it is important for foreign 
institutions to be vetted by host authorities before establishment, 
but insist that the Vietnamese banks should be allowed to open in 
the United States.  FinAtt explained that the Federal Reserve has 
the legal authority to determine whether banks can enter the U.S. 
market and generally bases its decision on its determination that 
the bank has sufficient capital, is subject to comprehensive 
consolidated supervision, and has a strong anti-money laundering 
regime, as well as on its consideration of other prudential matters. 
 
 
8. (SBU) The Vietnamese pressed their case by noting that all 
Vietnamese applicants have been restructured and recapitalized, 
using its new international standard classification system. (Note: 
Two of the banks have not yet even been "equitized" so are not yet 
recognized as separate corporations. End note.)  The SBV believes it 
has risk-based, consolidated supervision, particularly noting its 
work with foreign supervisory authorities to implement the Basel 
Guidelines for Bank Supervision.  Finally, they note their recent 
 
HANOI 00001151  002 OF 002 
 
 
admission to the Asia Pacific Group, a regional anti-money 
laundering (AML) organization, as evidence of their commitment to a 
strong AML regime. (Note: SBV officials will be meeting with the 
appropriate Federal Reserve Board staff to discuss this issue in 
mid-June.) 
 
EQUITIZATION OF STATE-OWNED BANKS 
--------------------------------- 
 
9.  (SBU) FinAtt noted that a fundamental concern about the current 
structure of Vietnam's banking system is the lack of separation 
between ownership and supervision of the state-owned commercial 
banks (SOCBs), which currently account for nearly three-fourths of 
the banking system's assets.  The SBV officials stated that 
technically the capital for the SOCBs comes from the MOF, and as 
such the MOF is the "owner" of the banks.  Regardless, they feel 
that after the "equitization" process, where banks are transformed 
into corporations and shares are sold to employees and others, that 
any concerns about conflicts between supervisor and owner should be 
completely mitigated.  They tried to make their case by saying they 
are not in charge of the "equitization" process of the state-owned 
banks.  They said the bank itself has to develop its own plan, which 
would be approved by the Steering Committee on Enterprise Reform, of 
which SBV was only one member, alongside the MOF and the Office of 
Government. 
 
10. SBU) Vietcombank and Mekong Housing Bank are scheduled to be 
equitized this year (note: one year behind schedule).  The Bank for 
Investment and Development of Vietnam (BIDV) and the Vietnam Bank 
for Agriculture and Rural Development (Agribank), two other large 
state-owned commercial banks, are expected to follow next year. 
Regulators agree on the importance of a public listing of the banks 
to help inform their regulatory efforts.  They highlight that many 
banks had entered into advisory contracts to try to get a good price 
for when they sold shares; however, these advisors are barred from 
taking a pre-IPO financial stake in the bank. 
 
FOREIGN INVESTMENT IN BANKING SECTOR 
------------------------------------ 
 
11. (SBU) With regard to the state-owned banks and other equitizing 
companies, Vietnamese policy seems to be moving toward requiring all 
strategic investors to buy their stakes at the IPO price at the same 
time as the IPO.  While SBV officials and bankers appreciate the 
fact that strategic partners with equity stakes would have more of 
an interest in implementation of reforms than pure consultants and 
could help garner a higher price at listing, a few officials noted 
rising concern about "selling too cheap" to foreigners. 
 
12. (SBU) Some British and Australian banks, several foreign private 
equity funds and international institutions such as the IFC already 
have moved in to take minority stakes in Vietnamese banks.  Earlier 
in 2007, the Prime Minister declared that while total foreign 
ownership in local banks would remain capped at 30 percent, 
individual stakes could go as high as 15 percent (or 20 percent with 
special permission) compared with 10 percent previously.  Under its 
WTO commitments, Vietnam was supposed to allow 100 percent 
foreign-owned banking subsidiaries upon accession, but it has not 
yet issued the guidelines to implement approvals.  Bankers note that 
the SBV is expected to ask for information-sharing arrangements to 
be formalized with home country supervisors before banks can 
establish their subsidiary.  Australian regulatory authorities have 
already complied with this expected requirement. 
 
13.  (SBU) Comment:  It is worrisome that the banking regulators say 
they have developed a strong supervisory regime while at the same 
time trying to disavow any control or influence over the 
equitization and privatization process.  They still seem to be 
advocating on behalf of their banks rather than supervising them to 
ensure adequate capital, corporate governance and risk management. 
Lack of appreciation for operational risks of unsupervised 
securities activities by banks also does not bode well for their 
ability to manage banking sector exposure to the stock market. End 
Comment. 
 
ALOISI