The differentiation is getting stronger and stronger in the banking sector under the pressure of raising capital and changing technology, etc. Some banks have entered the leading group with high profit and efficient thanks to the new steps taken in the past economic cycle. However, maintaining the position in the near future is not easy when the business situation of the sector is changing quickly.
The “S” list
Finally, Export Import Commercial Joint Stock Bank (Eximbank) manage to hold its annual general meeting (AGM) on the last days of June, after two times cancelling due to the complications from the bank’s owners. Despite having enough attendance of shareholders (more than 94 percent of shares with voting rights), the bank’s third AGM could not continue because 55 percent of shareholders did not agree with the content submitted by the bank’s Board of directors (BOD). Eximbank’s current messy image is very different compared to the past, when it was once a model in the sector with very high growth rate.
In 2012, Eximbank recorded impressive business results with high Return on Equity (ROE) of 14 percent and was one of the only two banks in the sector entering the list of the 50 most effective businesses in Vietnam, according to calculation of Nhip Cau Dau Tu magazine and Thien Viet Securities Company (TVS). That can be considered as a list of “S-rated” companies on the stock market.
Similar to Eximbank, Saigon Thuong Tin Commercial Joint Stock Bank was one also on this list with excellent financial data. At that time, owning Eximbank or Sacombank shares was a proud, but now shareholders of these two banks complain about the stock price at any meeting.
This situation was also seen in the group of state-owned banks. Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank, CTG) once led the list of the most effective banks, but now is facing many problems. The bank’s Chair of BOD Le Duc Tho said that the bank’s situation has become critical as it has been unable to increase charter capital since 2013. In 2018, VietinBank’s profit was only equivalent to about 37 percent of Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank, VCB), while their profit was approximately the same in the previous years.
It is a pity that old names are no longer on the list, but some other names have drawn attention of the market. In addition to Vietcombank, other names such as Vietnam Technological and Commercial Joint Stock Bank (Techcombank, TCB), Vietnam Prosperity Commercial Joint Stock Bank (VPBank, VPB, Military Commercial Joint Stock Bank (MBB), Asia Commercial Joint Stock Bank (ACB), HCM City Development Commercial Joint Stock Bank (HDB), and Tien Phong Commercial Joint Stock Bank (TPBank), are ranked respectively according to their capitalisation value. Statistics show that these banks are far ahead in the market in terms of business performance. Accordingly, the average ROE of the seven banks mentioned in the above increased in the period of 2016 2018, reaching respectively 13.58 percent, 18 percent and nearly 22 percent. Meanwhile, data of the SBV showed that the average ROE of the banking sector was 9.06 percent, in which that of state-owned banks was 10.21 percent and of private joint stock bank was 9.88 percent.
In recent years, banks have excelled and returned to their positions in the list of “S-rated” companies on the stock market. While only about two banks were in the list in the period before 2016, this number increased to seven in 2018.
Many banks posted huge profit in 2018. For example, Vietcombank recorded up to 18.3 trillion dong of pre-tax profit, up by 61 percent compared to the same period of the previous year, much higher than BIDV’s and VietinBank’s. Vietcombank’s Chair of BOD Nghiem Xuan Thanh said that the bank is very confident about its profit target of one billion US dollars in 2019. In the group of private joint stock banks, the pre-tax profit of Techcombank reached a record high of 10.661 trillion dong, up by 31 percent over the same period of the previous year. VPBank attained nearly 9.2 trillion dong of pre-tax profit, u; by 13 percent.
In fact, the 2013 -2015 period is considered the most difficult time of the banking sector with unsettled bad debts and gloomy real estate market. Although the credit growth was only 14 percent last year, the total profit of credit institutions (CIs) increased by about 40 percent, according to the National Financial Supervisory Commission. However, some parts of this total profit were unusual at some banks, such as insurance services or investment divestments (not including accrued interests).
But one advantage is that the bad debt issue now has solution and the real estate market is warming, which are important reasons to help banks settle bad debts and beautify their books. At the end of last year, the on-balance sheet bad debt ratio was 1.89 percent, lower than the 2.46 percent recorded in late 2016 and 1.99 percent in 2017, according to report of the SBV.
Over the years, many banks have disappeared or been merged, and some new rising stars have been named. This implies that the old-style growth model and governance method are no longer relevant to the current period. Banks growing rapidly in the previous period are not sure to continue rising in the next period.
In fact, the old-style growth model has no longer worked. Eximbank once praised lending to large business groups, but now most banks are focusing on small and medium enterprises (SMEs) and individuals. Even for Vietcombank, the number of individual customers has been significantly higher. The bank has also quickly recruited foreign personnel for retail positions. Nguyen Thi Thu Hang, director of Vietcombank Electronic Banking said that the difference is that today each product of banks is designed according to individual needs and depending on each period, instead of available common products like before. Viet Capital Securities Company (VCSC) in a report assessed that Vietcombank’s consumer credit growth is even higher than the average growth of FE Credit and HD Saison the two consumer finance companies of VPBank and HDBank, which are currently dominating the market.
Many banks have chosen different ways compared to traditional ones. VPBank is focusing more on individuals and SMEs with high risk appetite. Techcombank is still making good profit from personal lending, mainly in real estate segment and investment products. TPBank is strongly investing in technology and branding, calling itself a digital bank. After a period encountering problems, ACB with internal forces built over the years has returned to the track with impressive growth numbers. According to the recent audited financial statement, in 2018, the bank’s profit for the first time surpassed the peak in 2011 with nearly 6.4 trillion dong of pre-tax profit thanks to the reversal of risk provisioning set in the previous years. ACB continues to aim high profit in 2019 and has a good base.
Meanwhile, MB is still moving forwards in terms of revenue and profit scale and receiving positive assessments of securities companies. Recently, MB has continuously promoted the business of its member companies, from MBS (securities company), MIC (insurance), MB Aegas Life (life insurance venture), MB Capital and Mcredit (consumer finance company) with the aim of creating ecosystems for cross-selling products. According to MB’s general director, the bank’s member units are assigned to bring about 1.421 trillion dong, double the previous year. Meanwhile, MB Ageas Life aims to break even, while it suffered a loss of 319 billion dong last year.
Overall, the profit flows of these banks have become more diversified than traditional credit. Viet Dragon Securities Company expects that the service income of banks will expand by 26.4 percent in 2019, accounting for 10 percent of the total operating income (8.6 percent in 2018).
Change or be left behind
The innovation in management thinking and grasping the right market segments have brought many successes to banks, but this is not sure to bring good news for banks in the future.
New governance models will also be challenges that banks are facing. Instead of the family-style management in the past, the international integration in the near future will change the rules of the game considerably. Banks must be more accountable to individual customers if they do not want to be abandoned because there are many other options.
Banks at the present time are under significant pressure of capital mobilisation, not only to grow but also to meet operational safety criteria under the Basel II standards. Many banks are cautious with the 2019 business plan while focusing on raising capital to meet the Basel II otherwise they have to narrow the scale of operation. However, in the context when capital raising faces numerous difficulties, banks cannot set high growth targets like previous years.
In addition to the new regulations that banks must comply with, the business context is not much different. Not only there are more potential rivals but there are also diverse ways of competition, focusing banks to change if they do not want to be downgraded.
For example, the slower credit growth of VPBank affected the bank’s plan in 2018. Its consumer finance company FE Credit slowed down and experienced decline in market share as new competitors emerged, according to FiinGroup’s report. To compensate, VPBank accelerated the business of the parent bank. In 2018, report showed that VPBank’s separate profit increased by more than 31 percent compared to the same period of the previous year, accounting for 55 percent of the consolidated profit.
Meanwhile, the following banks are also ready to speed up any time if any other banks encounter problem. Many banks are growing very fast, such as Vietnam International Commercial Joint Stock Bank (VIB) with 95 percent profit growth in 2018, and Orient Commercial Joint Stock Bank (OCB) with the introduction of Omni-channel) to go deeper into retail sector. Sacombank and Eximbank will also be fierce competitors once they are stabilised.
Technology is another pillar that banks cannot ignore. Potential competitors are emerging, changing the business situation of traditional financial intermediaries. Numerous names in the international financial world such as MasterCard, PayPal, PayU, Stripe and Visa will collaborate with Facebook to create a unique cryptocurrency with the ambition to serve the needs of payment and money transfer on a global scale at a fee “from low to zero”.
In the recent seminar on digital banking trends held recently, deputy director of the SBV’s Payment Department Le Anh Dung said that banks will have to change, adapt and not only provide financial services but many other services.
With technology development, the differentiation will be stronger among bank groups. “As fintechs develop, technology applications such as blockchain or cloud computing can connect individuals together without having to go through an intermediary (banks are financial intermediaries). This will completely change the picture of the banking sector in the next 10 years,” said deputy general director of NAPAS Nguyen Hung Nguyen.
A senior leader of a bank shared that the business plan of the bank now must be constantly reviewed and changed. If a does not change, does not catch the right trend timely, it is likely to be left behind.
