The Comprehensive and Progressive Trans-Pacific Partnership Agreement (CPTPP)which has officially come into force for Vietnam from January 14th 2019 is said to have huge impact on many industries and sectors. So, what are the advantages and disadvantages for the banking sector which plays a very important role in connecting all activities of the Vietnamese economy?
Domestic banks currently account for up to 92 percent of mobilisation activities and 95 percent of lending activities in Vietnam. With about 122 credit institutions (CIs) and total assets of the system of up to 10,000 trillion dong (equivalent to 436 billion US dollars), foreign banks only account for 8.8 percent. This shows the clear dominance of domestic banks and the priority of dealing with domestic banks is the main trend of Vietnamese.
However, the recent study by the scholar group including Dr Vu Ngoc Diep, Dr Le Mai Trang and Nguyen Thuy Linh from the University of Commerce conducted many notable analyses, and stressed that Vietnamese banks will face many challenges and pressures from CPTPP members after joining the agreement.
The CPTPP basically retains the content of the TPP agreement but allows member countries to postpone a few obligations to ensure the balance in the new context. Like TPP, CPTPP is considered a new generation Free Trade Agreement (FTA) with high standards due to the highest degree of liberalisation commitments with coverage on the highest number of areas. It not only promotes liberalisation in trade of goods but also in service and investment, including financial services.
CPTPP offers many opportunities and also challenges to all related industries of participating countries, including the banking sector.
According to the analysis group, the strength of Vietnamese banks is the great trust of customers in the system, particularly in domestic banks; the increasingly improved bad debt management; and the gradually diversified products. Some banks have made much progress in fintech and information technology applications.
However, there are many weaknesses. Firstly, the products and services for international market are not yet diversified. Secondly, the level of assess of Small and medium enterprises (SMEs) and people especially from rural areas, is not satisfied. Thirdly, the brands of most commercial banks are not strong in the international market. Fourthly, the level of ensuring safety is not high. Lastly, the application of technology remains modest and especially uneven.
Joining the CPTPP, the banking sector of Vietnam will receive many opportunities, firstly the international investment flows which facilitates the banking system to enhance liquidity and increase business opportunities. The growth and development of Foreign Direct Investment (FDI) firms will lead to the rise in capital demand and the need to establish relations with Vietnamese banks.
In addition, the banking and finance sector will be expanded according to the general commitments, and some new services will be added. The CPTPP creates prospects for the commercial sector, thereby bringing opportunities for the banking sector to support businesses with their business development. Banks’ customers will be more diversified, not just focusing on domestic customers.
However, it is important to note that the capability and scale of the Vietnam’s banking system remain low compared to CPTPP members. The capital safety level of Vietnam, despite being improved in the recent time, is still low compared to regional banks’. The Capital Adequacy Ratio (CAR) of the banking system of Vietnam is the lowest among CPTPP members.
Vietnamese banks will also face increasingly fierce competition, particularly with the participation of foreign banks and foreign investment funds. The financial services provisions in CPTPP allow banks in member countries to provide cross-border services, which means that banks in Japan can also provide card, payment, etc. services to Vietnamese people without having a branch in the country.
Notably, the analysis group believed that the segment of customers with high and average income, and educated customers will gradually shift to foreign banks. With modern technology systems and highly-qualified human resources, foreign banks are having higher competitive advantage than domestic commercial banks. The risk of losing right on the home ground is an existing challenge for Vietnamese banks.
The risk of being dominated and acquired if operating inefficiently is entirely possible. Capital account deliberalisation is the freedom to carry out the conversation of domestic financial assets into finance in foreign countries and vice versa at the exchange rate. This issue, though opening up many opportunities for the access to foreign investment flows, leads to challenges in competition and management.
The maximum capital contribution ratio of foreign investors in Vietnamese banks is required at 30 percent. This is the commitment rate when Vietnam joined the WTO. Foreign banks often choose to penetrate and develop new markets by buying shares, becoming strategic shareholders, seeking to take over or carry out mergers and acquisitions (M&A) deals. This is the short way that helps foreign banks quickly set foot in Vietnam’s financial market. The above ownership rate is now close to the ceiling limit in many banks such as Asia Commercial Joint Stock Bank (ACB), Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank), and HCM City Development Commercial Joint Stock Bank (HDBank), etc.
