This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 05 HANOI 000335 
 
SIPDIS 
 
STATE PASS USTR FOR EBRYAN 
STATE ALSO PASS USAID ANE AFERRARA and DMCCLUSKEY 
TREASURY FOR OASIA 
USDOC FOR 4431/MAC/IFP/OKSA/HPPHO 
BANGKOK FOR USAID 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EAID ETRD VM BTA FINREF SOE
SUBJECT: VIETNAM'S BANKING SECTOR 
 
REF: 03 HCMC 1157 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE HANDLE ACCORDINGLY. 
 
¶1.  (SBU) SUMMARY: Vietnam's banking sector is presently 
characterized by a few dominant state-owned commercial banks 
(SOCBs), a number of comparatively small joint stock banks 
(JSBs), and some foreign banks.  In recent years, the GVN 
has undertaken a number of reforms, with the goals of 
ensuring the banking system's stability, expanding services, 
and rationalizing domestic resource allocation by ensuring 
that they are dedicated to commercially viable activities. 
The reform program focuses on four main areas - the 
restructuring and commercialization of SOCBs, restructuring 
of JSBs, meeting Vietnam's international commitments, and 
improving the regulatory framework and enhancing 
transparency.  Unfortunately, many areas of concern remain 
largely unresolved.  Progress on restructuring the SOCBs is 
sluggish.  Classification of non-performing loans (NPLs) has 
improved, but deficiencies persist in both the accounting 
and strategy.  Furthermore, the slow pace of SOE reform may 
negate efforts to address this issue.  Foreign banks 
continue to compete on an unequal footing with Vietnamese 
banks.  Although directed lending has been largely removed 
from the SOCBs, it continues to take place.  In addition, it 
is now concentrated in institutions outside the formal 
banking system, thus eliminating the ability to account for 
total lending in Vietnam.  Finally, despite efforts to 
strengthen the SBV, it remains weak and fragmented.  END 
SUMMARY. 
 
STATE-OWNED COMMERCIAL BANKS 
---------------------------- 
 
¶2.  (U) Vietnam's state-owned commercial banks (SOCBs) 
dominate its financial sector, with the four largest SOCBs 
representing around 70 percent of the system's total assets. 
The Ministry of Finance (MOF) "owns" the SOCBs.  The GVN has 
stated that it intends to preserve the domination of SOCBs 
by developing them into commercially-oriented financial 
intermediaries.  Towards this end, it has begun implementing 
a restructuring plan for the four largest SOCBs.  In June 
2003, SBV announced its plan to equitize the remaining SOCB, 
the Mekong Housing Bank, between 2006 and 2010.  In 2005, a 
plan for equitization is to be undertaken.  The preparations 
are to include an independent financial and portfolio audit 
based on IAS, a diagnostic assessment of its operations, and 
a review of its external policy and legislative environment. 
 
¶3.  (U) Over the past year, a number of developments have 
increased the number of products and services offered to 
clients of SOCBs and raised the share of their credit 
allocated to the private sector.  (Note:  Despite this 
increase, the private sector continues to complain about 
lacking access to capital, and SOCBs remain extremely 
cautious about lending to it, and do so only on a highly- 
collateralized basis.  End Note.)  SOCBs still view state- 
owned enterprises, especially large state-owned 
corporations, as their core customers and give them priority 
access to credit.  This credit is extended mostly on an 
unsecured basis, relying on the government's support and 
implied backing given to those companies.  Because financial 
health and credit risk are not adequately assessed, credit 
margins are not properly priced, which in turn may narrow 
the banks profitability.  Even though their application 
appears irregular, SOCBs have drafted credit manuals.  Due 
to this weak credit risk analysis and unofficial ceilings, 
most SOCBs are encountering difficulties implementing the 
recent interest rate liberalization that allows banks to 
freely determine the rates that they charge. 
 
¶4.  (U) Vietnam chose to retain Vietnam Accounting Standards 
(VAS) and not adopt International Accounting Standards 
(IAS).  However, it has improved VAS, causing loan 
portfolios to be reclassified based on rules that are close 
international norms.  (Note: Previously, VAS simply counted 
the amount of the missed loan payment.  Now, when a payment 
is missed, banks must follow international practice and 
count the entire loan amount as non-performing.  End Note.) 
The four SOCBs also completed donor-funded IAS audits for 
2000 and 2001 and improved loan loss provisioning.  They 
began launching a computerized banking system pilot program 
that will allow customers to withdraw money at any branch 
instead of just the one where they opened their account. 
¶5.  (SBU) Although the GVN and SOCBs made some progress on 
resolving NPLs and improving capital adequacy, problems 
especially persist in these areas.  The SBV alleges that the 
SOCBs have resolved around 30 percent of their stock of NPLs 
(identified as of December 2000).  However, the actual 
percentage of NPLs remains difficult to estimate, because 
many banks are now rescheduling and restructuring loans in 
order to ensure that they meet their NPL targets.  Even 
though the SBV has declined to estimate the amount of NPLs, 
simply stating that restructuring has reduced the amount, 
international experts estimate that NPLs account for between 
15 and 25 percent of Vietnam's loan portfolio.  Difficulties 
in this area also remain, because many loans lack 
collateral, especially those to state-owned enterprises 
(SOEs).  Therefore, the GVN is discussing a mechanism that 
would trade the debts of SOEs scheduled for equitization. 
Still, delays in SOE reform have made it difficult for SOCBs 
to meet their resolution targets (see septel on SOE reform). 
 
¶6.  (SBU) After declaring that it would undertake a 
conditional recapitalization based on banks' reform efforts, 
the GVN found the banks' restructuring plans too dated and 
vague to be practically used for targeting recapitalization. 
Therefore, the past three phases of recapitalization valued 
at 7.75 trillion VND (approximately a half billion USD) have 
not occurred in a transparent manner, do not appear to have 
dealt with underlying problems in the banking system, and 
were based on separate targets from the Ministry of Finance 
and SBV.  The GVN has simply injected more capital into all 
SOCBs without requiring that they address systemic problems. 
If capital structures are not changed, such continuing large 
expenditures will be of little value for the development of 
the banks and may dilute incentives for reform.  (Note:  The 
World Bank estimates that the actual recapitalization needs 
of SOCBs may exceed five times that already provided if 
current NPL estimates are accurate. End Note.) 
 
¶7.  (U) Several additional operational changes are envisaged 
in the current restructuring, which should encourage SOCBs 
to operate in a more market-oriented manner with management 
held accountable for operations and results.  The GVN has 
agreed to the importance of separating the GVN's ownership 
role of the SOCBs from day-to-day activities.  A clearer 
separation of the roles and responsibilities of the Board of 
Directors and the bank management is also to be developed in 
the near future.  While the Board will be responsible for 
setting and ensuring compliance with the overall credit 
policies of the bank, the management will only act as 
implementers.  Furthermore, SOCBs will establish separate 
credit and risk management teams.  To assist with these 
changes, a number of donors are funding "twinning" projects 
that bring together respected international banks and SOCBs. 
Although hope remains high that these programs will help the 
SOCBs, the lack of human resource capacity may prevent them 
from achieving their ambitious goals. 
 
JOINT STOCK BANKS 
----------------- 
 
¶8.  (U) In Vietnam, joint stock banks (JSBs) have in many 
ways taken on the role of local, "private" banks.  (Note: 
Every JSB still has some level of state interest and 
indirect SBV management. End Note.)  Following a recent 
series of mergers and liquidations, thirty-six JSBs now 
operate in Vietnam and account for approximately 12 percent 
of the lending.  Primarily geared toward small and medium- 
sized enterprises and private companies, JSBs play an 
important role in providing credit and banking services to 
the private sector.  In addition, they tend to be more 
dynamic and customer oriented than SOCBs.  However, they 
lack extensive networks and expertise in international trade 
and complex transactions. 
 
¶9.  (U) Although parts of this sector have posted strong 
growth and performance, approximately one third are still 
encountering problems in these areas.  The SBV continues to 
strictly monitor these weaker ones, encouraging them to 
merge and revoking licenses when necessary.  In addition, 
most JSBs have undergone restructuring to increase their 
viability.  SBV has provided capacity training for managers 
in order to strengthen personnel management, and like the 
SOCBs, the GVN has increased their charter capital. 
However, some regulatory discrimination between JSBs and 
SOCBs remain. Unlike SOCBs, JSBs are not permitted to open 
an extensive branch network. (See reftel for more 
information about a successful JSB.) 
 
FOREIGN BANKS 
------------- 
 
¶10.  (U) Although Vietnam's banking services have evolved in 
the past few years, the "rules of the game" continue to vary 
significantly for different players, with foreign banks 
experiencing the greatest limitation on their operations. 
Among other issues, SBV still tightly controls the granting 
of banking licenses.  At present, 27 branches and 42 
representative offices of foreign banks operate in Vietnam, 
accounting for approximately 24 percent of the banking 
system's chartered capital, 15 percent of lending, and 
around 8.5 percent of the sector's assets.  Leading foreign 
banks with branches in Vietnam include Citibank, JP Morgan 
Chase, HSBC, Deutsche Bank, Standard Chartered, and ANZ, and 
Wachovia recently opened a representative office.  In 
addition, there are four joint venture banks in Vietnam, 
which account for around 3 percent of lending. 
 
¶11.  (U) With the 2001 U.S.-Vietnam Bilateral Trade 
Agreement (BTA), Vietnam made a number of commitments in the 
field of financial services.  The GVN has generally sought 
to address these obligations through a non-specific 
assurance that BTA obligations take precedence over domestic 
legislation in cases of conflict.  Specifically, the SBV has 
stated that BTA provisions shall become effective 
immediately when due regardless of the status of domestic 
legislation.  It plans to address this commitment by issuing 
individual regulations each time an obligation comes due 
rather than issuing a "blanket" decree. 
 
¶12.  (U) Among other commitments, the GVN agreed to increase 
the ratio of deposits in Vietnamese Dong (VND) from an 
original level of 25 percent of the branch's legal capital 
under the terms of the BTA.  This ratio is to increase 
annually for U.S. banks until full national treatment is 
applied in year eight (starting December 2008).  U.S. banks 
are currently allowed to accept Dong deposits at a level of 
250 percent of their legal capital.  In addition, in 
response to significant lobbying from non-U.S. foreign 
banks, the SBV decided in September to increase their ratio 
to fifty percent of their legal capital. 
 
¶13.  (SBU) A number of new products were introduced in a 
limited number of foreign banks and SOCBs in 2003.  The SBV 
is now allowing a few banks to offer currency options on a 
trial basis.  It also permitted some, including Citibank, to 
provide interest rate swaps on a provisional basis.  In 
general, foreign banks find themselves at a disadvantage 
when it comes to introducing new products since the SBV must 
approve each one.  In addition, foreign banks are limited in 
their branch networks, restricted on accepting Dong 
deposits, prevented from taking initial mortgage interest in 
land use rights, and not allowed to issue credit cards. 
(Note: Under the terms of the BTA, U.S. banks will be 
allowed to take mortgage interest starting in December 2004 
and issue credit cards in December 2009. End note.)  They, 
therefore, tend to provide only wholesale banking services 
and concentrate on multinational corporations and foreign 
invested enterprises.  This reliance makes their business 
vulnerable to the flow of foreign direct investment. 
 
POLICY LENDING INSTITUTIONS 
--------------------------- 
 
¶14.  (U) One of Vietnam's major reforms in recent years has 
been to move "policy lending" out of SOCBs by creating the 
Development Assistance Fund (DAF) and the Bank for Social 
Policy (VBSP).  The DAF is a specialized institution aimed 
at conducting policy-based lending to large scale, medium- 
and long-term projects.  Although the GVN has committed to 
revising the DAF's governing framework in 2004, its purpose 
will remain unchanged.  The VBSP is designed to provide 
preferential lending to targeted poor and remote households. 
However, because it is both a deposit taking and a policy 
lending institution, inherent risks exist for those deciding 
to invest in the VBSP. 
 
¶15.  (SBU) These extra-budgetary institutions were created 
to shift the problems associated with policy lending from 
the financial sector.  Unfortunately, they could create a 
significant burden on the budget depending upon the quality 
of the lending and whether final borrowers can service their 
debts.  Given the DAF's lack of transparency and expertise 
in credit and risk management, this possibility appears 
highly likely.  This risk is further exacerbated by the fact 
that these institutions appear to be the GVN's current quasi- 
fiscal method to maintain SOEs. 
 
THE STATE BANK OF VIETNAM 
------------------------- 
 
¶16.  (U) The State Bank of Vietnam acts as the supervisory 
and regulatory body for the banking sector.  The SBV, in 
cooperation with a number of donors and international 
financial institutions, is working to strengthen its 
internal processes and enhance the quality of inspection. 
In the past, it simply focused on ensuring that financial 
institutions complied with laws and regulations whereas now, 
it is attempting to analyze asset quality and risk.  In 
addition, it is trying to strengthen its independence and 
supervision of the banks within its jurisdiction.  Unlike in 
the U.S., though, the SBV is not an independent body, and it 
continues to operate under government guidance. 
 
¶17.  (U) In addition to its role as supervisor/regulator, 
SBV also acts as the SOCBs' shareholder even though the 
SOCBs are officially "owned" by the Ministry of Finance. 
The SBV is tasked with acting as the state body managing the 
banking system. To that end, the SBV has permanent 
representation on Supervisory Boards and appears, through 
various appointments, approval, and licensing processes, to 
be involved in such daily activities in SOCBs that are 
essentially powers to be exercised by the owner.  This dual 
role jeopardizes the SBV's independence in supervising 
SOCBs, distorts the playing field for other institutions, 
and makes business decisions difficult to undertake. 
 
¶18.  (U) Organizationally, SBV possesses a heavy, fragmented 
structure, which can lead to issues falling between the 
cracks, duplication of work, and slow internal flow of 
information.  Furthermore, the reporting lines from 
financial institutions to various departments are unclear, 
resulting in inefficiencies, overlapping information, and 
the potential that some data is not reviewed.  Finally, 
SBV's regional structure with 61 branch offices limits the 
central government's ability to direct overall operations. 
Experts have recommended that the GVN substantially reduce 
this number and clarify the reporting lines.  An expert 
evaluation of nine of the Basel Core Principles identified a 
number of weaknesses, including a lack of consistency, 
transparency and accountability in the banking system and in 
the bank supervision process. 
 
¶19.  (SBU) COMMENT:  Unfortunately, most of the banking 
system reforms that Vietnam has undertaken in recent years 
appear to be mere "window dressing" rather than an effort to 
address systemically the system's weaknesses.  The main 
areas of concern - SOCBs, directed lending, non-performing 
loans (NPLs), a level playing field, and State Bank of 
Vietnam (SBV) supervision - remain largely unresolved.  This 
situation has created significant risks to the system, which 
are exacerbated by the high current rate of credit growth to 
the economy.  (Note: Estimated at around 30 percent for 
2003, this growth rate concerns the international financial 
institutions, as well international experts. End note.) 
 
¶20.  (SBU) COMMENT CONT'D:  Still, even though it is 
occurring slowly, the policy environment continues to 
improve, and donor technical assistance, especially the 
USAID-funded Support for Trade AcceleRation (STAR) project, 
is raising the GVN's capacity to implement reforms. 
Vietnam's senior leaders accept that reform in this area 
must take place if future economic growth goals are to be 
achieved.  However, the emphasis appears to be on "managing" 
the changes and reform necessitated by international 
commitments and domestic economic conditions rather than 
pushing forward aggressively.  While fears about risks and 
challenges remain, fairly solid agreement exists within the 
GVN about the need to bring Vietnam's economy into 
conformity with international standards, meet its BTA 
obligations, and accede to the WTO.  Vietnam's financial 
sector and broader economic reform commitments, especially 
those in the BTA, have and will shape the discussion 
regarding banking reform and ensure that it continues into 
the future.    BURGHARDT