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

UNCLAS SECTION 01 OF 04 HANOI 001047 
 
SIPDIS 
 
STATE PASS USTR FOR EBRYAN 
STATE ALSO PASS USAID ANE 
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 FINREF
SUBJECT: VIETNAM'S UNHEALTHY BANKING SECTOR 
 
REF: HCMC 294 
 
¶1.  This cable contains sensitive information and should not 
be placed on the internet. 
 
¶2.  (SBU) Summary:  Vietnam's banking sector is 
underdeveloped and dominated by state owned commercial 
banks, many of which would be insolvent by international 
standards.  Joint stock banks comprise the fastest growing 
segment of the market, but their financial health varies 
widely.  The Postal Savings System offers convenience to 
people in rural Vietnam, but also serves as a convenient off- 
budget way to fund state-owned enterprises.  Rapid credit 
growth and an undetermined level of non-performing loans 
could threaten the banking sector in the future.  U.S. and 
other foreign banks have been operating for some years, but 
are constrained by branching restrictions, high capital 
requirements, equity caps, limited access to the ATM system 
and subsidized lending by state-owned banks.  End Summary. 
 
Vietnam's Banking Sector at a Glance 
------------------------------------ 
 
¶3.  (U) Vietnam continues to be a largely cash-based 
economy.  Even the government still pays salaries in cash. 
Few Vietnamese have a personal bank account, though this is 
starting to change. One foreign banker estimated that about 
two percent of the population have bank accounts.  Instead, 
they tend to keep cash at home, preferring dollars for large 
amounts since they are deemed more stable and are much 
easier to store.  As the transition to a market economy 
continues, the state continues to dominate Vietnam's banking 
sector.  Assessing the health of that sector is difficult 
because the lack of transparency of financial records 
persists and audits, while independent, continue to be of 
poor quality and to use Vietnamese accounting standards. 
 
¶4. (U) State-controlled banks account for three fourths of 
lending and four fifths of deposits.  There are three types 
of banks in Vietnam:  state-owned commercial banks (SOCBs) 
which are "owned" by the Ministry of Finance, privately held 
joint stock banks and foreign banks.  The four largest SOCBs 
account for 70 percent of loans and 75 percent of deposits. 
They are the Bank for Foreign Trade of Vietnam 
(Vietcombank), the Bank for Investment and Development of 
Viet Nam (BIDV), Industrial and Credit Bank of Vietnam, 
(Incombank) and the Vietnam Bank for Agriculture and Rural 
Development (VBARD).  Much of their lending goes to state- 
owned enterprises (SOEs), often with little regard for the 
quality of credit.  While some SOEs such as Vietnam 
Airlines, PetroVietnam and Vietnam Posts and 
Telecommunications have healthy cash flows, many others do 
not and find debt servicing difficult.  As a result, 
international observers such as the IMF opine that the four 
largest SOCBs would be insolvent by international standards. 
 
¶5.  (SBU) The 33 joint stock banks (JSBs), which account for 
11 percent of lending, are the fastest growing segment of 
the banking market. They lend mainly to Vietnam's budding 
private sector.  While their credit quality is mixed, it is 
generally viewed as somewhat better than that of the SOCBs. 
At the same time, however, when blocks of what many regard 
as the two top joint stock banks (Asia Commercial Bank and 
Saigon Commercial Bank or Sacombank) went on sale, an 
American bank decided to bid on only one of them as a result 
of its due diligence.  Only one of these sales has been 
announced. 
 
¶6. (U) The 27 foreign bank branches and the four joint 
venture banks (between SOCBs and private sector) comprise 
the remaining nine percent of the market.  Leading foreign 
banks include Citibank, JP Morgan Chase, Hong Kong Shanghai, 
Deutsche Bank, Standard Chartered and Australia-New Zealand 
(ANZ) Bank.  Wachovia opened a representative office about a 
year ago.  Far East National Bank (FENB), which operates in 
California, is a 100 percent subsidiary of the Taiwanese 
holding company, Sinopac. 
 
¶7. (U) Set up in May 1999, Vietnam Postal Savings Services 
Company (VPSC) is a subsidiary of a monopoly 
telecommunications SOE, Vietnam Post and Telecommunication 
Corporation (VNPT).  VPSC accepts saving accounts (both on 
demand and for fixed terms), provides postal money transfer 
services and payment services through postal saving 
accounts. VPSC's nationwide network reaches remote and 
mountainous areas through the telecom infrastructure. VPSC 
now provides postal saving services in 64 provinces and 
cities through 803 post offices.  VPSC plans to upgrade its 
online network and to expand its services to include money 
exchange, payments (benefits, pension, telephone and 
utilities bills), credit cards and e-commerce. It also aims 
to increase its market share of international remittances 
service from less than one percent currently to five to ten 
percent over the next three years. 
 
¶8. (SBU) One of VPSC's functions is apparently to provide an 
off-budget funding source for the Development Assistance 
Fund (DAF).  The DAF is a specialized extra-budgetary 
institution for conducting policy-based lending to large 
scale, medium- and long-term projects.  It was created to 
shift the problems associated with policy lending away from 
the financial sector.  While the DAF is not included in the 
state budget, it could create a significant burden on the 
budget depending upon the quality of the lending and whether 
final borrowers can service their debts.  DAF appears to be 
the GVN's current quasi-fiscal method to maintain SOEs.  In 
2004, VPSC took in about USD 730 million from the public and 
transferred about USD 158 million to the Development 
Assistance Fund (DAF).  Since its establishment, VPSC has 
transferred a total of nearly USD 538 million to DAF.  In 
2005, it plans to transfer about USD 177 million to DAF. 
 
Rapid Credit Growth and Non-Performing Loans 
-------------------------------------------- 
 
¶9.  (SBU) Vietnam's financial sector faces two key problems: 
rapid credit growth and the unknown but significant amount 
of non-performing loans (NPLs).  Estimates of the amount of 
credit growth are quite rough, but vary widely.  One World 
Bank economist claimed that for 2004 it was no more than 20 
percent, where it has been in recent years, while another 
stated it was probably higher, but did not provide a figure. 
A State Bank of Vietnam (SBV) official said that there was 
no exact figure, but estimated that it was over 30 percent 
in 2004.  He also stated that the State Bank had asked the 
banks to "control lending."  Another international economist 
claimed that credit had grown by 28 percent in 2003 and 42 
percent in 2004.  This economist expressed concern that at 
such a level, loan quality was probably quite poor. 
 
¶10. (SBU) While there is no clear picture of the amount of 
NPLs in Vietnam and estimates vary widely, all observers 
agree that there is a problem and that the SBV must deal 
with it soon.  An SBV official said that there are no data 
beyond 2000 and declined to give an estimate.  He noted that 
Vietnam is in the process of developing new definitions for 
NPLs.  The SBV recently stated that it had "settled" about 
USD 1.24 billion in non-performing loans so far, but World 
Bank experts dismissed this as old news.  The SBV has said 
that it "settles" NPLs in several ways such as transferring 
them off-balance sheet (where they are monitored as off- 
balance sheet items), selling them to asset management 
companies, restructuring them, or settling them using 
proceeds from the sale of mortgaged assets/collateral.  The 
SBV injected about USD 760 million in additional capital 
into the SOCBs in recent years to improve their capital 
adequacy ratios. 
 
¶11. (SBU) Until March 2005, the World Bank had maintained 
that NPLs comprised about 15 percent of total lending in 
Vietnam, but local World Bank economists now acknowledge 
that it likely exceeds 20 percent and could approach 30 
percent, as the IMF has maintained for a long while.  Noting 
that the SBV is in the process of evaluating NPLs, a World 
Bank financial sector coordinator Tom Rose said the SBV 
should be able to estimate NPLs to within 10 percent in six 
months.  He predicted that the SBV would be shocked by the 
total and hence would be unlikely to release the figures to 
the public.  The first step in addressing this issue is for 
the GVN to get a clear picture of bad debt and then to 
monitor lending trends, Rose said.  When Vietcombank is 
equitized and the GVN has to present a clear picture of its 
books to attract foreign buyers, the public will become 
aware of the NPL issue, he predicted. 
 
Equitization 
------------ 
 
¶12. (SBU) The SBV has begun steps to equitize the SOCBs. 
The World Bank financial sector expert provided some details 
on the situation.  SBV's governor recently signed the 
proposal to equitize Vietcombank (VCB) and it has gone to 
the Prime Minister for approval.  The state would keep a 
dominant share (not less than 51 percent) of VCB's chartered 
capital.  An international firm would value the bank and 
determine share prices.  The SBV has not yet decided how 
many shares will be available to the private sector for 
purchase or whether the usual 30 percent cap on foreign 
equity will apply.  The SBV has also completed a proposal 
for equitizing Mekong Housing Bank (an SOCB) and will submit 
it to the Prime Minister in the second quarter of 2005. 
Equitization of other SOCBs will follow the VCB model. 
 
Foreign Technical Assistance 
---------------------------- 
 
¶13. (SBU) The World Bank and other donors are involved in 
various projects to improve Vietnam's banking system.  Most 
observers here consider the bank payment system 
modernization loan to be the key first step.  IMF 
representative Susan Adams says that this loan will provide 
the "plumbing" for the banking system.  Currently, the SBV 
has no practical way to track transactions, she noted.  SBV 
receives about 60 documents monthly in hard copy from 
commercial banks, but simply cannot analyze them fast 
enough.  With a computerized payment system, they could spot 
problems more quickly and efficiently.  Although this loan 
does not currently include any private banks, the World 
Bank, the IMF and other donors deem it "necessary" to laid 
the foundation for a banking system. 
 
¶14. (SBU) The World Bank also chairs the Financial Sector 
Working Group which looks closely at the many issues in the 
financial sector and seeks to coordinate donor assistance. 
Up to now Tom Rose, the senior World Bank official on this 
issue has been based in Washington and a lower level 
official in Hanoi has handled most of the daily work.  This 
arrangement has yielded limited success while signaling a 
lower priority to this issue.  However, as a result of 
concerted donor urging to raise the priority, a more senior 
World Bank official is slated to move to Hanoi to assume the 
management of this important issue this summer. 
 
What Foreign Bankers Want 
------------------------- 
 
¶15. (SBU) A number of foreign banks have been operating in 
Vietnam for some years.  They have several concerns about 
the current market that affect their ability to expand and 
to prosper.  The WTO market access negotiations offer an 
excellent opportunity to handle some of these matters. 
 
¶16. (SBU) U.S. banks would like to be able to establish an 
unlimited number of branches in Vietnam without any 
geographic restrictions.  At present, they can only set up 
branches in Hanoi and Ho Chi Minh City and must invest USD 
15 million in additional capital for each branch.  In 
addition, banks would like to be able to operate their 
branches in Hanoi and Ho Chi Minh City as a single entity, 
which would reduce costs.  Both the State Bank of Vietnam 
and an international accounting firm confirmed to ECON/C 
that there is no capital requirement for new branches of 
Vietnamese banks.  The Director of a Joint Stock Bank also 
recently confirmed this to ECON/C, but noted that the SBV 
intends to establish new regulations that would require 
Vietnamese banks to put up capital for new branches. 
 
¶17. (SBU) U.S. banks would also like to be able to link up 
with the nation-wide automatic teller machine (ATM) network. 
At this point, they can establish ATMs at their branches and 
elsewhere but need to use a leased phone line to link to 
their computer systems.  In contrast, Vietnamese banks can 
access the ATM system.  There does not appear to be any 
discrimination against foreign banks regarding access to the 
ATM system, just a long waiting line for access. 
 
¶18. (SBU) One often cited issue is the continuing cap on 
foreign equity at 30 percent of any joint stock bank and 10 
percent for each foreign investing entity.  Such levels do 
not attract active foreign investors who could provide the 
capital, technology, expertise and training to help 
Vietnamese banks and their staffs develop their skills. 
 
¶19. (SBU) Another concern of foreign bankers is that the 
limited terms of their licenses (often 20 years) preclude 
them from making long term loans often needed for 
infrastructure projects once they have been in business for 
a few years.  Vietnamese banks do not have similar 
constraints. 
 
¶20. (SBU) Foreign bankers also voice concern that the SOCBs 
can offer loans at lower cost than foreign banks.  SOCBs are 
not required to make a profit and hold considerable amounts 
of government deposits.  This gives an SOCB an immediate 
lending advantage so that it can undercut interest rates 
charged by foreign banks.  Moreover, foreign banks remain 
subject to the regulation limiting the amount of capital 
that can be lent to a single borrower to 15 percent while 
the Prime Minister has granted exceptions to this cap for 
certain borrowers to whom SOCBs lend. 
 
MARINE