Market Commentary: Fitch Special Report entitled "Vietnamese Banks: A Home-Made Liquidity Squeeze?"

http://files.myopera.com/ptson/files/VietBankingSector2008.pdf

Given our concern about the risk to a banking crisis in Vietnam (see "Market Commentary: Vietnam - Risk is More of a Banking Crisis, not Yet a BOP Crisis"), we thought it would be important to highlight some important things on this note citing some data as of end of 2007:

1) In 2007, Vietnamese bank loan growth reached 53% and stood at USD66bn (93% of GDP), driven by ample liquidity and strong demand across all sectors, includnig securities and real estate. Loan growth hit 15% in Jan-April ytd (would be 45% if we annualized it) vs. 10% in the same period last year, though supposedly slowed in April

2) The private joint stock commercial banks (JSBs) were the most aggressive, with average loan growth of about 100%, while the 4 largest state-owned commercial banks (SOCBs) grew their loan book by a more moderate 24% since they were preparing for their partial privatization so focused on improving capitalisation and loan quality.

3) By end of 2007, SOCBs market share is down to 50% of total loans.

4) Fitch estimates that around 25% of the loan growth financed residential and commercial properties related to speculating, and believes loans to SOEs were largely stable, though JSBs were now the more aggressive lenders. (As an aside, MOF did sound increasingly concerned about SOEs expanding into non-core businesses and investing in both property and securities)

5) Fitch estimates around 50% of system assets are backed by property collateral of some sort.

6) Under current Vietnamese accounting standards, banks are reporting non-performing loans of only 3% (equivalent to 6% under IFRS0 at the end of 2007) -- so probably very little provisioning so far.

7) 25% of loans are in USD; majority of loan growth financed by customer deposits.

8) SOCB: Fitch has no particular domestic liquidity concerns for the four SOCBs -- very strong deposit franchises with 22% deposit growth funding their loan growth.

9) JSBs: Fitch believes the LARGER ones (ACB, Sacombank, Techbank, VIB) still look structurally healthy and no immediate concerns about asset quality, but if higher interest rates were to persist, it would be a concern given the banks' strong loan growth. Meanwhile, Fitch is concerned about the short-term liquidity of the smaller JSBs and believes that despite the lifting of deposit ceiling, liquidity position could still be problematic and may ulitmately need to be acquired by larger banks.

10) Fitch raised concerned with recent developments wherein authorities issued additional 9 banking licenses, two have already begun operations, at a time when Vietnam would benefit from FEWER banks, and not more. Fitch says almost all of which was reportedly given to corporate enterprises (mostly state-owned) which already had substantial non-bank operations. Fitch drew parallels of this type of bank ownership structure to what was problematic in other Asian banking systems before, citing Indonesai.

11) Over the logner term, Fitch sees good potential for banks as current penetration remains very low (only 5% of population uses bank services regularly, and only 10% of population have bank accounts) but also acknowledges that partial privatization of the SOCbs is taking longer than expected.