Can foreign lenders break Vietnamese banks' legacy problem?

Foreign ownership caps and regulatory constraints block foreign bank entry.

Vietnam’s troubled banking sector is increasingly attracting the interest of foreign lenders who just might be able to break the legacy problems including weak regulatory frameworks, crony capitalism, corruption and state-directed pricing, plaguing much of the local banking system, according to Fitch Solutions.

The country has around 10 licensed wholly-foreign-owned banks, such as HSBC Vietnam, Standard Chartered Vietnam, Hong Leong Vietnam, CIMB Vietnam. 

Foreign banks have been gradually embracing expansion plans into Vietnam through wholly foreign-owned subsidiaries instead of forging partnerships with troubled local banks, which could only be a net positive for the financial services system, according to Fitch Solutions. 

“Although there has been several high profile exits by foreign banks from the Vietnamese banking sector over the last two years, we believe that the operating environment remains attractive to foreign investors,” the research firm added. 

Malaysia’s Public Bank earlier received the regulatory approval from the central bank to open three branches and two new transaction offices in Hanoi, Ho Chi Minh and Danang. Moreover, Singapore’s UOB incorporated its fully-owned Vietnamese subsidiary United Overseas Bank (Vietnam) last week after it has been operating under a branch license since 1995. 

Korean lenders have also shown increased activity in the country’s banking scene with Woori Bank and Shin Han Bank securing the nod from the State Bank of Vietnam to expand their foothold. 

“[T]he influx of foreign bank subsidiaries should allow a transfer of expertise and increase competition within the banking system,” the research firm said in a report.

However, foreign lenders are still hampered by a series of problems impeding their expansion plans including the rule prescribing a 30% cap on foreign ownership in Vietnamese banks, making managerial control doubly difficult.

There are also reports that the government is tightening the issuance of foreign bank licenses to boost the weakened banking sector and encourage M&A activity. 

Banks may also choose to direct their energies into meeting Basel III norms and discontinue partnerships with Vietnamese banks as a result.