Viet Nam should have only five major banks that provide financial services and support domestic businesses, as well as effectively compete with foreign banks, which are about to enter the country.  Keith Pogson, managing partner at Asia Pacific Financial Services for Ernst & Young, spoke with the local media about the banking situation in Viet Nam and its development in the future.

You said Viet Nam should have only five major banks. How can they meet the capital demand in the economy?

Keith Pogson

I highly appreciate the State Bank of Viet Nam (SBV)'s aggressive move to reduce the number of banks from the current 40 to between 15 and 17 in the future. But from my point of view, I think five is enough and they must be really big banks operating at the regional level. Of course, Viet Nam should still maintain other forms of credit institutions, such as consumer finance companies and financial leasing, to serve the rural areas and niche markets.

If you look globally, a majority of the most successful banking markets have only two to five large-scale domestic banks, while Viet Nam has too many. This is similar to countries that have experienced a wave of mergers in the previous years. In Malaysia, they had some 45 banks two decades ago. Now they have only 10. During the next five to 10 years, investment in infrastructure development will be the greatest need among all nations. If Viet Nam does not have big banks to arrange these funds, it will be at a disadvantage, especially from the perspective of the country's socio-economic development.

This year, the central bank is expected to promote and complete a series of mergers and acquisitions (M&A). Do you think it is possible to achieve that target?

We must see the central bank's goals to evaluate whether the target is feasible or not. If SBV only wants to resolve the cross-ownership issue, I think it should not hurry.

It would take several years after the mergers and acquisitions to have a system, personnel and work flow that operates smoothly.

However, bad debts have been a big issue. Will these debts affect M&A among the banks?

Bad debts have never been a barrier in banks' M&A. In my view, there is no bad asset, but what is important is the price it is sold for. A bad asset will be bought at lower prices. In several countries around the world, there are some agencies similar to the Viet Nam Asset Management Company (VAMC). These agencies issue bonds to buy debt to ensure that the bad debt level stays at less than 3 per cent during restructuring.

A successful bank M&A depends on three factors, including culture, views and discipline. In reality, the disagreement on views has resulted in several risks.

For example, there is a merger between two banks. However, one bank wants to develop into a retail bank, while another wants to focus on the business segment. This could result in a failure in the M&A. Personnel are also a decisive factor in the success of a merger.

Do you think that foreign investors were paying attention to bad debts in Viet Nam's banking system when VAMC was allowed to buy their debt at market prices on April 5?

I have two decades of experience in dealing with banks and agencies resolving bad debts. I do not see buying bad debts at market price garnering any interest. It would interest investors if they were allowed to buy the debt below market price. Foreign investors have a strong interest in buying bad debts in the country's banking system. However, whether they decide to buy or not depends on several issues. The market will decide the price for bad debts themselves.

Foreign banks are expected to enter Viet Nam's market, especially after the establishment of the ASEAN Economic Community (AEC). How should local banks prepare to compete with these rivals?

Vietnamese banks must operate on a large scale to compete with foreign banks. To put it simply, when you are big, you can afford huge investments in technology, and products to expand operations across the border. Therefore, the dynamics and determination of the central bank for consolidation and mergers to create big and stronger banks is correct.

Malaysia has two major banks at the regional level. It is the same for Singapore. When AEC becomes a reality, Vietnamese banks must prepare to compete with them. According to the roadmap, by 2020, Viet Nam will have to completely open its doors in the banking sector. In my opinion, you should do some work in these next five years.

For example, you should take steps to support VAMC so that it becomes more capable of handling bad debts, and not just buying and holding on to them. In addition, it is necessary to improve the performance standards at local banks. — VNS