Vietnam’s banking sector has been rapidly growing in recent years, attracting the attention of foreign investors. The country’s economy has been consistently performing well, with the government’s focus on reforms, liberalization, and market-oriented policies. In this article, we will look at the opportunities and risks associated with investing in Vietnam’s banking sector.
Overview of banking sector’s market in Vietnam
Vietnam’s banking sector is facing challenges such as rising non-performing loans and credit growth limits, which are limiting lending opportunities. These challenges have fueled the potential for mergers and acquisitions in the sector as domestic banks seek foreign investment to solve their problems. Investing from abroad may also mitigate the industry’s exposure to real estate bonds in Vietnam’s fledgling bond market.
However, the regulatory environment for the banking industry is challenging in Vietnam, with rules limiting foreign investment to 30%. Domestic banks hoping to overcome the sector’s difficulties may apply for exclusion from this limit, which could be possible if the challenges persist.
Foreign firms considering investing in Vietnamese banks need to have a deep understanding of the country’s banking industry and what involvement foreign partnerships would involve. It is imperative for interested investors to conduct thorough research to assess the challenges, risks, and opportunities of investment in the sector.
Limitation on foreign ownership
Decree No.01/2014/ND-CP outlines the foreign ownership limits for Vietnamese banks. This regulation limits foreign investment in a domestic bank to a maximum of 30% of the bank’s charter capital.
However, the limit for foreign ownership bound by this regulation varies depending on the type of foreign investor involved.
+ Foreign individuals, for instance, can own no more than 5% of a bank’s charter capital.
+ Foreign institutions have a maximum limit of 15% of the charter capital of a Vietnamese credit institution, unless they qualify as “foreign strategic investors”.
+ Those who are categorized as “foreign strategic investors” can own as much as 20% of the charter capital.
+ Ultimately, foreign investors are restricted to a maximum of 20% ownership of a bank’s charter capital.
In certain circumstances, the Prime Minister may authorize the ownership percentage of a foreign strategic investor in a credit institution to exceed the legally stipulated limit. This will only occur when it is necessary to restructure an ailing credit institution and to safeguard the overall safety of the credit institution system. Consequently, the aggregate shareholding of foreign investors in the troubled joint-stock credit institution will surpass the prescribed legal limit.
Opportunities and risks associated with investing in Vietnam’s banking sector
Opportunities:
High economic growth: Vietnam’s economy has been growing at a rapid pace, with a steady upward trend. This has led to a high demand for banking services, providing a significant opportunity for foreign investors.
Positive demographic trends: The country’s young and growing population, coupled with an expanding middle class, has led to an increase in demand for banking products and services. This presents a significant opportunity for foreign investors to tap into this market.
Liberalization policies: In recent years, the Vietnamese government has implemented various policies to liberalize the banking sector. This includes allowing foreign investors to own up to 30% of a local bank and allowing international banks to set up subsidiaries in the country. This provides a level playing field for foreign investors, reducing barriers to entry and creating opportunities for them to invest in the sector.
Low banking penetration: Despite recent growth, Vietnam’s banking penetration is still low, with only 30% of the population having a bank account. This provides a significant opportunity for funding and financial services for foreign investors to tap into.
Risks:
Regulatory risks: While the government has implemented liberalization policies, there are still risks associated with the regulatory environment. Regulatory uncertainty and a lack of clarity in laws can pose challenges to foreign investors, particularly in the areas of licensing, capital requirements, and foreign exchange control.
Operational risks: Vietnam’s banking system is still developing, and there are challenges associated with infrastructure and technology. This can pose operational risks for foreign investors, who may not be familiar with the regulatory and operational framework in the country.
Credit risks: Due to an increasing number of non-performing loans, the government has been implementing measures to reduce that. This has led to the tightening of credit policies, which can pose a risk to foreign investors who may not be familiar with the local credit environment.
Currency risks: Currency fluctuations can affect investors who invest in Vietnamese banks with foreign currency, posing a risk. This is particularly relevant in the face of the current economic volatility.
Current developments in the banking sector of Vietnam
In the last twelve months, foreign investments in Vietnamese banks have shown an upward trend. To add to this, FTSE Russell along with MVIS index funds have included multiple Vietnamese banking stocks in their portfolios. Vietnam Economy assessed that this move could potentially infuse tens of millions of dollars into the sector.
Considering the hurdles the Vietnamese banking industry is currently facing and their endeavours to expand foreign investor limits, it is reasonable to assume that this pattern of increased foreign investment in Vietnamese banks will endure. Observers consider foreign investment as a viable solution for strengthening the balance sheets of Vietnam’s banking industry, which has been tackling several challenges. However, the existing restrictions on foreign ownership represent a significant roadblock that investors must overcome.
The Prime Minister previously had the discretion to raise the ownership cap, and given the sector’s mounting economic challenges, it is increasingly likely that they will lift the restrictions in the near future. If the ownership limits are indeed eased, foreign investors could potentially have new opportunities created for them.
It is essential to acknowledge that difficulties have arisen between domestic banks and their foreign counterparts in the past. Hence, it is crucial for foreign firms considering investment in Vietnam’s banking sector to thoroughly deliberate on these challenges before making any decisions.
Conclusion
In conclusion, investing in Vietnam’s banking sector presents both opportunities and risks for foreign investors. Therefore, it is imperative to conduct thorough research, evaluate the regulatory framework, and assess the credit and currency risks involved before investing in the sector. Despite the challenges, with the right approach, foreign investors can be successful in tapping into the vast potential of Vietnam’s banking sector.
Harley Miller Law Firm (HMLF) advises foreign corporations to seek the expertise of its business advisory unit to gain deeper insights into the intricacies that come with owning a share in a Vietnamese bank.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: miller@hmlf.vn
