Cablegate: Update On Banking Sector Reform in Vietnam

VZCZCXRO3018
RR RUEHHM
DE RUEHHI #1151/01 1731044
ZNR UUUUU ZZH
R 221044Z JUN 07
FM AMEMBASSY HANOI
TO RUEHC/SECSTATE WASHDC 5714
INFO RUEHHM/AMCONSUL HO CHI MINH 3292
RUEHGP/AMEMBASSY SINGAPORE 2411
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SECTION 01 OF 02 HANOI 001151

SIPDIS

TREASURY FOR OASIA
SINGAPORE FOR REGIONAL TREASURY ATTACHE BAKER
STATE PASS FEDERAL RESERVE SAN FRANCISCO FOR DFINEMAN

SENSITIVE BUT UNCLASSIFIED
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN VM
SUBJECT: Update on Banking Sector Reform in Vietnam

REF: HANOI 1149

1. (SBU) Summary: State Bank of Vietnam (SBV) officials believe
their efforts to reform the banking sector have put it on a firm
path toward international standard supervision. However, they tried
to distance themselves from the equitization process (over which
they should have at least supervisory authority) and have not
developed good mechanisms for cooperation on supervision of
non-banking financial services. Banking supervisors pushed for the
United States to allow Vietnamese banks to enter the United States,
and asked for specific feedback on any shortcomings in their
anti-money laundering regime. End Summary.

2. (SBU) This is one of five cables reporting on Regional Financial
Attache Susan Baker's May 29-June 1 visit to Vietnam. This message
reports her findings and impressions of the banking sector.

SBV'S REFORM EFFORTS
--------------------

3. (SBU) SBV officials framed a discussion with FinAtt by explaining
their role is both regulating and managing the banking system. They
acknowledge that credit growth is relatively high, but argue that
high lending is needed to support strong GDP growth. They expect to
face the challenge of high growth by controlling risks, lowering
non-performing loans (NPLs) and pushing for better compliance with
stricter rules for loan classification and provisioning.

4. (SBU) Indeed, some official sources argue that the VND 11
trillion (roughly $700 million) that has been spent recapping the
state-owned banks and the reduction in reported NPLs have put the
Vietnamese banking sector on a much stronger footing than countries
such as China. Others remain concerned about the contingent
liabilities presented by state-owned financial institutions and poor
enforcement of asset quality classification standards.

LENDING FOR SECURITIES
----------------------

5. (SBU) One area the regulators clearly are concerned about is bank
lending for securities trading, particularly stock market
speculation. Reacting to the run-up in the stock exchange, the SBV
increased the risk weighting on securities lending to 150 percent
(vs. 100 percent for corporate lending), meaning that banks would
have to set aside capital equivalent to 12 percent of any securities
loan (vs. 8 percent for corporate loans). Furthermore, the
regulators advised the banks to cap their lending for securities
purchases at 3 percent of their overall lending portfolio. Banks
are also limited in the amount of loans and equity investments they
can give to securities companies.

6. (SBU) While relatively strict on the asset side, SBV officials do
not seem to appreciate the operational risks that might be involved
in allowing banks to operate securities businesses, especially those
(such as order-taking businesses) that are not supervised by the
State Securities Commission (SSC). SBV officials and private
bankers both acknowledge that the bank regulators and the securities
regulators are not communicating about potential conflicts or
undertaking a consolidated supervision approach. Both local banks
FinAtt met volunteered that they want to expand their non-banking
financial services into securities and insurance.

VIETNAMESE BANK ENTRY INTO THE UNITED STATES
--------------------------------------------

7. (SBU) SBV banking policy officials made a clear request for
approval of three applications for Vietnamese banks to enter the
United States. They recognize that it is important for foreign
institutions to be vetted by host authorities before establishment,
but insist that the Vietnamese banks should be allowed to open in
the United States. FinAtt explained that the Federal Reserve has
the legal authority to determine whether banks can enter the U.S.
market and generally bases its decision on its determination that
the bank has sufficient capital, is subject to comprehensive
consolidated supervision, and has a strong anti-money laundering
regime, as well as on its consideration of other prudential matters.

8. (SBU) The Vietnamese pressed their case by noting that all
Vietnamese applicants have been restructured and recapitalized,
using its new international standard classification system. (Note:
Two of the banks have not yet even been "equitized" so are not yet
recognized as separate corporations. End note.) The SBV believes it
has risk-based, consolidated supervision, particularly noting its
work with foreign supervisory authorities to implement the Basel
Guidelines for Bank Supervision. Finally, they note their recent

HANOI 00001151 002 OF 002

admission to the Asia Pacific Group, a regional anti-money
laundering (AML) organization, as evidence of their commitment to a
strong AML regime. (Note: SBV officials will be meeting with the
appropriate Federal Reserve Board staff to discuss this issue in
mid-June.)

EQUITIZATION OF STATE-OWNED BANKS
---------------------------------

9. (SBU) FinAtt noted that a fundamental concern about the current
structure of Vietnam's banking system is the lack of separation
between ownership and supervision of the state-owned commercial
banks (SOCBs), which currently account for nearly three-fourths of
the banking system's assets. The SBV officials stated that
technically the capital for the SOCBs comes from the MOF, and as
such the MOF is the "owner" of the banks. Regardless, they feel
that after the "equitization" process, where banks are transformed
into corporations and shares are sold to employees and others, that
any concerns about conflicts between supervisor and owner should be
completely mitigated. They tried to make their case by saying they
are not in charge of the "equitization" process of the state-owned
banks. They said the bank itself has to develop its own plan, which
would be approved by the Steering Committee on Enterprise Reform, of
which SBV was only one member, alongside the MOF and the Office of
Government.

10. SBU) Vietcombank and Mekong Housing Bank are scheduled to be
equitized this year (note: one year behind schedule). The Bank for
Investment and Development of Vietnam (BIDV) and the Vietnam Bank
for Agriculture and Rural Development (Agribank), two other large
state-owned commercial banks, are expected to follow next year.
Regulators agree on the importance of a public listing of the banks
to help inform their regulatory efforts. They highlight that many
banks had entered into advisory contracts to try to get a good price
for when they sold shares; however, these advisors are barred from
taking a pre-IPO financial stake in the bank.

FOREIGN INVESTMENT IN BANKING SECTOR
------------------------------------

11. (SBU) With regard to the state-owned banks and other equitizing
companies, Vietnamese policy seems to be moving toward requiring all
strategic investors to buy their stakes at the IPO price at the same
time as the IPO. While SBV officials and bankers appreciate the
fact that strategic partners with equity stakes would have more of
an interest in implementation of reforms than pure consultants and
could help garner a higher price at listing, a few officials noted
rising concern about "selling too cheap" to foreigners.

12. (SBU) Some British and Australian banks, several foreign private
equity funds and international institutions such as the IFC already
have moved in to take minority stakes in Vietnamese banks. Earlier
in 2007, the Prime Minister declared that while total foreign
ownership in local banks would remain capped at 30 percent,
individual stakes could go as high as 15 percent (or 20 percent with
special permission) compared with 10 percent previously. Under its
WTO commitments, Vietnam was supposed to allow 100 percent
foreign-owned banking subsidiaries upon accession, but it has not
yet issued the guidelines to implement approvals. Bankers note that
the SBV is expected to ask for information-sharing arrangements to
be formalized with home country supervisors before banks can
establish their subsidiary. Australian regulatory authorities have
already complied with this expected requirement.

13. (SBU) Comment: It is worrisome that the banking regulators say
they have developed a strong supervisory regime while at the same
time trying to disavow any control or influence over the
equitization and privatization process. They still seem to be
advocating on behalf of their banks rather than supervising them to
ensure adequate capital, corporate governance and risk management.
Lack of appreciation for operational risks of unsupervised
securities activities by banks also does not bode well for their
ability to manage banking sector exposure to the stock market. End
Comment.

ALOISI

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