Analysis of the Vietnamese Banking Sector with special reference to Corporate Governance

DISSERTATION Of the University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) to obtain the title of Doctor Oeconomiae

submitted by

Bao Toan Tran

from St. Gallen

Approved on the application of Prof. Dr. Martin Hilb and Prof. Dr. Rudolf Grnig

Dissertation no. 3412 Hoa Sen Design - Saigon, 2008

Analysis of the Vietnamese Banking Sector with special reference to Corporate Governance
DISSERTATION Of the University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) to obtain the title of Doctor Oeconomiae

submitted by

Bao Toan Tran

from St. Gallen

Approved on the application of Prof. Dr. Martin Hilb and Prof. Dr. Rudolf Grnig

Dissertation no. 3412 Hoa Sen Design, Saigon 2008

The University of St. Gallen, Graduate School of Business Administration, Economics, Law and Social Sciences (HSG) hereby consents to the printing of the present dissertation, without hereby expressing any opinion on the views herein expressed.

St. Gallen, October 15, 2007

The President: Prof. Ernst Mohr, PhD

ACKNOWLEDGEMENTS
A journey of ten thousand miles begins with a single step, according to a Chinese saying. I took this first step on a long journey across time and space some years ago with the decision to start my doctoral studies. The doctoral thesis brought me back to my homeland, where I had the chance to get to know many people from business and from the government and to study my country from an interesting point of view that of Corporate Governance. Now, close to my target, and while looking back, I have to say that the last journey of my official study has been really exciting, instructive but strenuous. Without encouragement and support from several people, I would never have reached this point. Above all, I would like to thank my supervisor Professor Dr. Martin Hilb, whose never-ending optimism and patience encouraged me to continue on my path. As a lonely (re-)searcher in a vast country where the topic New Corporate Governance is still unknown, I appreciate very much the fact that Professor Hilb took the time to listen and to discuss with me many issues that are now cropping up in this rapidly developing country and moreover, gave me valuable advice. I would also like to express my special gratitude to my co-Supervisor, Professor Dr. Rudolf Gruenig, who accompanied me on my last journey when I was at his University. His constant encouragement and inspiring support made me more confident. His problem-solving approach is different from the approach of Professor Hilb, which has benefited my development by giving me the opportunity to learn both. Like Yin and Yang, these two approaches complement each other the rational and the emotional side. I also want to express my appreciation for the teamwork of Dr. Dinh Toan Trung and Mr. Nguyen Thanh Binh, which resulted in the translation of the book New Corporate Governance by Professor Dr. Martin Hilb into Vietnamese, and I also appreciate the many good-spirited and instructive discussions with them concerning this topic. My special thanks also go to Dr. Peter Mayer and Mr. Pieter Perrett, who proofread my thesis and helped with the proper use of the English language.

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Last but not least, I would like to thank my wife and children for their understanding and patience with me, and my family for their trust in me, for their unconditional love and support and for their understanding that, during this time, I could not be physically near them. This work is especially dedicated to my grandfather, who showed me the right direction to follow in my life, but left me alone too early.

Vietnam, October 2007

Tran Bao Toan

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ABBREVIATIONS ACB AD ADB AFTA AGM ALCO ALM AMC ASEAN ATM BC BIDV bn BOD BoP BTA CAR CBIs CEO CFO CG CH-e CH-i CIC CRRD DATC DCF e.g. EAB EBT EIU EVN FDI Asia Commercial Bank Anno Domini = After the Birth Year of Jesus Asian Development Bank ASEAN Free Trade Area Annual General Meeting Asset and Liability Committee Asset and Liability Management Asset Management Company Association of South East Asian Nations Automatic Transaction (or Teller) Machine Before Christ Bank for Investment and Development of Vietnam Billion Board of Directors Balance of Payment Bilateral Trade Agreement (Average) Capital Adequacy Ratio Critical Business Issues Chief Executive Officer Chief Financial Officer Corporate Governance external changes internal changes Credit Information Center Committee for Nomination, Remuneration and Development Debt and Asset Trading Company Discounted Cash Flow exempli gratia = for example Eastern Asia Bank Earning Before Tax Economic Intelligence Unit Electricity of Vietnam Foreign Direct Investment

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FIEs FIS GDP GSO HCMC HR HSBC IAS IFC IMF IPO IT JSCB MHB MIS mn MNCs MoF n.a. NPAs NPL NYSE ODA OTC PCF PE PNTR PoS RMC ROE SARS SBV SECO SME SOCB SOE

Foreign Invested Enterprises Financial Institutions Gross Domestic Product General Statistic Office Ho Chi Minh City Human Resources Hongkong Shanghai Bank Corporation International Accounting Standards International Finance Corporation International Monetary Fund Initial Public Offering Information Technology Joint Stock Commercial Bank Mekong Housing Bank Management Information System Million Multi National Companies Ministry of Finance Not available Non Performing Assets Non Performance Loan New York Stock Exchange Official Development Assistance Over The Counter Peoples Credit Fund Price Earning Permanent Normal Trade Relations Point of Sale Risk Management Committee Return on Equity Severe Acute Respiratory Syndrome State Bank of Vietnam Secrtariat dEtat lconomie (State Secretariat for Economic Affairs) Small and Middle Enterprises State-owned Commercial Bank State-owned Enterprises

sqm SSC STC SWOT TA(A) UBS US$ USA VAS VAT VBARD VCCI VET VIB VIR VND WTO y-o-y

Square meter State Securities Commission Securities Trading Center Strength Weakness Opportunity and Threat Technical Assistance (Agreement) United Bank of Switzerland United States Dollars United States of America Vietnam Accounting Standards Value Added Tax Vietnam Bank for Agriculture and Rural Development Vietnam Chamber for Commerce and Industry Vietnam Economic Times Vietnam International Bank Vietnam Investment Review Vietnam Dong World Trade Organization Year on year

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Contents
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Content . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I III VI

List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XII List of Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XIII Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . XVII CHAPTER 1: INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3 Structure of the thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Research approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 3 4 5 6

CHAPTER 2:  T HEORY ABOUT CORPORATE GOVERNANCE IN GENERAL AND IN VIETNAM . . . . . . . . . . . . . . . 7 2.1 Governance theories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.1 The agency theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.2 The transaction costs theory . . . . . . . . . . . . . . . . . . . . . . . . 2.1.3 The stakeholder theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1.4 The institutional theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 9 9 10 11

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2.1.5 The new corporate governance theory . . . . . . . . . . . . . . . . 2.2  Characteristics of Corporate Governance system in Vietnam 2.2.1 The transformation to Principle-agent relationship in the SOEs 2.2.2 Governance structure in the SOEs in Vietnam . . . . . . . . . 2.2.3 Some shortcomings of the SOEs . . . . . . . . . . . . . . . . . . . . . 2.3 Research framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHAPTER 3:  SECONDARY DATA ANALYSIS OF THE VIETNAMESE BANKING SECTOR . . . . . . . . . . . 3.1 Environmental and economic analysis . . . . . . . . . . . . . . . . . . . 3.1.1 Political-legal situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1.1 Milestones of socio-political development . . . . . . . . . 3.1.1.2 Political system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1.3 The military . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1.4 Vietnams Economic Law . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 Socio-cultural environment . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2.1 Demographic situation . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2.2 Income disparities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2.3 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2.4 The influence of cultural factors . . . . . . . . . . . . . . . . . 3.1.3 Economic situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3.1 Economic indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3.1.1 GDP Development . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3.1.2 Domestic savings . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3.1.3 Foreign trade and payments . . . . . . . . . . . . . . . . . . 3.1.3.1.4 Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3.1.5 Current account . . . . . . . . . . . . . . . . . . . . . . . . . . .

11 11 12 12 16 18 19

20 20 21 21 22 23 24 25 25 25 26 28 31 31 31 32 32 34 35

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3.1.3.1.6 FX reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3.1.7 Fiscal revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3.2 Economic development . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.3.2.1 Development of the private sector . . . . . . . . . . . . . 3.1.3.2.2 Foreign direct investment . . . . . . . . . . . . . . . . . . . 3.1.3.2.3 Privatization of SOEs . . . . . . . . . . . . . . . . . . . . . . . 3.1.3.2.5 Infrastructure development . . . . . . . . . . . . . . . . . . 3.1.3.2.6 Building capital market institutions . . . . . . . . . . . . 3.1.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.4.1 Vietnam compared with selected ASEAN countries . . 3.1.4.2 Key factors with positive impact on Vietnams growth potential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.4.3 Major challenges facing Vietnam . . . . . . . . . . . . . . . . . 3.1.4.4 Development scenarios . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Banking market in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Retail banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1.1 Retail banking and the SME market . . . . . . . . . . . . . . . 3.2.1.2 Retail banking and the consumer market . . . . . . . . . . 3.2.1.3 Consumer banking products . . . . . . . . . . . . . . . . . . . . 3.2.2 Investment products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.2.1 Secondary market for bad debt disposal . . . . . . . . . . . 3.2.2.2 Stock lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3 Other financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3.1 Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3.2 Non Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.4. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.4.1 Market penetration . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.4.2 Rate of growth in loans and deposits . . . . . . . . . . . . . . 3.2.4.3 Oligopolistic banking market . . . . . . . . . . . . . . . . . . . . 3.2.4.4 Lending practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.4.5 Product offerings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35 36 37 37 38 39 42 43 47 47 51 53 55 58 59 59 63 65 71 71 72 73 73 73 74 75 76 76 76 77

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3.2.4.6 Quantity of non-performing loans . . . . . . . . . . . . . . . . 3.2.4.7 Consumer credit bureau . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Banking industry in Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1 State Bank of Vietnam (Central Bank) . . . . . . . . . . . . . . . . 3.3.2 State-Owned Commercial Banks (SOCBs) . . . . . . . . . . . . 3.3.2.1 Bank for Foreign Trade: Vietcombank (VCB) . . . . . . . 3.3.2.2 Industrial and Commercial Bank: Incombank . . . . . . 3.3.2.3 Bank of Investment and Development: BIDV . . . . . . . 3.3.2.4 Agriculture and Rural Development Bank: Agribank (VBARD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2.5 Mekong Housing Bank (MHB) . . . . . . . . . . . . . . . . . . .

77 79 81 81 81 85 88 90 92 94

3.3.3 Joint-Stock Banks (JSCBs) . . . . . . . . . . . . . . . . . . . . . . . . . . 96 3.3.3.1 Asia Commercial Bank . . . . . . . . . . . . . . . . . . . . . . . . . 98 3.3.3.2 Sacombank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 3.3.4 Foreign Banks & Joint Venture Banks . . . . . . . . . . . . . . . . 103 3.3.5 Competition in the banking industry . . . . . . . . . . . . . . . . 107 3.3.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.6.1 Tendency of consolidation . . . . . . . . . . . . . . . . . . . . . . 3.3.6.2 Undercapitalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.6.3 Raising capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.6.4 Investment in information technology . . . . . . . . . . . . 3.3.6.5 Improving management and governance . . . . . . . . . . . 108 109 110 111 112 114

3.4 SWOT and critical business issues . . . . . . . . . . . . . . . . . . . . . . 115 3.4.1 Opportunities and Threats of the Banking Sector in Vietnam 116 3.4.2 Strengths and Weaknesses of the Banking Sector in Vietnam 118 3.4.3 Critical business issues based on the SWOT Analysis . . . . 119

CHAPTER 4:  PRIMARY DATA ANALYSIS OF CORPORATE GOVERNANCE IN THE VIETNAMESE BANKING SECTOR . . . . . . . . . . . . . . . . . . . . . . . . . 120 4.1 Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 4.2  First Survey: Survey about the overall situation in Vietnam . . 122 4.2.1 Objectives of the First Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 4.2.2 Targeted group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 4.2.3 Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 4.2.4 Overview about the respondents . . . . . . . . . . . . . . . . . . . . . . . . . 124 4.3 Second Survey in the banking sector . . . . . . . . . . . . . . . . . . . . 125 4.3.1 Objectives of the Second Survey . . . . . . . . . . . . . . . . . . . . . . . . . 125 4.3.2 Targeted group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 4.3.3 Research Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 4.3.4 Overview about the respondents . . . . . . . . . . . . . . . . . . . . . . 127 4.4  Summary of the current situation and comparison with the standards mainly in the banking sector . . . . . . . . . . . . . . . . . . 129 4.4.1 Vision & Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 4.4.2 Organisational Structure and Governance . . . . . . . . . . . . . 139 4.4.3. Leadership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 4.4.4 Board culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 4.4.5. Systems utilized by BoDs to fulfill their responsibilities . 160

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4.4.5.1 Selection of members of the BoD and Top Management . 4.4.5.2 Remuneration of board members . . . . . . . . . . . . . . . . . . . . 4.4.5.3 Evaluation of members of Board and Top Management . 4.4.5.4 Development of board members . . . . . . . . . . . . . . . . . . . . .

161 166 167 169

4.4.6 Information and communications . . . . . . . . . . . . . . . . . . . . 170 4.5 Recommendations mainly for the banking sector . . . . . . . . . . 173 CHAPTER 5: IMPLICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 5.1 Implications for research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 5.2 Implications for teaching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 5.3 Implications for practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 ANNEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183 ANNEX I: Interviewers list . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 ANNEX II: First Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 ANNEX III: Second Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201

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LIST OF TABLES

Table 3-1. Key figures of countries in ASEAN . . . . . . . . . . . . . . . . 48 Table 3-2. Country Attractiveness for Investment of Vietnam . . . . 50 Table 3-3. Vietcombank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Table 3-4. Incombank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Table 3-5. Bank of Investment and Development . . . . . . . . . . . . . . 90 Table 3-6. Agribank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 Table 3-7. Mekong Housing Bank . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Table 3-8. JSCBs valuation and forecast . . . . . . . . . . . . . . . . . . . . . 96 Table 3-9. Asia Commercial Bank ACB . . . . . . . . . . . . . . . . . . . . . . 98 Table 3-10. Sacombank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 Table 3-11. Recent investments by foreign banks in local JSBs . . . . 106

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LIST OF FIGURES

Figure 1-1. Figure 1-2. Figure 2-1. Figure 2-2. Figure 2-3. Figure 2-4. Figure 3-1. Figure 3-2. Figure 3-3. Figure 3-4. Figure 3-5. Figure 3-6. Figure 3-7. Figure 3-8. Figure 3-9. Figure 3-10. Figure 3-11. Figure 3-12. Figure 3-13. Figure 3-14. Figure 3-15. Figure 3-16. Figure 3-17. Figure 3-18. Figure 3-19. Figure 3-20. Figure 3-21. Figure 3-22. Figure 3-23. Figure 3-24. Figure 3-25. Figure 3-26.

Research structure of the thesis - overview . . . . . . . . . . . . 5 Research approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Structure of the thesis overview Chapter 2 . . . . . . . . . . . 7 Current relationship in a state-owned corporation - overview 13 A typical governance structure of a state-owned General Corporation - detailed view . . . . . . . . . . . . . . . . . . . . . . . . . 14 Model of New Corporate Governance . . . . . . . . . . . . . . 18 Structure of the thesis Overview Chapter 3 . . . . . . . . . . 20 Milestones in the recent development of Vietnam . . . . . . 22 Normalized political stability and violence index . . . . . . . 23 Income disparities between regions . . . . . . . . . . . . . . . . . . 26 Public investment in social sector has increased since 2004 27 Main cultural influences of the Vietnamese culture . . . . . 29 Economic Situation GDP Development . . . . . . . . . . . . . 31 Domestic savings feed investment . . . . . . . . . . . . . . . . . . . 32 Export situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Fiscal revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Foreign direct investment . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Numbers of privatizations . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Infrastructure situation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 PortfolioMatrix of Country Attractiveness for Investment 49 Scenario analysis GDP growth forecast to 2010 . . . . . . 56 Three major scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Urban population growth . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Penetration of banking services in urban Vietnam . . . . . 65 Overview of the loan limit in selected commercial banks 66 ATM/card alliances in Vietnam . . . . . . . . . . . . . . . . . . . . . 67 Mortgage market indicators in Vietnam . . . . . . . . . . . . . . 69 Growth of the life insurance premium income in Vietnam 74 AsiaPac Loan Penetration . . . . . . . . . . . . . . . . . . . . . . . . . . 75 Banking NPLs 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 SOCBs before 1988 and now . . . . . . . . . . . . . . . . . . . . . . . . 82 Markevt share of SOCBs . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

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Figure 3-27. Figure 3-28. Figure 3-29. Figure 3-30. Figure 3-31. Figure 3-32. Figure 4-1. Figure 4-2. Figure 4-3. Figure 4-4. Figure 4-5. Figure 4-6. Figure 4-7. Figure 4-8. Figure 4-9. Figure 4-10. Figure 4-11. Figure 4-12. Figure 4-13. Figure 4-14. Figure 4-15. Figure 4-16. Figure 4-17. Figure 4-18. Figure 4-19. Figure 4-20. Figure 4-21.

Relative size of top 17 CBs in term of charted capital (bn) Customer segments served by types of banks . . . . . . . . . Overview of Opportunities and Threats . . . . . . . . . . . . . . Strengths and Weaknesses of the Banking Sector in Vietnam The External Change (CHe) and the Internal Change (CHi) Formulation of critical business issues . . . . . . . . . . . . . . . . Structure of the thesis overview Chapter 4 . . . . . . . . . . . Personal data of the respondents . . . . . . . . . . . . . . . . . . . . Status of the participated firm . . . . . . . . . . . . . . . . . . . . . . . Some facts about the banks BoD in the Second Survey . Areas of focus for the discussion of corporate governance practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Involvement of the BoD and of the top management in the strategy process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Steps in the strategy process . . . . . . . . . . . . . . . . . . . . . . . . Composition of the strategy project team . . . . . . . . . . . . . Strategic control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Vietnamese boards showing the distribution of different committees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Committees at Bank2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate structure of a SOCB based on the example of Bank 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Companies in the VCCI-Survey with an internal audit function . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Companies which do not have Audit committees . . . . . . Committees at the Board level . . . . . . . . . . . . . . . . . . . . . . . Committees on the Top Management level . . . . . . . . . . . . Risk Management Group . . . . . . . . . . . . . . . . . . . . . . . . . . Number of members of boards in Vietnam . . . . . . . . . . . . Combined structure of the boards of directors . . . . . . . . . Corporate culture of the questioned companies . . . . . . . . The applied Management tools applied in the board of directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

84 107 116 117 118 119 120 124 125 128 129 132 133 134 138 139 141 142 143 144 148 150 152 154 155 158 160

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Figure 4-22. Figure 4-23. Figure 4-24. Figure 4-25. Figure 4-26. Figure 4-27. Figure 4-28. Figure 5-1.

Required criteria to be selected as a member of board of director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Example of a selection criteria list for board members . . Remuneration systems for board members . . . . . . . . . . . Performance evaluation of board members . . . . . . . . . . . Desired topic of advanced training for the members of boards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of board meetings per year . . . . . . . . . . . . . . . . . . Recommendations based on the areas of focus . . . . . . . Structure of the thesis overview Chapter 5 . . . . . . . . . .

161 164 166 168 169 171 175 177

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XVII

Analysis of the Vietnamese Banking Sector with special reference to Corporate Governance Summary
As a result of the imminent WTO accession and the obligations arising from bilateral trade agreements, the government of Vietnam has realized the compelling need to reform the economy. Vietnam has committed to move to a market-based economy and to create a level playing field for all participants, whether state-owned or private, domestic or foreign. A goal is also set to equitise all the remaining state-owned companies which are not defined as strategic industries until 2010. Companies from all sectors are obliged to strengthen their competitiveness in order to survive on the domestic business arena and overseas markets. Such a goal will be difficult to achieve without the introduction and implementation of good governance practices. This study laid the focus on the Banking Governance in Vietnam. As this survey was the first (Swiss) research in the Banking Sector in Vietnam, we deliberately tried to span most of the corporate governance issues that are proposed in the concept New Corporate Governance by Martin Hilb (2006). The results of our research have shown that within one year, since our first survey was conducted, there were positive developments in the field of corporate governance in the banking sector. However, the companies have just made the first steps into the right direction. There are still many challenges lying ahead, especially for the state-owned companies. The listed companies, which are able to select experienced foreign companies as strategic partners benefit from the transfer of state-of-the-art technology, capital and modern management know how, and thus can also improve the situation of corporate governance. In our surveys, we also revealed the expectations of some SOCBs that the equitisation would help them to free themselves from the tight corset of the state ownership and guidance. This dissertation is mainly addressed to professionals who want to improve their skills and knowledge in corporate governance, but also to the applied research audience. We also hope that our experiences in Vietnam provide some input to the theory of corporate governance in emerging countries.

CHAPTER 1:

INTRODUCTION

This chapter presents an overview of the research, including background of the study, research objectives, research approach, as well as the structure of the thesis.

1.1 Background
Vietnam attracts its investors to its largely untapped market with its population of 85 million, strategic geographical position in one of the worlds most economically dynamic regions, stable political situation, high economic growth and low production costs. The shift from a centrally planned economy to a market economy over the last two decades is also paying off with an average annual growth of 7 per cent. In the year to come, the country aims to achieve growth of more than 8 per cent to bring Vietnam out of its position as an undeveloped country. To fuel economic growth, Vietnam needs further investment, and to attract investors it has introduced regulatory and institutional reforms. Accession into the WTO is an opportunity for Vietnam to bring itself in line with common international practices and thus open up more sectors to foreign investment. Besides, Vietnam also aims to promote the private sector. Private sector companies tend to face a range of obstacles in establishing and achieving growth in their businesses, in contrast to the various privileges and forms of government assistance enjoyed by state-owned enterprises (SOEs). In recent years, some major strides have been made to improve the regulatory regime and general business environment for Vietnams non-state sector. Most notably, in January 2000, an epochal Enterprise Law came into effect, which has significantly improved the business environment that envelops Vietnams private companies. In particular, a lot of the paperwork previously required to register a new company has been removed, and the business registration process has been streamlined considerably. Furthermore, in December 2001, the private sector was officially acknowledged as one of the key elements of the national economy in amendments made by the National Assembly to Vietnams national constitution.
 T  his was partly the result of an economic and business environment that, until the mid1990s, continued to favour the 6,000 or so companies operating in the SOE sector (Credit Suisse, 2006).

The growth and development of the private sector in Vietnam will not just be about increasing the cumulative number of new companies registering and operating. It is more the willingness for change. And the pace of change needs to be accelerated parallel with the rapid growth of the economy, the accession of Vietnam into the WTO and the threat posed by foreign competitors. Through initiatives such as the ASEAN Free Trade Area (AFTA), the Bilateral Trade Agreement with the United States and Vietnams accession to the WTO, Vietnams increasing integration with the global economy and international business networks means that local companies need to be able to compete and collaborate in both the domestic business arena and overseas markets. This is arguably the next big challenge for the private sector in Vietnam. One of the sectors in Vietnam exposed to rapid change is the banking sector. This sector was substantially reorganized at the outset of the transition period. However, like other industries, further modernization during the 1990s was generally quite modest. This means that, in part as a legacy, the current banking system in Vietnam is still dominated by the state-owned commercial banks (SOCBs) which account for more than 70 percent of all bank deposits. They channel most funds through loans to the SOEs. Although there are many foreign bank branches and semiprivate joint-stock commercial banks (JSCBs), these have so far operated on a limited scale, serving niche markets. As a result of the imminent WTO accession and the obligations arising from bilateral trade agreements, Vietnam has committed itself to move to a market based economy and to create a level playing field for all participants, whether state-owned or private, domestic or foreign. This means that SOCBs, but also JSCBs will need to change in order to survive. Such a goal will be difficult to achieve without the introduction and implementation of good governance practice (IFC-Report, 2006) that: -  permits investors and creditors to provide long-term capital to firms and fund investment with confidence;

-  enables senior managers to focus on generating efficiency and productivity gains; and -  allows for the creation of an internal architecture within firms that allows them to increase their scale and capacities.

1.2 Objectives
When this study was started, Corporate Governance was a new topic in Vietnam. At that time, the term Corporate Governance was not part of the Vietnamese corporate language. Official guidelines in this regard were insufficient. It was assumed that most governance theories had been developed in western industrialized countries and these theories might not suit Vietnams special social and economic environment. In addition, it is often quoted that there is no one-size-fits-all governance regime in the corporate governance literature (Wang, 2006, 18). Relatively little research work has been carried out in the area of corporate governance in Vietnam. In the banking sector, there has apparently been no empirical study of general corporate governance. This thesis aims to fill the gap, at least partially. The study looks at current corporate governance practice in the banking sector in Vietnam. Thus, the major objectives of the thesis are: 1.  To obtain an overview of the current corporate governance practices in Vietnam. 2.  To gain a better understanding of actual corporate governance practices of the banking sector in Vietnam.

 G  overnmental institutions such as the Ministry of Finance and the State Bank of Vietnam translated Corporate Governance into Vietnamese in a way that was equivalent to Company Management (in Vietnamese: Qun Tr Cng Ty). While translating the book New Corporate Governance, by Prof. Dr. Martin Hilb, we introduced the term Qun Tr Hi ng Doanh Nghip which is descriptive of the entire connotation of Corporate Governance (see Hilb, Qun Tr Hi ng Doanh Nghip, 2006).  A  s part of its Support to Industry Restructuring & Enterprise Development (SIRED project, Danida seeks to strengthen corporate governance practices in the fisheries sector in Vietnam (IFC-Report, 2006).

3.  To provide recommendations on how to improve corporate governance practices in Vietnam. We expect the results of this study and the subsequent recommendations to be of interest and relevance to: Board members and members of senior management in the banking sector; researchers; trainers for corporate governance issues; and to a lesser extent, relevant government agencies.

1.3 Structure of the thesis

The thesis is presented in 5 chapters: Chapter 1 is the introduction. Chapter 2 deals with the theoretical framework for the secondary research and primary research which will be discussed in the Chapter 3 and Chapter 4. Chapter 3 includes a study of the influencing factors from the environment, the market, and industry in order to identify the risks and the opportunities the board might face. Furthermore, in order to work out the critical business issues of the banking sectors, the strengths and weaknesses of the different types of banks such as state-owned commercial banks, private commercial banks, and foreign banks are identified. This provides a general overview of the situation, and the challenges the country and, more specifically, the banking sector in Vietnam faces. The results of this chapter serve as basis for the surveys on corporate governance practice in the banking sector which are discussed in Chapter 4. Chapter 4 aims to find out, what the current state of the corporate situation in Vietnam is and to make recommendations on how to improve the situation based on certain areas of focus such as vision and strategy, board structure, board culture, leadership, systems, information and communications. Chapter 4 also provides suggestions as to how the board could tackle challenges in the board. This is based on the analysis of the current status and the future situation under consideration of the areas of focus.

Chapter 5 highlights the implications for research, teaching, and practice.

Chapter 1: Introduction Chapter 2: Theory about Corporate Governance 2.1 Governance theories 2.2 Characteristics Chapter 3: Secondary Data Analysis Chapter 4: Primary Data Analysis Chapter 5: Implications

1.1 Background

3.1 Environment

4.1 Background

5.1 Research

1.5 Conclusion

2.4 Conclusion

1.2 Objectives

2.3 Research framework

- Secondary data analysis - Primary data analysis

4.2 First survey

4.5 Recommendations

3.4. SWOT / CBI

3.2 Market

5.2 Teaching

1.3 Structure

4.3 Second survey

S ituational
2.4 Board Vision 3.1 Board Selection

S trategic I ntegrated

5.3 Practice 3.3 Industry 4.4 Summary

1.4 Research approach

1.2 Internal Context

4.2 2.1 Risk Board 4.1 Composition Auditing Mgmt 3.4 3.2 Keep it 1.1 Board controlled Board External Development Feedback 4.3 Context 4.4 CommuniControlling cation 2.3 Board 3.3 Structure 2.2 Board Board Compensation Culture

Figure 1-1. Research structure of the thesis - overview

1.4 Research approach

In Chapter 3 (see also Research structure), the information collected is based predominantly on desk research. To understand the current situation and future development of Vietnam, expert interviews were conducted with board members and members of senior management from diverse companies in Vietnam, with policymakers and members of relevant government agencies. As an explorative and empirically oriented research project, an in-depth qualitative study was carried out in order to investigate the phenomenon within its real-life context. Within the frame of the empirical research, we conducted two surveys which will be presented in Chapter 4. The first survey deals with the overall situation of corporate governance in Vietnam. The second survey was conducted with some specific banks.

 A list of interview partners is attached in the Annex.

The research approach is shown in Figure 1-2:

Legends: x xx xxx Applied intensively applied very intensively applied Desk research

RESEARCH METHODS
Survey of listed companies Expert interviews Case studies

1. Banking Environment

XXX

XXX

2. Banking Market

XXX

XXX

PHASES

3. Banking Industry 4. Banks (based on areas of focus) 5. Implications

XXX

XX

XXX

XXX

XXX

Figure 1-2. Research approach

1.5 Conclusion
In this chapter, the background, but also the research objectives, research approach, and the research structure of the thesis are presented. In the following chapters, we will discuss in-depth the content and results of the research.

CHAPTER 2:  THEORY ABOUT CORPORATE GOVERNANCE IN GENERAL AND IN VIETNAM

In this section, the theoretical basis is built for the secondary research and primary research which will be discussed in the Chapter 3 and Chapter 4. The research will focus on the issues of corporate governance in the Banking sector.

Chapter 1: Introduction

Chapter 2: Theory about Corporate Governance 2.1 Governance theories 2.2 Characteristics 1.5 Conclusion 2.4 Conclusion 2.3 Research framework
- Secondary data analysis - Primary data analysis

Chapter 3: Secondary Data Analysis

Chapter 4: Primary Data Analysis

Chapter 5: Implications

1.1 Background

1.2 Objectives

1.3 Structure

S ituational
2.4 Board Vision 3.1 Board Selection 4.1 Auditing

S trategic I ntegrated

1.4 Research approach

1.2 Internal Context

4.2 2.1 Risk Board Mgmt Composition 3.4 3.2 Keep it 1.1 Board controlled Board External Development Feedback 4.3 Context 4.4 CommuniControlling cation 2.3 Board 3.3 Structure 2.2 Board Board Compensation Culture

Figure 2-1. Structure of the thesis overview Chapter 2

Charles Darwin, the author of the Origin of the Species, said in the 19th century that It is not the strongest that survive, it is not the most intelligent, it is those most responsive to change (Charles Darwin, cited in ING-Report, 2006). In order to be responsive to change companies in Vietnam need to continue learning from other countries. In recent years the world has witnessed a number of company scandals stemming from corporate governance malpractices and fraud. Incidents emanating from corporate governance malpractices have
 C  ompany names that often come to mind are for example Enron, Arthur Andersen, Daewoo, Xerox, Shell, and AIG, among others. Recently, in the high-profile trial of former Enron executives for fraud and conspiracy, they had been found guilty.

also occurred in the young history of Corporate Governance in Vietnam. Thus, the pattern of shortcomings concerning the corporate governance issues in Vietnam and in other countries is very similar. These scandals emphasize the need for major improvements in corporate governance practices in Vietnam. Let us turn next to the governance theories and the governance practice in Vietnam in order to identify a framework for the research.

2.1 Governance theories

A number of different theoretical models have evolved to provide the frameworks for explaining and analyzing corporate governance. However, concepts, definitions and perceptions of corporate governance tend to differ from country to country (IFC-Report, 2006). It is also known that there is no single, accepted definition of corporate governance. The definitions usually reflect the needs, the interests or attitudes of different people (Wang, 2006). There are also definitions related to shareholders (agency theory), at the other end related to stakeholders (stakeholder theory). The other corporate governance theories are here briefly explained.

 A  number of high profile cases have received a lot of attention in the national press over the past few years. They have included some of the largest and best known companies in the country, such as Vietnam Airlines, Seaprodex, Minh Phung, Vietsovpetro, Viet Hoa Bank, Saigon Beer.  I  n Germany, large public companies tend to have a two-tier board system, comprising of a non-executive supervisory board and an executive board. This contrasts with the single board of directors system adopted in the US and UK, which has the primary role of protecting the shareholders interest (IFC-Report, 2006). In the finance literature, corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment (Shleifer and Vishny 1997, cited in Wang, 2006); in the economics literature, corporate governance is defined as addressing an agency problem, or conflict of interest, involving members of the organization [where] transaction costs are such that this agency problem cannot be dealt with through a contract (Hart 1995, cited in Wang, 2006); according to the Cadbury Report (1992), corporate governance is defined as the system by which companies are directed and controlled.  A  gency theory paradigm arises from the fields of finance and economics, whereas transaction cost theory arises from economics and organizational theory; stakeholder theory and institution theory arise from a more social-orientated perspective on corporate governance (Wang, 2006).

2.1.1 The agency theory According to the agency theory, the shareholder who is the owner of the companies delegates day-to-day decision making in the company to the directors, who are the shareholders agents. The problem that arises as a result of this system of corporate ownership is that the agents do not necessarily make decisions in the best interests of the principal. The potential for the personal interests of a companys senior managers can diverge from those of its shareholders. Where the managers and the owners of a company differ, as they often do in larger firms with a wide shareholder base, there is a possibility that their respective interests may become misaligned. This is where boards of directors and inspection / auditing committees can balance the equation, monitoring the actions of senior management, who control the day-to-day operations of the company, on the shareholders behalf (IFC-Report, 2006).10 Corporate governance is thus restricted to the relationship between a company and its shareholders. One of the shortcomings of the agency theory is that only the needs of top executives and shareholders were taken into account, but not the justifiable needs of employees, customers or the environment (Hilb, 2006). 2.1.2 The transaction costs theory Transaction costs theory is based on the fact that firms have become so large that they substitute for the market in determining the allocation of resources. The firm was considered not as an impersonal economic unit in a world of perfect markets and equilibrium but rather as an organisation comprising of people with differing views and objectives (Solomon, 2004).
 Managers of the companies are defined as agents and the shareholders as the principals. 10  In Vietnam, enterprises have Inspection Committees. According to the Enterprise Law (1999), the Inspection Committee is responsible for supervising all operations and business activities of the Company on behalf of the shareholders. The law also stipulates that an Inspection Committee is required for any company with more than 11 shareholders. In other countries there is often an Audit Committee, a Nominations Committee, and/or a Compensation Committee. These are usually chaired by independent directors.

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2.1.3 The stakeholder theory Hung (1998) explained that stakeholders include employees, customers, suppliers, banks, environmentalists, government and other groups who can help or hurt the corporation, and he concluded there are many groups in society besides owners and employees to whom the corporate is responsible. Not only do companies affect stakeholders, but also stakeholders in turn affect companies in some way. The goals of a corporation should only be achieved by balancing the often conflicting interests of those stakeholder groups. A basis for the stakeholder theory is that companies are so large, and their impact on society so pervasive that they should discharge accountability to many more sectors of society than solely their shareholders (Solomon, 2004). The stakeholder theory deals with a web of relationship with other stakeholders that can influence a company, including employees and unions, suppliers, clients, and the government. Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society (Sir Adrian Cadbury, World Bank, 2000). The concept of corporate governance, codified by the OECD, proposed that the major mechanisms to look for include an independent board of directors, fair treatment of minority shareholders, and coordinating the interests of capital owners and business managers. Corporate governance is about promoting corporate fairness, transparency and accountability. The corporate governance structure specifies the distribution of rights and responsibilities of the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. We score the companies based on specific issues such as board composition, management remuneration, accounting treatment and transparency (cited in www.shareanalysis.com).

11

2.1.4 The institutional theory Institutional theory offers its own set of assumptions regarding human behaviour and the nature of the firm. Institutions, broadly defined, are socially and culturally created devices such as structures and activities which provide stability and meaning to social behaviour (Wang, 2006). Institutional frameworks are made up of both formal (e.g. political rules, judicial decisions, economic contracts) and informal (e.g. socially sanctioned norms of behaviour which are embedded in culture and ideology) constraints (North, 1990; Scott, 1995). 2.1.5 The New corporate governance Hilbs both-and, glocal approach (2006) shows that companies can achieve sustainable growth, long-term profit maximization and shareholder wealth maximization by taking stakeholders into account as well as shareholder interests. 11 Hilb (2005) defines the New Corporate Governance as a system by which companies are strategically directed, integratively managed, and holistically controlled, in an entrepreneurial and ethical way, and in a manner appropriate to each particular context.

2.2  Characteristics of Corporate Governance system in Vietnam

The issue of corporate governance in Vietnam is complicated. Here we do not seek to provide a fully comprehensive picture of the corporate governance practices in Vietnam. Rather, we have sought to summarize some of the most important topics related to corporate governance practices, such as Principle-agent relationship in the SOEs, the one-tier or two-tier system. Finally, we also want to identify the suitable framework for the research in this dissertation.

11  Hilb (2006) adopts both the global relevance of aspects of the Anglo-American board best practices, and the local governance best practices evident in the approaches adopted by many international firms operating in countries around the world.

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2.2.1 The transformation to Principle-agent relationship in the SOEs As the economic reform in Vietnam gradually unfolds, the governing strategy has changed from direct involvement in the decision making process of the enterprise to a more performance-based12 approach. Thus, profits, revenues contributed to the state budget have become among the most important performance criteria for SOEs. The relationship between SOEs and the government is referred as being a Principle-agent relationship, in which the former is the agent and the latter is the principal. As the principal of SOEs, the government, through its various agencies has established incentive schemes and monitoring mechanisms intended to ensure that the agent acts in accordance with the governments interests and to prevent the senior executives of SOEs from pursuing their own self-interest. Theoretically, for such a system to work well requires the principal to know the business quite well, set realistic objectives, and objectively monitor and evaluate the performance of the enterprise, all while taking into account the real capacity and market conditions in which the enterprise is operating. 2.2.2 Governance structure in the SOEs in Vietnam The Vietnamese corporate governance system is often compared to the German two-tier system.13 The two-tier system consists of three bodies for governing public limited companies, namely the State (or shareholder general meeting), the inspection committee14 and the management board.

12 Also called governing from a distance. 13  The two-tier system has developed in the continental European environment characterized majority shareholders of companies, a greater role for the participants themselves, a less liquid capital market, etc., while one-tier system has been created in the Anglo-Saxon environment characterized by dispersed share structures, an active capital and securities market. The one-tier system has two bodies of governance. They are the general meeting of shareholders, and the Board of Directors. There is no universal answer to the question of which governance system is better. Different models of governance have been formed in different economic and social system as well as through different political orientation. 14  The Inspection Committee in Vietnamese Governance structure is somewhat comparable to the German supervisory Board (the Willam Davidson Institute at the University of Michigan, 2005)

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STATE

Board of Management Inspection Committee Top Management

State-owned Corporation

Figure 2-2. Current relationship in a state-owned corporation - overview

The state There are two types of SOEs in Vietnam: Most of the SOEs in Vietnam are members of the general corporations15 owned by central government (see Figure 2-3.) or owned by provincial or municipal government. The remainders are more or less independent SOEs, reporting directly to a national line ministry, a provincial or municipal Peoples Committee, or some other government organisation. These SOEs do not belong to a larger general corporation. They report directly to their supervisory line ministry or provincial / municipal Peoples Committee.

15 Such as Construction, Textiles & Garments, Cement, Oil & Gas, Telecommunication.

14

However, the governance structures of independent SOEs are similar to general corporations in that they are directly supervised by, and report to, government agencies.

Central Government

Central Supervisory Ministry

Administrative relationship, the body is directly responsible for taking care of the enterprise

Central Specialist Ministry

Regulatory relationship, making and observing regulations

General Corporation
Board of Management Inspection Committee

Management team

Members SOEs

Figure 2-3. A typical governance structure of a state-owned General

Corporation16 - detailed view The amended State Enterprise Law of 2003 intended to provide autonomy to SOEs by empowering the Board of Management of General Corporations and by limiting the role of government agencies to regulatory functions. The Law has given and formalised the Boards role as the direct representative of the states ownership of the corporation. In other words, the effort of the recent SOE reform has focused on mitigating the apparent confusion between the States regulatory and ownership functions and on making SOEs accountable for their own profits and losses.

16 See also Figure 4-12.

15

The board According to the amended SOE Law of 2003, the Board has the right to make every decision pertaining to the business of the corporation. However, the Law also states that the Board can only make those decisions that do not come under the rights and responsibilities of other state representatives and which are not assigned to other government agencies and organisations. The ownership rights of SOEs are currently exercised by various government agencies. For example, the Ministry of Finance acts as the representative for the states capital, and is responsible for the administration of that capital. The supervisory ministry, which is normally the ministry overseeing the relevant sector, such as the Ministry of Construction, Ministry for Agriculture, in which the corporation operates, is responsible for the establishment, dissolution, personnel, and overall supervision of the enterprise (see Amended SOE Law, 2003) The inspection committee Under the Enterprise Law, only joint stock firms with 11 or more shareholders must establish an Inspection Committee. In theory, the Inspection Committee should be appointed by shareholders at the annual general meeting. But in practice, the appointment of the inspection committee can be made by the Board of Management. The reason is that the Board of Management members are also the owners or majority shareholders. As it is written in the Enterprise Law, the Inspection Committee is expected to perform a number of important functions, principally related to their oversight role, such as evaluating the financial accounts, monitoring the performance of management, regularly informing the board of management of the performance of the enterprise, overseeing disclosure and communications made by the enterprise, and if necessary, recommending changes to the Board of Management or operations of the enterprise. Although not required under the Enterprise Law, there are a number of other functions that should be included within the Inspection Committees responsibilities as part of a companys pursuit of good corporate governance, such as ensuring firms compliance with existing laws and regulations, overseeing major transactions or investments, overseeing major

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costs or expenses incurred by board of management or senior management, reviewing internal controls and risks, monitoring potential conflicts of interest by board of management, managers or major shareholders, selecting independent auditors. 2.2.3 Some shortcomings of the SOEs The government officials as principals often lack business experience and business knowledge. Government institutions17 commonly do not have the capacity nor expertise to closely monitor the performance of an SOE and then reward accordingly. As a result, there are many shortcomings about which we want to discuss here: Problems of the laid back administrative approach Due to the lack of expertise and governance capacity the government agencies have chosen a so-called laid back administrative approach of setting growth objectives for SOEs. According to this approach, revenues or profits this year must be higher than that of last year, or the company must grow by a fixed percentage every year, regardless of market condition. There are also penalties for the general director if the SOE does not meet the objectives set out by the General Corporation and government institutions.18 To avoid the penalties, the underlying rule is that revenues or profits this year must be higher than last year. In other word, SOEs are thriving to make no loss, but only a little profit. This laid back administrative approach may also prompt attempts to manipulate the financial accounts, so that the general directors can retain their position.

17 The immediate principal or General Corporation. 18  According to the State Enterprise Law, a general director can be dismissed if the SOE incurs losses for two consecutive years. But there are also incentives for the general director if the SOE meets or exceeds the set targets. In fact, the incentives for entrepreneurial activities under the carrot and stick system do not exist, because the SOE general director is rewarded little if the enterprise earns a lot of profit, but can face severe punishment if the enterprise makes a loss. Such regulation certainly would not motivate an SOE general director to invest for the long term development of the enterprise.

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Problems of the political relationships Personal relationships between SOE managers and government officials turn out to be very important. One way to build a good relationship with officials is to employ their relatives or persons introduced by them. Thus, to be a good manager of a SOEs, the competence of political relationships is deemed to be crucial. These political relationships are necessary if the SOE wishes to make a large investment. The SOE has to get approval from a number of agencies. Problems of individual conflict of interests The majority of recent reported corporate governance malpractices in the SOEs have involved direct or indirect kick-backs, and this is possibly the most serious agency problem. SOE clients always ask for commissions. They do not care much about checking the contract carefully before signing. If the commissions are paid, then the clients would accept any product and service, even those with some defects. Otherwise the clients would find a reason to complain. Problems of the reporting The role of the Board in many SOEs is therefore not clear, and to a great extent, limited. For SOEs that belong to General Corporations, they not only report directly to the mother entity, the General Corporation; but also at the same time have to deal directly with various government agencies on a number of important aspects of their business.

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2.3 Research framework

Due to the current political system (see 3.1.1.2 Political system) and special cultural characteristics where the Vietnamese strive for harmony in the collective (see also 3.1.2.4 The influence of cultural factors) we decided to choose the approach of New Corporate Governance proposed by Hilb (2006) as a framework for this dissertation. The New Corporate Governance recommends bringing added value simultaneously to shareholders, customers, employees, and the public (Hilb, 2006).19 The New Corporate Governance is based on a reversed KISS principle as described in the Figure 2-4.

Figure 2-4. Model of New Corporate Governance

(Hilb, 2006)

19  We are aware of the fact that there is a growing perception among theorists and practitioners that the paradigm of shareholder value and the paradigm of stakeholder value may be compatible (see also Wheeler et al., 2002). For example, ignoring the needs of stakeholders can lead to lower financial performance; creating value for stakeholders through business focus on maximizing value for all stakeholders may be able to create financial value for shareholders.

19

The reversed KISS framework comprises of four parts: Part 1: Keep it situational On the environmental level of the special situation of Vietnam, five different issues are considered: Economic, political-legal, technological, ecological and socio-cultural (Rueegg-Stuerm, 2005). Furthermore, the banking market (including customers) and Banking sectors (including competitors and related players in the finance industries) will also be analysed. These issues will be discussed in Chapter 3. Part 2: Keep it strategic We differ here seven areas of focus that will serve as leading dimensions in the primary research (see Chapter 4): Vision and strategy, board structure, leadership, board culture, Systems, Processes, Information and Communication. Part 3: Keep it integrated This dimension integrates targeted recruitment, evaluation, remuneration and development of members of the supervisory and managing boards (see Hilb, 2006). Part 4: Keep it controlled This dimension refers to auditing, risk management, internal and external communications and feedback functions of the board (see Hilb, 2006).

2.4 Conclusion
In this chapter, several governance theories and the corporate situation in Vietnam were discussed. Based on the specific situation of Vietnam, we have decided for the New Corporate Governance approach (Hilb, 2006) which will serve in the Secondary and Primary research as a framework.

20

CHAPTER 3:  SECONDARY DATA ANALYSIS OF THE VIETNAMESE BANKING SECTOR

In this chapter, an analysis of the environment, the industry and the market of the banking sector is carried out. This provides a general overview of the situation, and the challenges the country and, more specifically, the banking sector in Vietnam is facing. The results of this analysis will serve as a basis for the survey about corporate governance in the banking sector which is discussed in Chapter 4.

Chapter 1: Introduction

Chapter 2: Theory about Corporate Governance 2.1 Governance theories 2.2 Characteristics 1.5 Conclusion 2.4 Conclusion 2.3 Research framework
- Secondary data analysis - Primary data analysis

Chapter 3: Secondary Data Analysis

Chapter 4: Primary Data Analysis

Chapter 5: Implications

1.1 Background

3.1 Environment 3.4. SWOT / CBI

1.2 Objectives

3.2 Market

1.3 Structure

S ituational
2.4 Board Vision 3.1 Board Selection

S trategic I ntegrated

1.4 Research approach

1.2 Internal Context

4.2 2.1 Risk Board 4.1 Composition Auditing Mgmt 3.4 3.2 Keep it 1.1 Board controlled Board External Development Feedback 4.3 Context 4.4 CommuniControlling cation 2.3 Board 3.3 Structure 2.2 Board Board Compensation Culture

3.3 Industry

Figure 3-1. Structure of the thesis Overview Chapter 3

3.1 Environmental and economic analysis

In the environmental analysis, the major influencing factors are discussed. The environmental analysis deals with the following situations: politicallegal, socio-cultural, economic. The purpose is to find out how these factors influence the development of the banking sector and related issues.20

20 For example Human Resources, Information Technology.

21

3.1.1 Political-legal situation 3.1.1.1 Milestones of socio-political development With the start of the reforms of the communist country Vietnam in 1979 there were three main parts, the agrarian and industrial reform, the Doimoi policy and the introduction of macro-economic institutions (Dinh, 1997). From 1986 the market reforms started with the new general secretary Nguyen Van Linh after the death of the long-time, all-powerful Communist party leader Le Duan. The first step in the reform process can be described as administrative dualism and allowed the establishment of private ownership of land and businesses. The Doimoi policies, the second stage in the reform process, represented a further evolution of the reform process which has been started and on the improvement of the productivity of the ailing economy and introduction of a market oriented economy in the place of a planed economy. The measures were aimed at the improvement of resource allocation and efficiency, reduction of trade barriers, establishment of privateand family ownership and the liberalisation of the agricultural, industrial and trade sectors. The third stage targeted the fiscal, monetary and credit supply and the ownership of land which was not allowed until 1988. In spring 1989 the banking and finance reforms aimed to combat the hyperinflation rates, eliminate the causes of speculative pricing and to find real market prices, set fiscally sound interest rates and liberalize the foreign exchange system in order to encourage foreign trade. The long lasting Cambodia War (from 1978) ended in 1989 and with the demise of the Communist block, due to Glasnost and Perestroika in Russia, Vietnam and its Communist Party were urged to find other trade partners than the Soviet Union or other socialist countries. Tariffs appeared to be an issue and in 1990 a new duty law was introduced which aimed to expand foreign trade. In 1994 the US Embargo was lifted and in 2002 a trade agreement with the USA was reached. In December 2006, the U.S. Congress approved Permanent Normal Trade Relations (PNTR) for Vietnam.

22

Figure 3-2. Milestones in the recent development of Vietnam

(Source: Vietnam Tiger Fund, 2007) 3.1.1.2 Political system Vietnam is governed by the Communist Party of Vietnam, which brooks little opposition. However, the absence of democratic freedom is currently not a major issue, with political stability and economic prosperity being the preferred option.21 As with China, the changes seen in the economy are not accompanied by any visible signs of political reform for Vietnam. To be fair, there does not appear to be a strong push for democracy either. The broad population seems more intent on taking advantage of the economic opportunities made possible by the reform process. Vietnams key leadership changed in June 2006 with the appointment of a new President and Prime Minister, who are both southerners.

21  Many business people point to the successes of China, which has chosen to open its economy without opening up its political system as worth emulating, rather than Russia, which attempted to liberalise its political system without first opening up the economy.

23

Vietnam remains a Socialist Republic with a one-party system (Communist Party) under the leadership of President Nguyen Minh Triet and his Prime Minister Nguyen Tan Dung, but binding itself with the commitment toward a more market oriented economy.22
High Switzerland Japan United States Vietnam

2 1 0

-1 Pakistan -2 -3

China Sri Lanka

Low

213 Countries

(Source: Kaufmann, Kraay and Mastruzzi, 2006, cited in UBS, 2006)23 3.1.1.3 The military The relatively high level of military involvement in senior government positions, while starting to change, still highlights the need to better understand the associated economic risks as international experience demonstrates, especially in the region. In Thailand, for example, the military also occupies a large position in the economy. In the long run this runs the risk of driving down returns for the private sector because entities run by the

Figure 3-3. Normalized political stability and violence index

22  D ocument from the International Conference UNCTAD in Geneva Economic Internationalisation Human Development and State-Society Relations in Asia: Learning From Vietnam, presented by Mr Chevalier Alain, IUED, 15 December 2006. 23  The World Banks Governance Indicator includes 6 aspects: 1) government effectiveness, 2) political stability (or no violence), 3) voice and accountability, 4) control of corruption, 5) rule of law, and 6) regulatory quality. Specifically, the more capable a country is with governance issues, the more economic benefits it can enjoy. In a politically stable environment, combined with a strong set of legal and regulatory systems, investors are more willing to make long-term investments in the form of FDI and continued capital inflows (Kaufmann, Kraay and Mastruzzi, 2006, cited in UBS, 2006).

24

military will frequently have a lower cost of capital or could be given preferential terms on which to compete. As such it will be interesting to watch how the role of the military evolves over the next decade. In other economies around the region it has been tough to balance vested interests with creating a level playing field especially where the military has significant political influence. 3.1.1.4 Vietnams Economic Law Vietnams economy is governed by several key laws that define the legal forms of business entities as well as their financing. These laws are (The William Davidson Institute, 2005): - Private Enterprise Law (1999) - State Owned Enterprises Law (1995, amended in 2003) - Cooperative Law (1996, amended in 2003) - Domestic Investment Encouragement Law (1994, amended in 1998) - Foreign Investment Law (1987, amended in 1990, 1992, 1996, 2000). In addition, the legal framework consists of layers in which general laws are superseded by specialized laws in a specific area. The system becomes more confusing as conflict in the code defers to the newest version (The William Davidson Institute, 2005). Streamlining the laws pertaining to business activities is a major agenda on the current reform schedule. The most immediate reform is the forthcoming Common Investment Law.24

24  Fusion of the Foreign and Domestic Laws on Investment. If the new Common Investment Law follows the trend, it will undoubtedly loosen restrictions on foreign investment and capitulate to some demands for foreign investment liberalization under the WTO negotiation.

25

A new Bankruptcy Law25 was enforced in October 2004. The earlier law was ineffective and only 191 bankruptcies were filed over a 9 year period: the law clarifies specific procedures, such as liquidation rights between liabilities and equity. 3.1.2 Socio-cultural environment 3.1.2.1 Demographic situation Vietnams demographic situation is broadly favourable and should provide a significant positive impetus to growth over the coming decade. Although the total fertility rate has dropped close to the replacement rate of about 2.05, and is forecast to fall further,26 the relatively large share of young people in the economy means that the overall working age population should grow steadily (HSBC, 2006). The growth rate of the working age population (age 15-59) has been much faster at 2.6 % over the last 5 years, although it will slow more rapidly to 1.2 % in the next 5 years (GSO, 2006; HSBC, 2006). The strong growth of this age group will provide a substantial boost to potential output growth. 3.1.2.2 Income disparities The relatively uniform spread of economic prosperity has meant that there are, so far, few manifestations of tension caused by disparate economic growth. The World Bank has calculated Vietnams Gini Index, which measures the disparity between rich and poor, as among the lowest in Southeast Asia. Intraregional disparities in income are not as pronounced as those in China, nor has there been any wide divergence in rural and urban incomes, as with India (CLSA, 2006, 12).

25 Law No. 21/2004/QH11 26  T his reflects the typical pattern seen in Asian and other countries, where rapidly rising incomes lead parents to have less children and increase the quantity and quality of expenditure on each one (HSBC, 2006).

26

Mekong River Delta South East Central highland South Central Coast North Central Coast North West North East Red River Delta 0 10 20 30

National avg 18%

Regional poverty (%) 40 50 60

Figure 3-4. Income disparities between regions

(Source: GSO, World Bank, 2004) Vietnam has, so far, benefited from a stable social fabric, with inter-regional and rural-urban differences so pronounced. Poverty levels have come down across regions over the past decade. However, it may be too early to judge the spread of economic growth. Indications of social inequality are beginning to be apparent, as illustrated by the national Gini coefficient, which rose from 0.34 in 1992/93 to 0.35 in 1997/98 and to 0.37 in 2002 (World Bank, 2004). Ethnic minorities are prevented from participating in economic opportunities, signalling a potential disconnection between growth and poverty reduction in remote and disadvantaged areas. The benefits of growth over the past decade have been unequally spread across regions, and migration has also redistributed the incidence of poverty across regions. 3.1.2.3 Education With a strong focus on literacy and education, Vietnam has been able to reach a literacy rate of over 90%. Primary school (five years of formal schooling) is compulsory and 80% of pupils go on to secondary school. For

27

the elite, there are private and international schools.27 In public schools, children are under considerable academic pressure, with little time to develop other skills and interests. In international schools, children can play and learn at the same time.28 The government further intends to strengthen the basic education system by introducing international training programmes to schools, universities and colleges, which should help improve the quality of education. It wants to diversify training programmes, establish more private schools and encourage cooperation between local universities and colleges and foreign partners. The government is looking to upgrade the quality of teaching staff in local universities and colleges by encouraging them to join training courses aimed at improving their professional skills. Scholarship schemes to support talented students have been implemented, while education in remote areas is being addressed. The government is aiming to lift literacy from 91% to 95% (VIR, 22.06.2006).

4 (Govt expenditure as % GDP) 3 2 1 0 2001 Education Health

2002

2003

2004

2005

Figure 3-5. Public investment in social sector has increased since 2004
(Source: IMF, 2006)

27 Private schools have been permitted since 2001. 28 Some debates are the same the world over, whether it is the US or China or Vietnam.

28

In various MNCs and local companies, there are professionals who had returned to the country after securing higher qualifications from overseas universities - 80% of students who go abroad for higher education return to work in Vietnam, attracted by better job opportunities and a more rewarding life in familiar environs. The desire for higher education is a shared value in most families, and education is seen as the passport to a better life. There is a strong belief according to Confucianism that education drives the future of children (Dinh, 1997). 3.1.2.4 The influence of cultural factors The culture of Vietnam is one of the oldest in the Southeast Asia region. The early influences of the Austro-Pacific culture before 111 BC are evidenced by the multiculturalism of the Vietnamese people. The matriarchal family structure is widespread in the North East and Northern Delta region of Vietnam (Weggel, 1992). This is where the culture of Vietnam originated in the very early time. Hence, the position of women in the matriarchal society of Vietnam is stronger than in neighbouring countries (Weggel, 1992). Although Vietnam lies geographically in Southeast Asia, its culture and the origins of its people are of East Asian descent. The principal religion in Vietnam is the so-called triple religion (Tam Gio) characterizing the East Asian intricate mixture between Mahayana Buddhism, Confucianism, and Taoism.29 This second major influence can be traced back to the Chinese domination which started around 111 BC and lasted until 838 AD. During this time, the special knowledge and advanced techniques in agriculture, philosophy, literature and sciences were introduced from China (Dinh, 1997). Despite a general Vietnamese culture that all Vietnamese share, there are considerable differences between different regions of Vietnam which have emerged due to southward expansion and later, exposure to the West; most
29  Vietnam belongs to the so-called Chopstick Culture that includes countries such as China, Vietnam, Korea and Japan.

29

noticeably that of Northern and Southern Vietnam. In this respect, Vietnam has many different cultural influences starting from the Austro-Pacific culture to the Khmer and Champa cultural influences. Thervada-Buddhism is dominant especially in the Mekong Delta and Hinduism has found acceptance by the ethnic Cham in Central Vietnam. Finally, the Western cultural influence started in the 16th century with the arrival of the Catholic missionaries from Spain, Portugal and France, continuing in the 19th century when Vietnam became a French colony. The Latin alphabet, which nowadays proves to be an advantage for the Vietnamese, was introduced in the 16th century. From around the mid 19th century, The Catholic Church and the French brought the knowledge of natural sciences, technology, the French civilization and language. Most recently, Leninism-Marxism was introduced by the Soviet Union and the American way of living by the USA (Dinh, 1997).

Taoism

Budd

hism

Conf

ucian

ism

Vietnamese Culture

nd Hi

tho lic

ism

uis m

Figure 3-6. Main cultural influences of the Vietnamese culture

Ca

30

Vietnamese are largely one-people - as many as 80% are Buddhist30 (though officially they follow no religion) and ethnic minorities comprise only 14% of the population. Significant Christian minorities of about 8% consist mainly of Roman Catholics and smaller but noteworthy new Protestant groups. The collective struggle for independence through the Centuries31 has created a strong bond between the different cultural and religious groups in Vietnam. Vietnam is a high-context country with a high level of collectivism, a medium-high power distance, achievement orientation, low uncertainty avoidance, rather matriarchal with a short-term orientation. The Vietnamese are very diligent, live in large families, show gratefulness through reciprocity and follow the Yin (female)-Yang (male) principle where the Yang dominates slightly. Furthermore, Vietnamese are frugal, are risk takers, want recognition for achievement, endeavour to resolve conflicts peacefully and strive for harmony in the collective (Dinh, 1997). Time has a different value for Vietnamese and being on time is less important than to lose face (Weggel, 1992). Short term planning and improvisation is common and flexibility is necessary as plans may change due to force majeure. Due to the high population density, especially in Vietnamese urban areas, proximity is common and privacy is not given (Hall, 2000). While people in Western countries separate business and private issues, Vietnamese do not. The principle of reciprocity to give back is a strong part of culture. Relationships matter and communication is crucial with focus on personal relations.

30 Interviews with Dr. Le Manh That, Vice Rector of the Vietnam Buddhist University. 31  After having regained independence from the colonial power China in the 10th century, Vietnam had to struggle to push back successfully the aggressive invasions of many world powers like Mongolia, then again China [in the Ming and Ching Dynasty], Siam, Japan, France and the US.

31

3.1.3 Economic situation 3.1.3.1 Economic indicators 3.1.3.1.1 GDP Development Economic growth has been steady, especially in the last five years, and is expected to continue in the same mode with the government expecting real GDP growth of around 8.5 % on average in the forthcoming years. This pace of growth is fairly consistent across different sectors. In 2006, the gross value of industrial output rose by 15.4% year on year; slightly slower than the pace of growth recorded in 2005. The growth of output was particularly rapid for private sector industrial firms (up by 21.6% y-o-y), ahead of foreign-invested firms (14.9%) and state-owned firms (11.8%). Industrial growth has been broadly based, in terms of both region and industry (GSO, 2007).
GDP growth 1995-2007
12.00 10.00 9.54 9.34 8.15 8.00 6.00 5.76 4.77 6.80 6.90 7.50 7.00 7.20

7.70 8.20

8.90

GDP per capita/ region in 2006

648 433 378 330 305 276 240 189 145 0 to to to to to to to to to to 1337 648 433 378 330 305 276 240 189 145

4.00 2.00 0.00

95

96

97

98

99

00

01

02

03

04

05

06

07

Origine of GDP 2006

Other 23% Manufacturing 21%

Source: GSO, 2006

Forestry 1% Real Est. 4% Fishing 4% Construction 6% Mining & Quarrying 11% Trade 14% Agriculture 16%

Figure 3-7. Economic Situation GDP Development

(Source: GSO, 2007, Vietnam Tiger Fund, 2007)

32

Despite the pace and breadth of recent progress, it is important to remember that 74% of the population is still rural and that Vietnams per capita income of US$ 660 ranks amongst the poorest nations, at 151st out of 208 countries, according to the World Bank (2006). Agriculture has steadily decreased as a share of GDP since 1988 (when it was 46.3%), but still comprises 22.8% of the economy.32 3.1.3.1.2 Domestic savings Domestic savings, increasing FDI and growing remittances make investment the key growth driver, accounting for fully one-third of the economy. The government expects the contribution of investment to reach 42% of GDP over the next five years.
(%) of GDP
Savings Investments

40 30 20 10 0

1990

1995

2000

2001

2002

2003

2004

Figure 3-8. Domestic savings feed investment

(Source: World Bank, 2005) 3.1.3.1.3 Foreign trade and payments The value of Vietnams exports continues to rise rapidly. In 2006 export revenue rose by 25% y-o-y to reach US$ 39 billion. It is noteworthy that exports in all major categories recorded strong growth. There were particularly rapid increases in the value of exports of manufactured goods, including footwear and electronic products, in addition to key export

32  In comparison, China has reduced its share of the rural population from 76.3% in 1985 to 58% today, squeezing agricultures share of GDP to below 15%.

33

commodities, particularly coffee, rice and cashew nuts. Exports of seafood products, however, rose by only 2% y-o-y, partly due to anti-dumping duties levied on catfish and shrimp. As a net crude oil exporter, Vietnams trade balance has benefited from the rise in crude oil prices, despite a dependence on imported oil products. While the situation may deteriorate in the short term in nominal terms due to the higher-value added of petrol and diesel, growth in domestic demand for fuel is unlikely to outpace oil production within the next five years. This net oil position could even improve once the delayed US$ 2.5 billion Dung Quat refinery becomes operational as now expected in 2009. While direct net trade balance is positive, Vietnam trade could still be negatively affected if high global prices weaken external demand, although this would be a condition that would impact on all of Asias exporters.

Principal exports first half year 2006

USD b 45 40 35 30 25 20 15 10 5 0 2000 01 02 03 04 05 06 Others 25% Crude oil 22% Export Import Garments textiles 15% Footwear 9% Aqua products 8% Wood products 5% Rice 4% Electronics and computer materials 4% Coffee 3% Rubber 3% Coal 2%

Figure 3-9. Export situation

(Source: GSO, 2007) WTO accession is expected to maintain export growth at 10-20% y-o-y over the medium-to-long term. If Vietnam is able to ramp up its production base to meet this potential growth in external demand, the countrys export to GDP ratio should continue growing from the current 63% of GDP share.33 Importantly, to achieve an increased level of export growth, Vietnam will

33  Even then, Vietnam will still lag behind Asias other major exporters in terms of export volumes, though overtaking the Philippines as the tenth ranked exporter in Non-Japan Asia is feasible within the next five years.

34

need to move up the export ladder and create higher value-added activities to its production base. This will mean heavy investment from either domestic sources or FDI, which are likely to weigh on the current account balance in the near-term. Vietnam has a similar, competitive low labour cost structure to China, substantial resources (including agricultural land), abundant labour and a low base of growth: all ingredients that could facilitate an extended period of rapid export expansion. However, its level of capital to labour force ratio is still relatively low compared to other countries, as evidenced by Vietnams lack of presence in higher-end engineering or technology manufacturing. If Vietnams export sector does step up, then this could help reverse the structural trade deficit and push the economy a little closer to achieving self-sustainability on its current account i.e., removing the reliance on international donors. However, this long term improvement will also be dependent on future international competition (particularly from China) and the rate that productive investment becomes available in the coming years. 3.1.3.1.4 Inflation Inflation has been a source of concern. However, since 2004 it has remained quite stable at an average of 7.9 % a year. Housing costs are increasing at a fast pace. The major risk is oil price pressure. International oil price increases have yet to be fully reflected in domestic fuel prices, as the government has been slow to raise domestic retail prices. Instead, the state-owned distributor is being forced to absorb much of the price rises, which, in turn, is being compensated by government transfers. However, this seems to be unsustainable, as domestic fuel prices have now risen by 120% since the beginning of 2004 (GSO, 2007). Without any refining capacity, Vietnam must import all its petroleum and diesel products. Though Vietnam has a relatively lower oil dependency compared to many of its neighbours, inflation due to higher imported oil prices could force aggressive monetary policy tightening in the years to come. The recent monetary measures seem to be aimed at improving credit quality in the financial system rather than controlling inflation or avoiding the risk of overheating. This suggests that the government is likely to accept a higher

35

inflation rate over the next year or two in order to maintain GDP growth at about 8% y-o-y or better. Consequently, an aggressive policy response to higher oil prices is unlikely. 3.1.3.1.5 Current account Vietnams exports of oil, seafood, rice and a growing electronics sector have performed well since 2004. Imports of capital and equipment are the main driver, which has positive implications for investment demand. But imports are also boosted by the impact of higher commodity prices, which may ease in the next year, assuming commodity prices eventually correct. Despite the weak structural current account, continued financial support from international donors and a positive capital and financial account are helping to stabilize the overall balance of payment (BoP). Overall BoP surpluses since 2004 have been supportive to the VND, though we expect that FX policy should still favour a slow depreciation trend to preserve export competitiveness. Still, the BoP has reduced average annual depreciation of the USD/VND from 2-4% in the post Asian crisis period to less than 1% in the past 12 months (GSO, 2007). With a stable BoP, the outlook for Vietnams external position is unlikely to change much in the near term. 3.1.3.1.6 FX reserves FX reserves have been growing steadily, especially over the past two years and the government seems to be preparing to allow state companies to tap offshore financing within the next few years to fund capital investment. Even with an escalation in foreign borrowing, Vietnams external debt to GDP ratio (35% in 2006) is within manageable levels and is even likely to fall for another year or two (GSO, 2007). Government finances look reasonably stable.

36

3.1.3.1.7 Fiscal revenue Strong revenue growth in 2006 and 2007 from VAT and oil revenues are helping to offset unexpected expenditures from subsidizing losses of the state-owned oil distributor.

Chart 17 The fiscal deficit has become more manageable

Budget balance (VND bn) 0 -2,000 -4,000 -6,000 -8,000 -10,000 -12,000 -14,000 1999 2000 2001 2002 2003 2004 2005E As % of GDP (RHS) 0.0 -0.5 -1.0 -1.5 -2.0 -2.5 -3.0 -3.5

Chart 18 2005 Budget plan

2003

2004E -11,575 11,575 5,653 5,653 23,093 17,440 5,922 8,788 2,866

2005 (budget) -12,800 12,800 9,998 9,998 33,250 23,252 2,802 7,500 4,698

Fiscal balance Total financing Domestic financing Treasury bill Insurance Issued Repayments Financing abroad Total foreign borrowing Amortization

-12,043 12,044 7,200 7,200 22,476 15,276 4,844 7,654 2,810

Figure 3-10. Fiscal revenue

(Source: MoF; CSFB, 2006) As a net oil exporter, the higher oil prices meant that oil-related revenue contributions to the fiscal budget ran almost 50% higher than budgeted in 2004 and 2005. Revenues from oil production and taxes account for about 28% of the total fiscal revenue. While the government is likely to continue posting a fiscal deficit for the foreseeable future, the shortfall is becoming more manageable, as its ratio to GDP has declined for three consecutive years and likely to fall again this year (CSFB, 2006). Expenditure may rise in the next few years from a phasing in of civil service pay increases, infrastructure spending and recapitalization costs from the SOEs and banking sectors. However, efforts to restructure the tax system and increased compliance, plus improved profitability (or reduced losses by SOEs), should help keep the budget deficit below 2% of GDP over the medium term (CSFB, 2006).

37

3.1.3.2 Economic development In recent conferences for foreign investors, government officials have espoused the governments commitments to economic reforms.34 According to the Prime Minister, the road map for the next five year plan (2006-2010) that was set by the Party Congress in April, 2006 revolves around following key areas (VET, May 2006; VIR, 16.03.2006): (1) (2) (3) (4) (5) (6) Development of the private sector Foreign direct investment Privatization of SOEs Global integration Infrastructure development Building capital market institutions

3.1.3.2.1 Development of the private sector The establishment of the Enterprise Law in 2000 set the stage for the rapid growth that has taken place in the private sector over the last five years. The rise of the private sector (both domestic and foreign), which now makes up two-thirds of the overall economic output has been key to the transformation of Vietnams economy. From less than 100 private companies when the new law came into effect, there are now more than 200,000 and the number continues to expand. Many of these are small scale and, essentially, family run businesses, in part because of the difficulty in accessing loan capital from the banks. Their share of industrial output is about 75% - up 25 % over the past ten years. This is a reflection not only of the rapid increase in the number of new private enterprises and privatisations, but also their increased efficiencies. Furthermore, the private sector employs 90% of the total workforce today and generates the overwhelming majority of the 1.5 million new jobs needed each year. Clearly, the private sector is not only a crucial economic pillar but also a social imperative (Merrill Lynch, 2006).

34  In August 2006, during a conference entitled Investing in Vietnam, the new Prime Minister Nguyen Tan Dung gave a speech that set out the main thrust of future economic policy centring on four major tasks deemed necessary to maintain a vigorous rate of economic growth between now and 2010 (VET, August 2006).

38

According to Vietnam observers (Merrill Lynch, 2006) this is beginning to change, especially as foreign banks are taking stakes and starting the process of upgrading credit assessment systems as well as credit products. The introduction of a unified tax rate (28%) has also helped to improve both the transparency for companies as well as tax collections for the government. 3.1.3.2.2 Foreign direct investment In 2006 foreign direct investment is estimated to have reached US$ 10 billion an eight year high (VietnamNews, 05.02.2007). In many cases we are seeing Vietnam attract capital as a complementary production base to China as manufacturers seek to diversify supply chains. For the many overseas development agencies in Vietnam this also represents something of a success story and there is active investment activity from the likes of the ADB and IFC. Minimum wages are still very low. For government employees it is just US$ 19 per month, foreign invested enterprises (FIEs) pay closer to US$ 60 per month (VET, Februar 2007).

USD b

12 10.2 10 8 6 4 2 0 2000 01 02 03 04 05 06 Transport & Comm 12% Agriculture, Forestry, Fisheries 5% 2.9 3.3 3 3.2 4.5 6.8 Hotels & restaurant 7% Other services 6% Real estate & costrn 13%

Mining 8% Infrastruture 2%

Manufacturing 47%

Figure 3-11. Foreign direct investment

(Source: GSO, 2007) The Japanese have been amongst the largest investors. Other key sources of investment have been Korea, Hong Kong, Taiwan and Singapore. The recent Memorandum of Understanding signed with Intel, for an estimated commitment of more than US$ 1.6 billion, would be the single largest technology investment in the country. In combination with domestic capex

39

this has helped to push the overall ratio of investment to GDP to over 35 % (VIR, 16.03.2007). This is the second highest ratio across the whole of non-Japan Asia. Around 38 % of total FDI commitments were destined for the two southern industrial provinces of Dong Nai and Binh Duong, whereas the inflows to Hanoi and HCMC, traditionally major destinations for FDI, were more modest. Around 60% of investment is focused on light industrial projects (GSO, 2007), where the payoff in terms of higher output and employment is relatively rapid. 3.1.3.2.3 Privatization of SOEs The Vietnamese privatization program35 was started in 1992. Equitization transforms SOEs into corporate entities and plays a key role in raising productivity and economic efficiency. This equitization of SOEs has steadily increased. The pool of equitized SOEs stands at 3,600 with another 1,500 to be equitized by 2010 (Vietnam Tiger Fund, 2007). Whilst willing to sell some SOEs completely, the government has a long list of strategic industries in which it will retain a 51% controlling stake.36
1200 800 400 0

2000

2001

2002

2003

2004

2005

2006

(Source: GSO, 2007; Vietnam Tiger Fund, 2007)

Figure 3-12. Numbers of privatizations

35 Officially known as the Equitization Program. 36  S ome of these include areas such as electricity production, telecomm infrastructure, mineral exploration and water supply. Less obvious examples are high quality cement production, large scale milk and beer production, labour export services and agricultural equipment.

40

By 2010, it is likely that all remaining SOEs will be equitised. This is a commitment by the government made in the National Assembly. Major listings will take place in sectors like telecom, oil and gas, financial services, airlines and banking. The privatization process itself begins with equitization. This is in effect an incorporation process that creates shares that are all held by the State. After this the true privatization process begins, usually with a limited public offering and an allocation of shares to employees which is typically anything between 20%-30% of total shares issued. These initial shares trade on the OTC market ahead of the actual IPO which takes place by Dutchstyle auction. To date, close to 2,000 companies have gone through such a process (about a third of the total SoEs) but the size of the individual companies has been relatively modest. The State Securities Commission estimates that these SOEs account for only 8% of the total invested capital of all registered enterprises (SSC, 2006). In tandem with this there have been important revisions to foreign ownership restrictions that are reminiscent of what we have seen across markets such as Thailand and Taiwan over the past decade. Private companies can be 100% foreign owned but for listed companies this is limited to 49% prior to October 2005 it was even lower at 30%. The new Enterprise Law 37 requires that all state owned enterprises to become incorporated within four years. At the same time the government is also setting up a Temasek-type asset holding company to accommodate all the residual holdings. An important element of these IPOs is the allocation of stock to management and employees as the joint stock entity is created this can be as much as 30% of the total shares issued. This provides much of the liquidity that passes through the OTC market and provides a potential source of stock for institutional investors to access.

37 It came into effect from July, 2006.

41

3.1.3.2.4 Global integration Vietnams restructuring story is ongoing and the next stage is being inspired by the World Trade Organization accession. The WTO accession process has demonstrated much of the reform commitment of Vietnam in the past few years, as the government has been very aggressive in restructuring the economy to conform to most WTO conditions.38 Post-accession, Vietnam has agreed to open up its domestic market on ten service lines and 92 product areas. It will also be committed to a tariff reduction schedule affecting 99.3% of all products imported. Average import tariffs will be reduced from an average 18.5% currently to 15% or less within three to five years - depending on the product (VET, Februar 2007). Some quotas on sensitive product areas will remain, but otherwise the scope of deregulation should be substantial. Vietnam will also comply immediately with eight WTO agreements on accession. 39 The risk is the economys ability to adjustment to the new conditions mandated under WTO. In rushing through regulatory and legal demands for accession, Vietnams firms at the ground level are still uncertain about how the new WTO regime will affect them. While the three to five year grace period for adjustment will give local firms time to familiarize themselves with new procedures and gradually rising foreign competition, Vietnam is still a less developed economy trying to adapt to a market-driven economic system. It seems likely that some confusion and restructuring pain will be unavoidable for domestic firms, particularly as lower import tariffs will mean heightened competition from imported goods. The eventual entry of foreign players in the domestic market is likely to pressurise many of the inefficient SOEs and smaller private enterprises, unless they adapt within the relatively short period of grace.

38  The National Assembly approved 12 bills at its session in November 2006, which completed 23 new or revised laws introduced since 2002 to meet WTO requirements. 39  T RIPS (trade-related intellectual property rights), TRIMs (trade-related investment measures), CVA (customs valuation), SPS (sanitary and phytosanitary measures), TBT (technical barriers to trade), Import Licensing, Pre- Shipment Inspection, and Rules of Origin.

42

However, WTO accession also opens markets to Vietnamese exports, creating demand for its existing low-value added products and will stimulate investments in upgrading its export and industrial base. Light manufacturing would be an important area of potential development, as Vietnams competitiveness in textiles and garments could lead the way for an expansion into other product areas. Although much more domestic investment or FDI would be needed for Vietnam to compete for WTO market share, an indication of possibilities can be derived from the countrys ability to increase exports to the US following the signing of a bilateral trade agreement in 2000. After the pact became effective at the end of 2001, Vietnams exports to the US have risen five-fold to US$ 5 billion by 2004 and accounted for 19% of the countrys total exports - compared to 5% in 2000. Excluding the US, Vietnams exports to the rest of the world rose by a comparatively slower 54% over the same period (GSO, 2006). 3.1.3.2.5 Infrastructure development Infrastructure constraints remain among the biggest concerns for businesses, which cite poor quality and high costs as key challenges. New evolving challenges such as the impending loss of concessional financing may play havoc with financial access along with diminishing returns on capital spending. In addition, according to the World Bank, refining planning processes, preparing for rapid urbanization, improving the efficiency of infrastructure service providers, and developing stronger institutions to encourage private finance or direct private provision of infrastructure, will become topical issues in the years to come (World Bank, 2005). Access to capital is a critical issue - official development assistance (ODA) declines in relative importance as Vietnam becomes more prosperous. Much of the incremental capital will need to come from financial markets or direct private finance requiring reform of consumer pricing, enterprise restructuring and revised regulation to establish the credit-worthiness of infra-enterprises.

43

90 80 70 60 50 40 30 20 10 0

(%)

Limited availability Poor quality Too expensive Poorly managed/Service delays Slow/too many procedures

National roads

Inter-provincial roads

Electricity

Telephone

Figure 3-13. Infrastructure situation

(Source: World Bank, 2005) Access to capital has significance beyond just infrastructure. As in China, because of the very fast pace of growth, concerns about the quality of growth have not been a significant source of concern. The banking system, though, is at a nascent stage and state-owned banks, in particular, suffer high credit delinquencies. NPLs may be as high as 15-20% (World Bank, 2005). Access to capital, both domestic and foreign, will be the most crucial driver of growth over the next five years. The quality of credit and growth will become more important to ensure that liquidity - both domestic and foreign - is unimpaired. 3.1.3.2.6 Building capital market institutions Bond market The Ministry of Finance is keen to establish a domestic credit rating agency in an effort to boost the development of a bond market. Few domestic firms have issued bonds, relying instead on loans from the banking system, and only two corporate bonds are traded on the stock exchange. A credit rating agency that provided better information on firm-specific risk would

44

help investors to price bonds accurately. Such an agency could also rate municipal bonds.40 Stock market in Vietnam Vietnams first stock market has only been operational since 2000, and has seen the number of companies listed grow from just 2 at the time of its launch, to 195 firms by March 2007 (SSC, March 2007). Officially known as the Securities Trading Center (STC), trading commenced in July 2000. The STC trades both equity securities (i.e. company shares) and fixed income securities (i.e. bonds). Crucially, of the 22 companies listed at the time of writing, all are former SOEs that floated public share issues as part of the official equitization programme, well before listing on the STC. In this respect, Vietnams stock market is not yet serving the important role of being a vehicle for local companies to raise equity capital through public share issues, although this should, hopefully, change in the near future. Vietnams STC is unlike many stock markets in that it is owned and operated by the government, rather like a public utility, instead of being owned by its members or investors (such as banks, securities companies, or other financial institutions). For the stock market to develop in the long-term it needs a more robust community of investors, with different demands and investment strategies for listed equities. Therefore, a welcome development was the licensing of the first local investment fund management companies.41 Both local and foreign investors are expected to invest in such funds, which will be able to invest in both listed and unlisted companies, as well as fixed income instruments such as bonds.

40  Recently the HCMCs Committee asked for the interest rate premium (over government bonds) on its municipal bonds to be raised from 0.2% to 0.3% per year, in a bid to make its paper more attractive. 41  The first of these, VietFund Management is a joint venture between local Sacombank and foreign-owned Dragon Capital, with a 30%-70% shareholding structure respectively. VietFund launched - and received approval from the SSC for Vietnams first official onshore investment fund (VF1), with capital of around VND 200-250 billion. VF1 is expected to list on the STC (DragonCapital, 2006).

45

Foreign investors In terms of foreign investors in STC-listed companies, both resident foreign institutions and individuals are permitted to buy and sell shares in Vietnam, and trade in securities listed on the STC. Foreign organizations and individuals as a group may now hold a maximum of 30% of a companys total outstanding shares (Decree 144 of 2003). The launch, in late 2003, of the first foreign investment funds focused exclusively on investing in companies listed on the Vietnam stock market (and pre-listing companies), may assist more institutional investors to gain some exposure to the STC. This paucity of institutional investors in commonly found in relatively young equity markets that have focused more on the supply side of the stock market: listing more and better companies, and obliging them to adopt better standards of corporate governance and disclosure. However, it is now widely appreciated that there is an equal need to work on the demand side of stock market development: developing an adequately robust market for the equity paper being issued.42 The listed companies There is quite a diverse range of different business sectors represented by the 195 companies currently listed on the STC (SSC, March 2007).43 Most of the listed companies are former SOEs, and the public offering of their shares took place significantly prior to the listing on the STC.44 The aggregate value of the listed companies shares trading on the STC (i.e. the total market capitalization) was roughly US$ 22 billion in mid-May 2007 (SSC, May 2007) - up from a low of roughly US$ 110 million at the end of
42  For example, Chinas stock market (which is Asias second-largest by capitalization), is reported to consist of 60 million-mainly poorly informed-retail investors, often trading on rumours, rather than on fundamental analysis of the relevant companies. In order to switch from a gambling mentality to a more fundamental investing approach, the Chinese government decided in 2001 to open up the market to institutional investors, including mutual funds, insurers and pension funds (Freeman, 2005). 43  The SSC is reportedly aiming for 500 companies listed on the STC by the end of 2010 (VietnamNet, 12 October 2006). 44  In some respects this echoes a similar situation in China, where only 80 or so of the roughly 1,200-plus companies listed on the Shanghai and Shenzhen stock exchanges are private companies; the rest being state-owned enterprises (Freeman, 2004).

46

2001. At present, the total market capitalization of the STC (excluding bonds) is equivalent to just 23 percent of the countrys GDP (SSC, May 2007). The government aims to reduce the number of SOEs to about 1,000 by 2007, but this is ambitious. Among the roughly 900 SOEs that have been equitized in Vietnam so far, a substantial proportion are thought to meet the minimum criteria to list on the STC, but the majority have chosen not to do so. This is despite the introduction of fiscal incentives by the SSC in a bid to encourage more companies to list. The current fiscal incentives include a fairly generous corporate income tax holiday for two years after listing (Vietnam Tiger Fund, 2007). Venture capital Although roughly nine years older than the stock market, the venture capital industry in Vietnam is a relatively recent phenomenon.45 At the beginning of the 1990s, the macro-economic and business growth forecasts for Vietnam (and Southeast Asia in general) were very positive, and institutional investors specializing in the emerging markets started to focus some of their attention on Vietnam (Freeman, 2004). During the first half of the 1990s, Vietnam experienced very substantial inflows of foreign direct investment, and there was also a fairly consistent annual increase in the number of foreign venture capital funds wholly or partially Vietnam oriented. A total of eight (listed) venture capital funds exclusively focused on Vietnam or the Indochina region were launched during this period, and over US$ 400 million in funds were raised for investment in Vietnam during this period (Freeman, 2004). In the latter half of the 1990s, venture capital activity in Vietnam was much less vigorous,46 largely as a result of (Freeman, 2004): -  Generally disappointing performances of several of the Vietnam funds, and a paucity of quality investments available;

45 The first venture capital fund oriented solely towards Vietnam was established in 1991. 46  Tellingly, no new venture capital funds for Vietnam were established between 1996 and 2002, at a time when venture capital activity in much of the rest of East Asia was on the rise.

47

-  The difficulties of developing attractive investment portfolios in Vietnam, and gaining exposure to the macroeconomic growth trajectory of the country through specific investments; -  General foreign investor sentiment towards the country lessened, due to a number of factors (including delays in opening the first stock market). As a result of legislative changes, todays foreign venture capital investors are experiencing a business environment that is markedly more conducive to investing in Vietnamese companies than their predecessors did in the mid-1990s.47 It should be noted, however, that the challenges faced by venture capital investors in Vietnam are not exclusive to this country. Venture capital investors in many emerging markets have encountered problems arising from low standards of corporate governance and transparency, limited recourse to the law, and dysfunctional capital markets (Freeman, 2004). 3.1.4 Conclusion 3.1.4.1 Vietnam compared with selected ASEAN countries Key figures of countries in ASEAN Below is a table showing a comparison of economic attractiveness of Vietnam versus some ASEAN countries with similar socio-economic indicators. 48

47  Such as the replacement of Decision 145 (of 28 June 1999) with Decision 36 (of 11 March 2003), most notably (Freeman, 2004):  - Removing the requirement that foreign investors must hold their shares for between 1-3 years;  - Removal of the need for the prime ministers approval on each individual deal (instead, the investee company need now only inform the government of the share sale);  - Removal of the restriction that foreign investors may only invest in joint stock companies; - The need for an auction process. 48  Vietnam became the 6th ASEAN member in 1995, a region with an area of 4361303 sqkm and a population of 555 million.

48

Countries

Area (sqkm)

Population (mn)

GDP per capita in USD (2005) 17110 106 385 1239 462 5160 1176 27250 2628 604

GDP growth (2005)

1. Brunei 2. Burma 3. Cambodia 4. Indonesia 5. Laos 6. Malaysia 7. Philippines 8. Singapore 9. Thailand 10. Vietnam Total

5270 657740 176520 1826440 230800 328550 298170 683 511770 325360 4361303

0.40 50.00 14.00 222.00 6.00 25.00 85.00 4.00 64.00 84.00 555.00

3.0 % 5.0 % 7.0 % 5.6 % 7.0 % 5.2 % 5.1 % 6.4 % 4.5 % 7.5 %

Table 3-1. Key figures of countries in ASEAN

(Source: CLSA, 2006) Country Attractiveness for Investment This analytical tool is based on the method of the McKinsey product-portfolio matrix that consists of two dimensions: the sociopolitical attractiveness (see Table 3-2. / Dimension x) and the economic attractiveness (see Table 3-2. / Dimension y).49

49  E ach dimension includes several assessment criteria which are weighted and graded. The summation of all criteria of the two dimensions delivers the position in the matrix as illustrated in Figure 3-14 (Dinh, 2006).

49

(5.0) High

Malaysia (3.55/4.48)

Vietnam (4.5/4.015) Thailand (3.5/3.65)

(3.33) Medium

Economic Attractiveness (y)

Philipines (1.88/2.76) Indonesia (1.535/2.67)

Legend:

(1.67) Low

Circle reflects GDP Size Of Countries

Low

(1.67)

Medium (3.33)

High

(5.0)

Socio-cultural Attractiveness (x)

Figure 3-14. PortfolioMatrix of Country Attractiveness for Investment

As the section 3.1.1.2 (Political system) showed, Vietnam is politically and socio-culturally a very stable and, therefore attractive country compared to its neighbours.

50

Sociopolitical Attractiveness (x)

Assessment Criteria 1) Political Stability 2) Social unrest 3) Terrorism 4) Corruption 5) Bureaucracy 6) Legal system Description of Assessment Criteria Infrequent change of government; law & order, very stable, good control, secure. Ethic or religious conflicts; conflicts due to gap of wealth; friendly & peaceful. Ethnic or religious fanaticism. Seldom or widespread. Efficient or inefficient resource allocation. Laws renewed (e.g. Company laws, Intellectual Property Rights), legal enforcement. Population situation; lifestyle; attitudes toward consummation, family, nature, religion. Membership in international organisations such as WTO, ASEAN, APEC. Laws and regulations concerning ecological protection, ecological awareness. Weighting of Criteria 0.19 0.11 0.125 0.14 0.065 0.1 Unweighted Value 5 5 5 4 3 4 Weighted Value 0.95 0.55 0.625 0.56 0.195 0.4

7) Socio-cultural situation 8) International relations 9) Ecological issues

0.14 0.07 0.06 1.0

5 4 4

0.7 0.28 0.24 4.5

Overall Sociopolitical Attractiveness

Economic Attractiveness (y)

Assessment Criteria 1) GDP situation 2) Location 3) Competition related issues 4) Market related issues 5) Infrastructure (technological development) 6) Resources 7) FDI situation Description of Assessment Criteria GDP growth rate. Proximity to market or to resources; geopolitically relevant location of the country. Protected industries; open to international competition. (present & future) size of domestic market; urban population growth. Investment in adequate infrastructure, such as transportation, internet, financial & banking, health care. Availability of raw material; fuels; energy; related supplier system are good. Accessibility for FDI; governmental promotion; free room for choosing the adequate entry mode; repatriation of profit(s). Availability of lowcost workforce; availability of well-trained workforce. Relevant for expatriates; life & leisure; safety (e.g. robbery, pocket picking); medical treatment on sound basis. Weighting of Criteria 0.115 0.135 0.10 0.115 0.105 0.115 0.07 Unweighted Value 5 4 3 4 4 4 4 Weighted Value 0.575 0.54 0.3 0.46 0.42 0.46 0.28

8) HR availability 9) Quality of life

0.11 0.095

4 4

0.44 0.38

10) Catastrophes Major natural events, such as floods, typhoons, storms, earthquakes. Overall Economic Attractiveness

0.04 1.0

0.16 4.015

Table 3-2. Country Attractiveness for Investment of Vietnam

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3.1.4.2 Key factors with positive impact on Vietnams growth potential National culture The culture of Vietnam, like Japan and Korea, has been strongly influenced by neighbouring China over thousands of years. Vietnams everyday behaviour and attitudes are determined by a synthesis of religions especially Buddhism, Confucianism, and Daoism. The Vietnamese are very diligent. Further, Vietnamese strive for harmony in the collective (Dinh, 1997). According to the Confucianism, Vietnamese pay a lot of attention to education, discipline, teamwork and are hard-working. Relationships matter and communication is key with focus on personal relations. All these characteristics are helping Vietnam achieve fast growth just as Japan, South Korea and China have done.50 Political stability The economic transition in Vietnam has not been achieved overnight the country has traveled a long way since 1976 when North and South Vietnam were unified. After decades of war, Vietnam began rebuilding its ravaged economy in the early 1980s, with initial steps characterised by a centralised planning system and a closed economy that faltered badly. In 1986, the government began to realise the need for reform and, in an effort to jump-start growth, began moving away from central planning to a more market-based economy that stressed the development of the private-sector and foreign participation. WTO Accession Accession to the World Trade Organisation WTO in January 2007 is another catalyst as foreign capital seeks to benefit from Vietnams advantages as an export hub, while also opening up more markets to Vietnamese industry. The US, for example, accounts for the largest share of the countrys exports (21%), boosted by the 2001 Bilateral Trade Agreement (VietnamNet, 05.03.2006). In addition, a lot of new FDI is aimed at greater
50  As Vietnam is the last goose to take off in the Flying Geese Model of the so-called chopstick-countries (Kaname Akamatsu, cited in Dinh, 1997).

52

value-added manufacturing, while services majors are also starting to tap Vietnams potential. Changing economic structure Vietnams growth record has been remarkable, but it must keep expanding at 8% if it is to create employment opportunities for the 1.4 million people entering the workforce each year (VET, March 2007). The country therefore, is facing some considerable challenges. The government is largely untested for its response to a potential economic slowdown, and such an event may have a profound impact on the countrys economic trajectory. Inflation is at a high 7.5% and rising crude oil prices have affected the fiscal situation. At the same time, the economy is becoming more investment intensive and is integrating rapidly within the global economy. Underpinning all this is the rise of the private sector and Vietnams transformation from a planned to a market-based economy. The private sector, both domestic and foreign, makes up two-thirds of the overall economy. Its share of industrial output is even higher at 75% - up 25 percentage points over the past ten years. This is a reflection not only of the rapid increase in the number of new private enterprises and privatisations, but also their increased efficiencies. Furthermore, the private sector employs 90% of the total workforce today and generates the overwhelming majority of the 1.5 million new jobs needed each year to accommodate the increasing work force (VET, March 2007). Clearly, the private sector is not only a crucial economic pillar but also a social imperative. Vietnam had a largely agrarian economy in the 1970s which has grown at a relatively robust rate of 4% a year over the past decade. Nevertheless, agricultures share of GDP has halved in the past decade, to 20%. A rise in industrial activity has transformed the profile of the economy and now accounts for more than 40% of GDP (EIU, 2006). This segment has grown at a 10% Cagr over the past decade accounting for half of the real growth over this period. Led by a trade and consumption boom, the service sector growth has also accelerated in the past few years, and now makes up 38% of the overall economy (EIU, 2006).

53

Strong economic foundation After decades of war finally ended in 1976 with the defeat of the US-backed south by the nationalist and communist north, Vietnam began to rebuild its ravaged economy in the early 1980s, creating a solid base of domestic demand backed by private consumption and investment. Accounting for 64% of GDP, private consumption is a pillar of the domestic economy. High domestic savings, increasing foreign direct investment and overseas worker remittances are driving rapid growth in investments and it now accounts for 36% of GDP (up from 27% in 1995). The government expects investment to reach 42% of GDP by 2010 (Vietnam Tiger Fund, 2007). Domestic savings, increasing FDI and growing remittances make investment the key growth driver, accounting for fully one-third of the economy. The government expects the contribution of investment to reach 42% of GDP over the next five years (VET, March 2007). Focus on investments As with Vietnams quest for growth in the banking sector, meeting the investment target and better technology access in other sectors will depend on its ability to attract foreign capital. The government has set a target for itself of meeting almost a third of the total investment needs in the next five years from foreign sources. While FDI will form the largest chunk, more remittances, portfolio investment and even development assistance are important targets. To that end, the governments efforts to open up and integrate the economy with the rest of the world and streamline legislation are part of an overall cohesive strategy for sustainable growth. Political stability, low labour costs, fiscal incentives and concessions, and a growing domestic market will make it easier for foreign capital to tap into Vietnams advantages as an investment destination. 3.1.4.3 Major challenges facing Vietnam Vietnams record of stable and accelerating growth has been remarkable, but it needs growth of at least 8% to create productive opportunities for the estimated 1.5 million people entering the workforce each year (VET, March 2007). The key challenges are as follows:

54

Legal system The necessary changes in the legal system in Vietnam have not been able to keep up with the pace of economic development. In terms of the banking sector, legal reform is particularly needed with respect to the clarification of legal concepts and contractual rights such as ownership and transfer of land-use rights, collateral registration procedures, mortgage laws and title deeds. The evolving nature of Vietnams regulatory environment and commercial law, combined with overlapping jurisdictions among government ministries often result in a lack of transparency and consistency in government policies and decisions related to commercial projects. Corruption This is a sensitive and a problematic area which is often cited as a major impediment to conducting business in Vietnam. Any setback or delay in legislative and regulatory reform will hamper the necessary influx of private capital to support the growth over the next 5-10 years. In June 2005, a Law on Corruption Prevention and Control came into effect, which among other things encourages whistle-blowing activities. All state employees now have to declare assets and income, including those of immediate family members. While all the MNC executives we spoke to stated that the government was very friendly towards business and that they had not encountered bureaucratic hurdles or instances of corruption, they did employ locals with connections (in Vietnamese: Quan H) to smooth their way through government related matters. Infrastructure Infrastructure constraints remain among the biggest concerns for businesses, which cite poor quality and high costs. Investment in sectors such as transport, power and telecommunications, among others, is necessary to address these concerns. Developing stronger, more effective government institutions to encourage private investment in the development of infrastructure will become more urgent issues in the coming years. A more expanded infrastructure and larger capacity is going to be needed to fuel the countrys growth.

55

Access to skilled and unskilled workforce One of Vietnams primary assets is a relatively well-educated and inexpensive labour force. However, signs of strain may start emerging as the country enters its next phase of growth. Many businesses have indicated that a shortage of skilled labour is starting to become an issue. The problem is most acute at the managerial level due to a shortage of strong tertiary-level training and is evident in the growing stock of expatriate management in the country. The government is aware of the problem and the Ministry of Education and Training plans to almost double the enrolment capacity of universities and colleges by 2015 and increase it by a factor of 5.3 times by 2020 from a 2006 capacity of 166.5 students per 1,000 people (VietnamNet, 06.04.2007). However, the skills shortage is not just limited to managerial ranks. According to estimates of Vietnams workforce of 45m, just 7-8% can be ranked highly skilled, 19-20% graduated from vocational training colleges, and the overwhelming 75% are unskilled (VietnamNet, 06.04.2007). 3.1.4.4 Development scenarios Although Vietnams growth over the past decade has been impressive, numerous issues and potential obstacles still remain. These factors can affect the pace of development of Vietnam. In order to forecast the development of Vietnam in the years to come, we have applied the scenario analysis with three major scenarios: optimistic; realistic; and pessimistic.

56

12.0 11.0 10.0 9.0 8.0

in percentage
8.3 8.1 6.8 6.0 5.1 4.4 6.0 6.9 8.8 9.5 9.3 8.8 9.1 9.2 9.5

Optimistic Realistic Pessimistic

8.8 7.1 7.3

7.8

8.4 8.2

8.3 8.6 8.8 8.9 8 7.7 7.5 7.2

7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0

Figure 3-15. Scenario analysis GDP growth forecast to 2010

The scenario analysis is conducted based on the assessment criteria listed below (see also Figure 3-16): - Development of global economy - Oil price - Privatization process - Infrastructural development - Terrorism - Political instability

93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10

90

91

19

19

19

19

92

57

Assessment Criteria Development of global economy Oil price

Scenarios Pessimistic Slow down of the global economy Realistic Global economy shows signs of slight slow down

Optimistic
Global economy still very healthy

Higher than US$ 100 Higher than US$ 60, per barrel but lower than US$ 100 per barrel

Lower than US$ 60 per barrel

Privatization process

Corruption, inefficient Privatization process Privatization can be bureaucracy hinders is progressing, but finished as planned privatization process slower than expected in 2010 and slowdown the reform efforts Major infrastructural projects cannot be started as planned due to financial shortage and bureaucracy International terror networks arrive in Vietnam and cause substantial damages Government shows some commitment to promote major Infrastructural projects The country faced social unrest, for example from the ethnic minorities or discontent farmers and land owners There can be some discontent within the party due to the severe anti-corruption campaigns Strong commitment of the government to develop major infrastructural projects Vietnam successfully hinders international terror networks from infiltrating the country The government shows strong leadership despite discontent and conflicts within the party

Infrastructural development

Terrorism

Political instability

The government comes under pressure due to economic slow down and conflicts within the party

Figure 3-16. Three major scenarios

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3.2 Banking market in Vietnam

Banks in Vietnam have significant growth opportunities. On one hand, Vietnams GDP growth has been one the fastest in the region over the past decade and, on the other hand, less than 5% of the Vietnamese population use banking services. The Vietnamese banking system has been partly reformed but it is still weak. The state-owned banks still dominate the banking system.51 The overdue loan rate is increasing and the commercial banks have limited lending capacity.52 An additional problem is that most Vietnamese-owned enterprises are undercapitalized which is sometimes due to inadequate banking and foreign investment laws. Once Vietnam liberalizes its market many local companies will have to compete with foreign entrants maybe for the first time. In such a situation, their competitive strength will depend, in part, on better access to more economically competitive banking services. With over 80% of Vietnamese enterprises falling into the small or mediumsized categories and people generally having low incomes, the current capacity for capital mobilization by banks is limited. The reason why the banking system is permitted to be equitized and to sell stock in foreign markets is to bring in additional foreign capital and thereby enable them to support the countrys economic development. To reform the banking sector and facilitate the liberalization of the commercial process, the government of Vietnam has announced the Internationally Integrated Programme of the Banking Industry, and is committed to implement it after Vietnam joined the WTO in January 2007

51  C urrently, five big state-owned commercial banks control around 70% of Vietnams banking market. 52  O nly 17% is controlled by joint stock banks, which are non-state commercial banks established under Vietnamese law and the rest 13% of the market shares belong to foreign banks or joint venture banks

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3.2.1 Retail banking Domestic banks have been aware of the importance of developing retail banking services for some time now. They have been trying to make heavy investments in retail banking development by opening many more branches. In addition, banks have spent a lot of money on core banking software and setting up the necessary IT infrastructure. They have also made every effort to promote the development of ATM systems, Internet Banking, Phone Banking and Home Banking.53 In 2006, the net earnings from services of the five state owned banks were reportedly US$ 3.2 m up 74% over 2005 (SBV, 2006). An 84% growth rate objective has been set for 2007 which is projected to come mostly from modern retail banking services. In general, the banking services provided by domestic banks tend to be backward and poor. Most banks do not provide services over the counter despite the fact that there is no selfservice system. Local banks now have different retail banking services, but they do not cooperate with each other. For example, all the big commercial banks try to develop their own ATM networks, but they cannot find a common platform to develop a single network, which could help reduce investment expenses (VET, 03.03.2007). 3.2.1.1 Retail banking and the SME market At the beginning of 2007, there were about 280,000 SMEs in Vietnam. The government believes that their number will double by 2010-11 (SSC, 2007). The SME sector accounts for about a third of the GDP and employs about 25% of the workforce (EIU, 2006). Less than a fifth of SMEs currently have access to the bank lending market. The rest have to make do with loans from family, friends or other private sources. Even those which do manage to borrow money from banks usually do so in a private rather than corporate capacity. In other words, the owner will pledge some personal assets, take out a personal loan and apply it to the business.

53  Currently, Retail banking is the only one far developed banking industry. The other banking services as investment banking, private banking, and corporate banking are still very embryonic.

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Banks are generally wary of the SME market as many small companies have few assets to offer as collateral; accounts are frequently unreliable and they are usually the first to suffer in an economic downturn. Add to this the paucity of credit information and one can see why the relationship between bank and small business tends to be fraught with problems.54 The banking sectors reluctance to lend to SMEs is partly due to lending rate regulations, under which banks are permitted to lend a maximum of 75% of their mobilised capital. Other reasons for the SMEs difficulty to borrow from banks is a lack of credit information on most potential customers and a risk averse lending culture which leads to the desire to spread the risk as widely as possible. The latter is ironic considering that most Vietnamese banks concentrate their lending on a few large corporate customers. The problem of SMEs is not only the amount of money available to borrow but also the short maturities of loans. Banks are not interested in medium term or long term loans to SMEs for project financing or business expansion. These kinds of loans require a good understanding of the business viability and potential cash flows from a new project. This is clearly beyond the current scope of a banking system which bases its credit decisions mainly on collateral. Among the Vietnamese banks, only Agribank and Sacombank have made a strategic decision to focus on the SME market. Agribanks involvement is illustrative of the situation. They are usually the lender as a last resort, a bank with a largely social policy function. Given the growing number of SMEs in Vietnam the potential of retail banking is very significant. Banks such as Vietcombank, Sacombank, and ACB which already focus on the two segments, retail banking and the SME market, enjoy a higher than average profit margin and superior returns on equity.

54  G enerally loans above US$ 315,000 are likely to be rejected, even though businesses may have sufficient collateral to borrow such amounts. Banks are typically afraid of the risks of lending capital over US$ 312,500. The comfort zone for SME lending is about US$ 63,000126,000, which is insufficient for most small businesses (VIR, 05.04.2007).

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To serve these segments requires fairly heavy capital investment in branch networks and IT in order to create the infrastructure necessary to support a retail banking platform. This has been lacking and poor distribution along with limited consumer information are the biggest barriers to entry into these two key segments. In other words, the capital costs are heavy and subsequent fixed costs are also high. The administrative costs involved in making thousands of small individual loans have also discouraged some banks. Therefore, some SOCBs are still reluctant to enter into retail banking or SME lending. SOCBs currently pay more attention to providing loans for infrastructure projects and large corporations. However, given the commoditised nature of this type of lending and the huge amount of capital required, it is not a viable strategy for most Vietnamese banks. In addition, margins are small and falling as large corporations can turn to the bond market instead. Credit loan market The credit loan market still remains underdeveloped compared to other Asian countries. In 1990, the credit ratio was only 4.7% of GDP. This ratio was increased to 44.8%, 52% and over 60% in 2002, 2003 and 2005 respectively (SBV, 2006). Credit has been growing at an average annual rate of 25% over the past five years. 55 Currently, lending at commercial banks amounts to about 60% of deposits but it still lags behind the sharp rise in deposits in 2007. 56 VND deposit rates hover around a 9-9.5% level at many private sector banks (VinaCapital, 2006). Current lending rates for VND loans are between 10-14%, which is uninteresting for borrowers. 57 If the credit market is to grow at the 20-25% target set for

55  While many economists believe that the optimum relationship between credit growth and GDP growth is a 2:1 ratio, this does not really apply to a developing country where the credit to GDP ratio tends to be low (VinaCapital, 2006). 56  By the end of June 2006 banks in HCMC had deposits of more than US$ 14.2 billion up more than 20% so far this year. Over the same period total outstanding loans grew by only 9.2% to US$ 12 billion (SBV, 2006). 57  The corporate sector seems to have reached the limit of its ability to expand credit at the current high rates. Another reason for the cautious lending stance is the funding mismatch between largely short term deposits and the largely medium / long term loans (VinaCapital, 2006).

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this year, banks will have to look more aggressively for new borrowers, perhaps in the retail market. Currently medium and long term loans account for about 42% of total loans. The problem is that up to 50% of short term deposits are being used to offer medium and long term loans (SBV, 2006). Such imbalances are long standing and a bit worrying. However, once the corporate bond market takes off, banks should be in a position to do more long term financing and reduce this dependency. Long term project finance Long term project finance is becoming more and more frequent as the government and large SOEs tap private sector banks for large infrastructure-type syndicated loans. One good example of the type of medium to long term financing provided by the SOCBs is the deal signed with Electricity of Vietnam (EVN). The syndicate is to provide a credit line of US$ 2.7 billion to EVN over the next four years at an interest rate pegged to the average 12-month deposit interest rate plus a 3% fee (VET, July 2006). As the corporate bond market takes off, companies will have the option of raising money there instead, but the main purchasers will still be the banks and insurance companies. Property sector loans Commercial banks have outstanding loans of about US$ 3.15 billion in the property sector (VietnamNet, 08.09. 2006). As a percentage of total loans, this amounts to a 10% exposure to the property market, or 24% of all medium to long term debt. By city (VinaCapital, 2006), -  15% of all outstanding loans in HCMC are exposed to the property sector, worth a total of US$ 1.8 billion. - in Hanoi the figure is 10% or US$ 562 million. Some individual banks have a far higher exposure, particularly amongst the JSCBs. BIDV for example, accounts for about 10% of outstanding loans to property developers, an exposure of about US$ 176.1 million (SBV,

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2006). However, the government has tightened lending by ordering banks to check the credit quality of loans to the property sector.58 Given the fact that few real estate transactions have taken place in the past few years there is concern that the frozen state of the market might jeopardize the quality of lending to the sector.59 However, the true level of exposure to the property market is far higher than these examples indicate. The number only includes direct loans to property developers for the purpose of project development. Loans to manufacturing companies which have large land holdings or who develop real estate projects as a sideline are not properly accounted for. Nor is the fact that the vast majority of loans are collateralised by land or property. Therefore, a sharp drop in property values would expose the entire banking sector to serious difficulty more through the deterioration in the value of the collateral than through direct exposure. However, a collapse in property prices based on an internal crisis is not expected. 60 Despite the fact that prices seem very high, and because few actual transactions take place and with inflation and GDP growth both high, prices are set to rise in the good years and simply stay flat in the bad years. 3.2.1.2 Retail banking and the consumer market Only a fraction of the nations 85 million people utilise modern bank services. According to market research (CI Electronic Monitor, 2006), the size of the urban middle class - those with a monthly income over US$ 500 living in the six major cities - has grown from 9% of the population to 34% since 2000. With an urban population of about 23 million (29% of the population) that amounts to an urban middle class of about 8.1 million

58 Loans must not exceed 70% of the value of a mortgaged property. 59  Transactions in Hanoi and HCMC fell 60% y-o-y in 2005. In 2005 only 113 projects (down 40% y-o-y) were being developed in HCMC, covering about 175 hectare of land (VinaCapital, 2006). For example, BIDV has had to reschedule about US$ 65.7 million in loans to Vietnams top seven developers (These are Song Da,Vinaconex, Housing and Urban Development Corporation, Hanoi Construction Corporation, Viglacera, Cienco 5 and Contrexim Holdings). These amounts to about a fifth of BIDVs total exposure to the property sector (VinaCapital, 2006). 60  Any collapse would come as a result of an external shock, leading to a general and perhaps sudden deflation in asset values across all classes.

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people. The urban population is increasing by about 800,000 (1% of the total population) a year (SGO, 2006). However, only about 22% of these people currently have a bank account. That means that only 1.7 million urbanites had a bank account as of 2005 (SBV, 2006).
%
35.00 30.00
3.75%

Mio 30
25 20 15

25.00 20.00 15.00

10 5 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Urban mio. urban pop in %

10.00 5.00 0.00

Figure 3-17. Urban population growth

(Source: SGO, 2006) Overall there are about 5 million bank accounts in the whole country and only 2 million ATM cards have been issued. The balance would be accounted for by small town inhabitants or by the large rural population. Figure 3-18. illustrates that the penetration rate of consumer banking products is still very low compared to that of the mobile phone.

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50 45 40

45 45

Hanoi HCMC AB class

22 18 17 22 17 13

35 34 30 25 20 15 10 5 0 Mobile phone Insurance plans Bank Account Savings Account

19 10

17

18 13 11

Credit Card

Figure 3-18. Penetration of banking services in urban Vietnam

(Source: CI Electronic Monitor, 2006) 3.2.1.3 Consumer banking products Consumer banking products fall into five broad categories: - Personal loans - Credit / debit cards and ATMs - Mortgages - Other products Personal loans Personal loans61 are a new product in the Vietnamese banking market. VBARD (2007) reports that consumer loans amount to 10% of their

61 E.g. car loans, home improvement loans, small business loans.

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outstanding loans and have a target of increasing that to 30% over the next few years following equitization. Given that most consumer loans attract fees, it is a high margin market and has enabled the banks which specialise in retail banking to enjoy far higher profit margins. In theory, anyone can get a personal loan to buy a house, car or motorbike, or to renovate their home, provided they can meet the banks strict collateral requirements. The SBV (2005) has issued a new regulation that allows commercial banks to provide unsecured loans to employees of SOEs and organisations. This represents a start towards expanding the consumer banking business. However this does not benefit private sector employees who make up the bulk of the middle class.
Banks
ACB VIB MHB VCB HSBC

Loan limits
US$ 12,500 US$ 9,335 US$ 3,125 US$ 3,125 10 month salary

Remarks
target credit card holders government employees

The minimal personal salary must be equivalent to VND 5 million

Figure 3-19. Overview of the loan limit in selected commercial banks

(Source: VIR, 05.04.2007) The majority of personal loans are medium to long term secured loans. Until now it was hard to get a personal loan of more than US$ 625 even with collateral. Now banks are happy to hand over US$ 1,875 US$ 3,125 in personal loans (VIR, 05.04.2007).62
62  The loan limit is being raised from US$ 6,250 to US$ 12,500. Vietnam International Bank (VIB) is happy to lend US$ 9,335 without security to government employees with a monthly income in excess of US$ 380. The MHB has increased its personal loan ceiling to US$ 3,125 (to be paid within 36 months). Vietcombank will happily lend you US$ 3,125 for five years. Most of these loans can be cleared within 3-7 days. Some banks such as EAB and Eximbank target employees of existing corporate customers as potential borrowers. Others such as ACB and Vietcombank target Visa and MasterCard credit card holders. Foreign banks such as HSBC will give secured loans up to a value of US$ 2,500-12500 for one to three years to its customers (VinaCapital, 2006).

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In general, this market is still embryonic due to credit history constraints. The potential for both the unsecured and secured markets is huge. Growth in the retail market is closely tied to the growth in the number of bank accounts, and the shift towards payment by bank transfer instead of cash. Credit, debit cards and ATMs Automatic Teller Machines (ATMs), credit cards and electronic payment are new in Vietnam. So far, banks have issued only 2.1 million debit and credit cards, and installed a mere 1,200 ATMs nation wide. The rate of growth, however, is impressive. Revenue from bank card transactions issued through 17 Vietnamese commercial banks surged by 300% in 2005. Five hundred additional ATMs were installed nationwide in 2005, 125 of these in the HCMC area (VinaCapital, 2006). Lack of distribution is the key hurdle. Only 10,000 outlets accept card payments; these are concentrating on big cities like Hanoi and HCMC and other major tourist sites. 15 banks are allowed to issue payment cards, and almost 80% of issued cards come from domestic institutions. There are three ATM/card alliances in Vietnam; the Vietcombank alliance, VNBC and BankNet.
ATM/card alliances Connect24 VNBC Founders founded by Vietcombank founded by EAB Other members alliance with 17 other banks Sacombank, ANZ (including 2 overseas banks, ChinaUnionPay and United Overseas Bank from Singapore) national funds transfer system

BankNet

BIDV

Figure 3-20. ATM/card alliances in Vietnam

(Source: Interviews with SacomBank, MHB)

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The big disadvantage is that the systems used by the three banks are different and are incompatible with each other.63 The VNBC Unicard is accepted at over 300 ATMs and 1,000 locations nationwide. Customers can use their Unicard to perform many banking functions including withdrawal, funds transfer and paying bills at ATMs. VNBC has already issued over 500,000 credit and debit cards (SBV, 2006). VCB, ACB, and Eximbank all offer international payment cards with 125,000 cards issued since 1996. Of this, Visa-member banks had the largest share with 62,000 issued up to the end of 2006, a y-o-y growth of 67% (SBV, 2006). Other international brands such as MasterCard, American Express and Maestro also saw strong growth.64 However, 89% of merchant sales volume via Visa cards in Vietnam is still generated by foreigners, mostly in Hanoi and HCMC. Retail purchases and cash withdrawals made by domestic card holders reached US$ 72 million in 2004, a relatively small amount compared with the US$ 237 million worth of purchases and cash withdrawals in Vietnam by international visitors (VinaCapital, 2006). Credit card fraud is an ever present problem in Vietnam.65 Magnetic strip cards in particular are vulnerable to counterfeiting and abuse. Eastern Asia Bank (EAB), one of the many second tier JSCBs have experimented with hybrid cards using a chip based infrastructure instead of magnetic strips. They are about to issue 5,000 such cards and collaborate with Petrolimex to issue cards for fuel purchases (VET, August 2006). Mortgages The growing middle class is very keen to become home owners. The fact that 60% of the population is under 30 years of age, impacts favorably on the size of the mortgage market. Young adults want to move out and buy their own house
63  This is typical of developing countries but one nationwide system would be a major breakthrough. It is expected that Vietcombank will win the race. 64  VCB is currently the only issuer of MasterCard, Visa and American Express cards in Vietnam, with more than 50,000 cardholders in its client base. VCB is also the acquirer bank for MasterCard, Visa, American Express, JCB and Diners Club, with 5,000 point-of-sale (POS) terminals and 400 ATMs nationwide. Visa obtained a license from the SBV last month to open the first representative office in Vietnam, and the company expects the number of Visa cards issued in the country to hit 500,000 by 2010 (VinaCapital, 2006). 65  Visa Asia-Pacifics statistics show that the fraud rate of Visa cards in Vietnam is approximately 0.15%. The normal global rate is about 0.06%.

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or apartment. This concept of ownership sets this generation apart from their parents and is now backed by a solid array of legislation. A legal framework has been put in place for the growth of a mortgage market.66 Mortgages are a necessity for most young couples starting off on the property ladder. The mortgage market has grown hand in hand with the explosion in the urban condominium market which has brought affordable housing within reach of many in the middle class.67 The mortgage market is new to Vietnam and currently accounts for only 10-15% of the total housing finance market. So far banks have approved mortgage loans of about US$ 1.2 billion which represents around 12.7% of their total lending (VinaCapital, 2006). Most property purchases are financed informally through family networks who typically advance sums at no interest. Nonetheless, the professional finance sector has a stronger grip on the condominium market partly as a result of tie-ups between developers and financial institutions.
Indicators Descriptions - growing middle class is very keen t o become home owners. Current volume 10-15% of the total housing finance market mortgage loans approved of about US$1.2 billion (around 12.7% of total bank lending) Alternative: Most property purchases are financed informally through family networks (or f riends) who typically advance sums at no interest

Target customers - 57% of the population is under the age of 30;

Prices for apartments Duration

about US$ 320-2,500 / sqm 7 to 10 years

Mortgage amount worth up to 70% of the value of the home Interest rate around 12%

Figure 3-21. Mortgage market indicators in Vietnam

(Source: Interviews with SacomBank, MHB)

66  One issue is that affordable housing has been hard to come by due to spiralling property prices. 67  P rices for apartments in major urban areas in Vietnam range from about US$ 3202,500 / sqm.

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The underdeveloped mortgage market has been the biggest constraint to growth in the housing market. As loan terms are extended to 15 years or more, demand is expected to explode. Typical mortgages can be worth up to 70% of the value of the home, have a seven to ten year term and carry an interest rate of about 12%. Some banks are testing the marketing of longer term mortgages which is expected to have a very positive impact on demand. Most households can only afford to spend about 30% of their income on housing. This is the affordability threshold. Normally a bank will lend only up to 70% of the value of a house for up to 10 years. The interest rate is currently around 12%. With such a short repayment schedule, high monthly repayments are a huge constraint on mortgage demand. Other products Remittances Remittances are a lucrative source of fee income for Vietnamese banks, but most of the money is left on the table owing to the lack of a foreign presence by the Vietnamese banking industry. With 2.7 million Vietnamese living abroad (mainly in the US and France) who send home US$ 5-7 billion a year and are being charged between 2-5% in fees for the service, the market size is quite significant. About US$ 4 billion of this is routed through the banking system by wire transfer (VIR, 03.07.2007). The rest comes through gold shops and is undocumented. Currently, the overseas portion of this market is dominated by foreign firms such as Western Union, which take the lions share of the resulting fees. VIB bank has recently launched a home delivery service for remittance payments within 24 hours at no additional cost (VIR, 03.07.2007). Electronic payments Electronic payments are also making steady inroads into a country once ruled by cash. Cash payments in Vietnam accounted for 21% of the total financial transactions in 2005, down from 24% in 2004 (VinaCapital, 2006). In fact, the SBV has completed draft decrees on electronic and non-cash payment systems including cheques and bank draft circulation systems. Fewer cash payments means less tax evasion, less corruption, less money laundering, and lower minting charges. The decrease in the cash

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payment rate in 2005 was the result of a sharp increase in bank payment transactions, and particularly those performed with payment cards. To limit cash payments, Vietnam needs to encourage intra-account payments for utility, internet, and cable television bills. Cash payments continue to account for the majority of daily transactions in Vietnam, where only large supermarkets and hotels use point of sale (PoS) payment systems. Two thousand and forty PoS card-reading machines were installed in 2005 (VinaCapital, 2006). As cash cannot dominate the market forever, more and more consumers will eventually be driven to open bank accounts as the utility of paying bills by direct debit becomes clear. 3.2.2 Investment products Investment products fall into 2 categories: - Secondary market for bad debt disposal - Stock lending 3.2.2.1 Secondary market for bad debt disposal Vietnam has yet to develop an efficient market mechanism to dispose of the bad debt weighing down the banking system. In 2000 the government issued regulations to allow commercial banks to set up vehicles called Asset Management Companies (AMC) to aid the collection and disposal of long term bad debt. The SOCBs went through the motion of setting up their own AMCs, with each bank kicking in US$ 1.875 million in capital. So far about ten commercial banks followed suit with their own AMCs. The idea is to transfer Non Performing Loans (NPL) from the parent bank to the AMC which would then manage the mortgaged asset until it can be realised or disposed of (VinaCapital, 2006). One problem is that as of yet there is no secondary market to trade distressed assets and few transactions have in fact taken place. The second is that the banks do not have the capital to write off the loans in order to be able to dispose of them in the secondary market. In addition, the government itself set up the Debts and Asset trading Company (DATC) in June 2003 under the Ministry of Finance with a charted capital of

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US$ 130 million with a mandate to help SOEs dispose of their NPLs and Non Performing Assets (NPAs). The DATC started operating in 2004, working to resolve bad debts at 20 companies identified by the government (VinaCapital, 2006). However, the DATC purchases/receives the assets/NPLs directly from SOEs themselves, not from banks. The DATC has recently set up a transaction and consultation centre for debt and asset trading in a bid to get things moving. It has also signed a cooperation agreement with the BIDV in order to create the framework for an asset trading market. One issue is that the DATC has a dual mandate, a social mandate to help SOEs clear up bad debts, and an economic one to earn a profit in the process. This leads to a conflict of interest. Both the AMCs and the DATC have so far demonstrated one thing clearly: without a secondary market for distressed debt they can do little to resolve the remaining NPL problem. That market requires a clear framework with legal backing for recovering collateral and participation from foreign experts who have experience in debt trading and disposal. A lack of trained personnel and limited experience in packaging and pricing debt is also hampering the process. Having recapitalised the SOCBs with a US$ 670 million capital injection in 2004, the government is reluctant to admit that it might have to do the same thing again. Nonetheless, the SBV has circulated a draft suggesting a further US$ 750-810m government bailout in 2007 before banks such as Incombank, BIDV and MHB are equitized. 3.2.2.2 Stock lending One of the hidden triggers of the recent surge in the stock market has been the willingness of banks to lend against stocks, using the certificates as collateral. This fairly new market is frowned upon by the SBV which fears that some banks lack the internal controls to manage this relatively high risk niche market profitably. Vietnam International Bank (VIB) reported its current loans to the sector accounted for roughly 5% of the banks total loans. Instead of lending only against bank stocks, VIB now offers loans against 29 different types of stocks ranging from shares in hydropower plants to insurance and information technology stocks. ACB also has about 1% of its total loans issued for stock portfolios. Figures provided by commercial banks showed that 13 million shares worth US$ 47 million on the market were used as collateral for loans (VinaCapital, 2006).

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3.2.3 Other financial services Other financial services fall into 2 categories: - Life Insurance - Non Life Insurance 3.2.3.1 Life Insurance To date only 6.5 million people out of the countrys population of over 84 million have life insurance. Moreover, David L Fried, regional director of HSBC Insurance (Asia-Pacific)68 suggests that Vietnams life insurance market represents a great opportunity for foreign insurers. The Vietnamese insurance industry has been expanding rapidly since 2000 with an average growth rate of 29% per annum. Revenues from insurance have accounted for 2% of the countrys GDP. Observers emphasize the benefit of further opening up the industry by pointing to the US$6.87 billion insurance money that has been pumped into the countrys economic development since 2001 (see Figure 1-22.). 3.2.3.2 Non Life Insurance Non-life insurance sales in the first five months of 2006 were worth US$ 250 million, a jump of 25% over last year. The growth potential is still very positive. Vietnam has 15 domestic companies providing non-life insurance and two more have been licensed. The Vietnam Insurance Corporation, Bao Viet was the dominant player accounting for 32.8% of premium income in this period. The HCMC Insurance Company Bao Minh was second with 24% while the rest of the companies selling insurance had tiny market shares. 69

68 Research paper of HSBC in July 2006. 69 The Vietnam Insurers Associations public in the Thanh Nien newspaper on 11.10.2006

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9,000 8,000 7,000
VND billion

6,000 5,000 4,000 3,000 2,000 1,000 0 1997 1998 1999 2000 2001 2002 2003 2004 2005*

Figure 3-22. Growth of the life insurance premium income in Vietnam

(Source: Mark Sander & Adrian Liu cited in VinaCapital 2006) 3.2.4. Conclusion Currently, the Vietnamese banking sector can enjoy an excellent growth rate, can gain more social attention and contribute more and more to the countries GDP growth. However, the banking sector also has to face many market challenges. The following factors which are expected to impact on the Vietnamese banking system positively or negatively will be analysed: 1. Market penetration 2. Rate of growth in loans and deposits 3. Oligopolistic banking market 4. Lending practices 5. Product offerings 6. Quantity of non-performing loans 7. Consumer credit bureau

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3.2.4.1 Market penetration There are only about 6 million bank accounts in Vietnam, 5 million of them for individuals which amounts to a penetration rate of about 6%. In reality, the effective potential market size is about 20 million or triple the current penetration level (Merrill Lynch, 2006). That is the size of the socioeconomic class in Vietnam.70 The reason is simple: the distribution and infrastructure of banking services is very poor relative to the telecommunications industry, which has virtual national coverage. Banks are almost unheard of in secondary cities and rural areas. This means that banks simply do not have easy access to over 70% of the population. Some reasons for the interest in banking services are: until recently, the government encouraged a cash economy by paying state employees in cash; there is a traditional distrust of banks; the banks themselves have done a poor job of providing services to the retail public; and small businesses too are poorly served by banks which are unwilling to give them large loans unless they have the collateral to back it up.
200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% HK TW CN MY SG TH SK VN HK IN ID

Figure 3-23. AsiaPac Loan Penetration (Loan to GDP, 2005E)

(Source: CEIC, SBV, Central Banks in Merrill Lynch 2006)

70  Even so, if we compare this to the internet and mobile phone penetration rate of 14% and 12% the number is rather low.

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Despite the limited penetration and physical presence, the banking industry is growing rapidly with both deposits and loans expanding at high, double-digit growth rates. More recently, some banks such as Vietcombank, ACB, Sacombank, and Techcombank are making a determined effort to court the retail market. 3.2.4.2 Rate of growth in loans and deposits Credit growth in Vietnam has been expanding at a very high rate during the past few years. In fact, the state-owned banks saw credit grow at an annual average rate of 24% since 2002. Given the inability of some bankers to distinguish a good credit risk from a bad one this is not entirely a good thing. A 7% GDP growth rate can accommodate an annual credit growth rate of about 14-20% (VinaCapital, 2006). However, credit growth rates above that level for any extended period of time can be unhealthy for an economy.71 3.2.4.3 Oligopolistic banking market Four state banks have carved up 70% of the loan market while forty-odd joint-stock banks and a host of foreign banks compete for the remaining 30% (SBV, 2006). Compare this with the US where the ten biggest commercial banks control only 49% of the countrys banking assets. Thus, at the top tier, the Vietnamese market acts like an oligopoly. 3.2.4.4 Lending practices Lending decisions in Vietnam are still based more on relationships than cash flow. The assessment of loan customers is usually driven by the relationship with the bank and the size of the collateral being offered. Cash flow driven assessment and qualitative analysis is reserved for large private sector customers only. Amongst the large banks, only the ACB bank uses DCF analysis across their entire customer base. The problem is partly due to outside interference in the decision making process and partly due to a

71  One bank has forecast that credit could grow at 35% per annum over the next five years given sufficient access to capital. While the better banks could probably cope with this, the temptation for others to take on too much risk is high.

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lack of professional guidance. The absence of IT infrastructure to support professional credit analysis is another major factor. Another issue is exposure. Most banks lend a lot of money to a fairly narrow base of customers. The top 30 state-owned corporations probably account for over half of the state banks loan portfolios. The JSCBs are no different. Getting someones credit history in Vietnam is often impossible. Banks do not share much information and the state credit bureau only carries the history of the very largest lenders. Lack of credit information is probably the single greatest hurdle standing in the way of the development of a proper retail market. 3.2.4.5 Product offerings The SOCBs are generally geared to the large corporate and state-owned sector, providing syndicated loans for utilities, infrastructure projects, heavy industry and property developers. JSCBs are geared mainly towards lending to small and medium size enterprises (SMEs) and the wealthier retail customers. However, given the banks low penetration and limited branch network they only reach a fraction of their potential customer base. Car loans, mortgages and house improvement loans are retail staples. And small business loans using property as capital is the basic model for the SME market. In general, the Vietnamese banking model is best described as relationshipbased rather than product-based as in international banks. Those banks that make the transition soonest will be the long term winners. 3.2.4.6 Quantity of non-performing loans According to the statistics of the State Bank of Vietnam the non-performing loans problem has been largely dealt with since 2000. The non-performing loans (NPLs) of state owned banks fell steadily from 12.7% in 2000 to 8.5%, 8.0% and 4.47% in 2001, 2002 and 2003, respectively. Under a new stricter definition, the official number in 2005 rose to about 7.7% (SBV, 2005). BIDV, with an NPL ratio of 9% dragged the average down. International regulatory agencies carried out a similar exercise using Ernst & Young and found that NPLs in the system using international accounting standard

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definitions came to about 15-20% of outstanding loans in the state-owned sector (Merrill Lynch, 2006). A major banking crisis has been avoided so far thanks to the robust property market and a generally healthy economy. For private sector JSCBs, average NPLs are around the 1% level at the end of 2005 (SBV, 2006). In the early 2000s there were some efforts by the government to resolve NPLs. In 2001-2003 the government injected a large amount of money into the SOCBs to enable them to write down their NPLs (SBV, 2005). 72 A blank cheque from the government may solve the immediate problem but does not change the lending culture that gave rise to it in the first place. Most NPLs are generated by SOEs refusing to pay their obligations to SOCBs. Pre-equitisation is a favorite time to write off or simply clear out these loans. That way SOEs can start their new life in the private sector unencumbered by debts. Of the NPLs from SOEs which have been resolved, 36% were paid out by state budget sources, 40% were dealt with by risk provision funds and 24% by the liquidation of assets (SBV, 2006). One major reason for the fairly painless partial clean-up was the fact that land prices skyrocketed in 2001-2003 (VinaCapital, 2006). This enabled banks to sell off collateral land use rights and buildings at a profit on those relatively rare occasions when they were able to take possession of collateral securitizing the NPL. There is not yet an effective secondary market for bad debt, although attempts to start one are ongoing. There are still very few NPL sale and purchase transactions taking place. While there appears to be modest progress being made with the bank sectors historical bad debt problems, the widespread adoption of a broad based credit culture where banks use market principles to assess credit risk does not appear to have taken place yet. There have also been discussions that the large SOCBs may establish specialized asset management companies to resolve their historical NPL problems.

72  Incombank, for example, wrote off about US$ 312 million worth of bad debts in 2004 alone (SBV, 2005).

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Figure 3-24. Banking NPLs 2005

(Source: VinaCapital, 2006) On the positive side, the raft of technical assistance agreements signed between JCSBs and foreign banks should begin to infuse better standards of credit risk management among the banks. Arguably, the most positive development on the asset quality front in recent years was the announcement by the governor of the SBV (April 2005) of the requirement for all financial institutions to adopt international standards of loan classification (Decision 493).73 3.2.4.7 Consumer credit bureau One of the greatest obstacles preventing a healthy retail banking market is the lack of timely and accurate credit information available to banks. Without any way to easily check the potential borrowers credit history, banks have to spend a lot of time and money trying to check up on them.74 The work is very time consuming, prone to error and greatly limits the number

73  This new requirement encompasses the classification of loans into 5 groups (Normal, Precautionary, Sub-Standard, Doubtful and Estimated Loss) and the use of specified reserving rates (group 1-5, 0%, 5%, 20%, 50% and 100%). 74  What takes minutes overseas can take months in Vietnam. Usually its just easier to say no. Or to attach unattractive conditions to the loan.

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of customers a bank can lend to.75 Without a private credit database, banks credit departments are overloaded trying to collect accurate information related to its borrowers, ranging from their repayment capability to appraising the value of their assets. Proper risk management is very difficult under those circumstances. The International Finance Corporation (IFC) has introduced a model private credit bureau in which foreign and domestic banks would work together as stakeholders. The bureau would act as a database compiling credit information related to individuals and small businesses. Information would be collected from member banks, and payments could be made in return for information provided by concerned agencies and local authorities. Potential bureau users will be banks, credit card providers, local finance companies, retail credit firms, insurance companies, utilities, and others. A private credit bureau would complement Vietnams public registry by investigating the borrowing histories of a much broader range of potential customers and maintaining a file on them. Detailed credit histories would enable financial institutions to better assess risk and determine what interest rates to charge. Consumers would benefit as average interest rates would fall along with banks risk levels. Loans could also be offered with little or no collateral. Banks could then manage their overall risk professionally and expand their consumer businesses faster.

75  For example, to get a credit card in Vietnam requires you to place a term deposit with the bank, equal to the amount of your card limit. As a result, after ten years, only 100,000 credit cards have been issued in Vietnam compared with over two million debit cards.

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3.3 Banking industry in Vietnam

After over a decade of financial sector reforms, the Vietnamese banking sector is perceived as still weak and inefficient by global standards. Legislative issues are ambiguous and regulations poorly enforced. The bank sector still suffers from a substantial amount of non-performing loans. However, on a more positive note, recent developments suggest that the reform process may be accelerating and will, in the foreseeable future, achieve harmonization with global standards. In this section, some key areas of reform will be reviewed and the level of progress made so far will be assessed. 3.3.1 State Bank of Vietnam (Central Bank) The first wave of reform and liberalization of the financial sector in Vietnam took place between 1988-90. One of the most important developments that emerged was the creation of a two-tiered banking system consisting of the State Bank of Vietnam (SBV) as the central bank and supervisory institution (tier 1) and an operating system (tier 2). Similar to central banks in other markets, the SBV is responsible for monetary policy and the regulation of the banking system. While legislation is in place to guarantee the independence of the central bank from political influence, according to many multi-national agencies (i.e. World Bank, IMF, etc.), the central bank has little if any independence. The general view is that the SBV is politically and operationally dependent on support from government agencies. The government still exerts strong control over the banking sector in two ways. Firstly, directly through various regulations and restrictions which govern how they conduct business and secondly by strictly licensing the type of businesses they can enter. Also indirectly, through the interference of a myriad of agencies and ministries, both local and national, who want to have a say in how scarce credit resources are allocated. 3.3.2 State-Owned Commercial Banks (SOCBs) In Vietnam there are five state-owned commercial banks (SOCBs). Prior to the reforms of 1988-90, the SOCBs were departments of SBV, and thus primary vehicles of government policy lending decisions.

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Figure 3-25. SOCBs before 1988 and now76

(Source: SBV, 2006) These institutions dominate banking in Vietnam (estimated 70-75% share of the bank sector assets), with over 1,200 branches across the country. They act as an oligopoly at the top of the Vietnamese banking industry. In 1988 all of these banks which have been departments of the central bank, broke away to form independent banking entities. Despite this paper separation, in practice they remain tightly controlled by the central bank. The table below lists these banks.

76  In addition to the four main policy lenders, the Vietnam Bank for Social Policies (VBSP), previously know as the Vietnam Bank for the Poor, was established to provide loans to poor households especially in rural areas. The rural sector is also serviced by the Peoples Credit Funds (PCFs). These lending institutions were established in the early 1990s by the SBV following the collapse of a raft of rural credit co-operatives. There are approximately 1,000 PCFs operating in Vietnam now and they control around 1-2% of the total bank sector loans and deposits (Source: SBV, 2006).

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Local JSBs 20%

Foreign Banks 10%

SOCBs 70%

Figure 3-26. Markevt share of SOCBs

(Source: SBV, 2007) As their names suggest, these four banks were focused on specific segments of the economy. While these sector constraints have been abolished, each bank remained the key player within its historically mandated business segment. Historically the state-owned bank sector was used as an instrument of public policy and to promote social and political objectives as opposed to commercial objectives. The four large SOCBs slowly began evolving from specialized policy lending vehicles to more commercially orientated financial intermediaries over the last 10-15 years. Their policy lending past has burdened them with high levels of non-performing loans. Although official numbers suggest a system NPL ratio in the mid-teens, it is widely believed that the level is closer to 30%, with the vast majority of the bad loans concentrated in the SOCBs (VinaCapital, 2006).

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Vietcombank 7,800 VEARD 6,411 BIDV 3,970 Incombank 3,328 Sacombank 1,899 ACB 1,101 MHB 800 Eximbank 700 Techcombank 617 Southem Bank 580 VIB 510 East Asia Bank 500 Military Bank 450 Saigonbank 400 Hanubank 300 Oricombank 300 HDB 300

2000

4000

6000

8000

10000

Figure 3-27. Relative size of top 17 CBs in term of charted capital (bn)
(Source: SBV, 2006; VinaCapital, 2006) In the following analysis, the emphasis is put on Focused businesses, Performance and Challenges.

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3.3.2.1 Bank for Foreign Trade: Vietcombank (VCB)

Table 3-3. Vietcombank (Source: SBV, 2006; VinaCapital, 2006; Vietcombank, 2006; Vietcombank, 1st quarter report 2007) Focused businesses Vietcombank is the largest and best managed of the state banks. The bank has a leading position in both the retail and the corporate markets in Vietnam. It is second only to Agribank in market share of the deposit and lending markets. Vietcombanks core business is focused on foreign exchange transactions, trade and providing long term financing to the largest SOEs. It handles one third of Vietnams trade payments, its traditional business area, which includes trade finance and international payments. The bank also dominates the interbank foreign exchange market. VCB has an active retail banking business, issues credit and debit cards, makes secured loans and offers foreign exchange services. VCB is closest to being considered a full service bank in Vietnam. The bank had a total of 27 branches, 41 sub branches and 47 transaction counters at the end of 2004 (Vietcombank, 2006).

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VCB also owns a financing subsidiary, a securities company, a leasing arm and an asset management company. It also has stakes in two insurance companies, seven banks, three real estate companies and one credit fund. The bank has captured the lions share of the lending to the best quality SOEs which were mainly in export related industries. Performance VCBs corporate customer list includes most of Vietnams blue chip stateowned or equitised companies. Typically, Vietcombank plays the lead role in large scale syndication for infrastructure projects such as refineries.77 In the future, it is expected that the development of the corporate bond market will change VCBs business model. The bank will arrange and underwrite bond issuances through its securities arm rather than lend large sums directly to corporations. This business is not a major profit earner for the bank. It is expected that margins will not decline as the focus shifts from pure syndication to a mix of lending and bond underwriting. Loan growth has averaged about 55% per annum over the past six years, slowing down recently as the bank started to clean its books ahead of listing. The loan to deposit ratio is about 60% which is the industry average. According to the bank, its NPL burden has been largely dealt with over the last five years. Out of a total of US$ 354 million worth of bad debts, US$ 277 million had apparently been settled under the equitisation program by December 2005. Under the latest SBV standard definition of NPLs,78 Vietcombank had a total bad debt ratio of only 2.6% at the end of 2006 which is far better than the other banks (Vietcombank, 1st quarter report 2007).79

77  Vietcombank is also leading a consortium of four banks lending a total of US$ 2.7 billion to EVN for the construction of power stations in 2006-2010 (Vietcombank, 2007). 78 Known as decree 493. 79  As of December 2004, Vietcombanks CAR stood at 7% as calculated by Vietnam Accounting Standards (VAS). However under the more relevant International Accounting Standards (IAS) the CAR was a far more modest 4.4%.

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Vietcombanks shareholders equity (chartered capital, reserves and retained earnings) totalled US$ 487.5 million in December 2004. During 2002-2003 the bank received a total of US$ 125 million in government help through the issuance of special bonds (SBV, 2005). Challenges Vietcombank has taken major strides in boosting its internal controls and strengthening management. Risk management (RMC) and asset liability commitees (ALCO) have been set up to manage the banks risk profile and, hopefully, avoid some of the mistakes of the past. Like all state-owned banks, VCB has received considerable help and input from organisations such as the World Bank in order to create a mechanism to manage credit risk more effectively. The bank has improved its operations dramatically over the past five years. Margins and ROE have recovered sharply since 2002 when ROE hit a low of just under 7.5%. A cleanup of the loan book with some government help was the key to the turnaround. The bank is striving to improve the quality of its loan book and to grow the retail business ahead of listing (Vietcombank, 2006). VCB has also been raising money through the bond markets. Vietcombank issued a total of US$ 84.4 million in convertible bonds in 2005 purchased by a mix of institutional and retail investors. The 7-year bonds carry a coupon of 6%. After equitisation, probably in 2007, convertible bond holders will be able to become shareholders of the bank (VET, March 2006).

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3.3.2.2 Industrial and Commercial Bank: Incombank

Table 3-4. Incombank (Source: SBV, 2005; VinaCapital, 2006; Incombank, 2006) Focused businesses Established in 1988, the Industrial and Commercial Bank of Vietnam (Incombank) has 134 branches, 500 sub-transaction offices and savings offices in most of Vietnams cities, provinces and commercial centers (Incombank, 2006). After the Asian crisis the bank was burdened by NPLs and poor management, but with government help it recovered. Incombank provides deposit and savings accounts, short, medium and long term credit facilities, syndicated loans, financial leasing, loan guarantees, overseas remittances, credit card services, travellers checks, foreign exchange and securities trading. Its core customer base is state-owned heavy industry although it is expanding into new areas. Performance In 2005, Incombank reported a 28.2% growth in total assets to US$ 7.27 billion and a 18.3% increase in total lending to US$ 4.7 billion. For 2006 the bank reported a 33% revenue growth and 42% growth in EBT and net profits (Incombank, 2006).

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In 2005 lending growth rose 18% to US$ 4.68 billion while total assets rose 28% to US$ 7.25 billion. By sector, the banks loan portfolio was 33% exposed to the industrial sector, with an additional 22% in the construction and transportation sectors (Incombank, 2006). These tend to be stateowned heavy industries or domestic developers and much of their borrowing is at favourable or below-market terms. In fact, the banks exposure to these traditional sectors is second only to BIDV and it explains the banks below average profit margins. Incombank has turned itself around in the past five years with considerable government help. The NPL ratio has dropped to 2.18% and CAR was around 6.07% at the end of 2005. Revenue growth was a very strong 55% with earnings up 183% last year. Challenges Similar to Agribank, Incombank has recently suffered losses speculating on the forex markets and offering loans against stocks. While the size of the losses at Incombank is manageable (US$ 5.35 million), it serves as a clear indication of the weakness of its internal controls. While Incombank has made significant progress since 1998, it still has a long way to go before it can catch up with Vietcombank. Incombank will be a benificary of government aid until 2008 (year of expected equitization), although the size of the assistance will be less than that to BIDV and Agribank simply because the bank is in relatively better shape. The NPL ratio fell from 3.5% to 2.18% and while these numbers do not reflect the full picture, they illustrate the progress that Incombank has made recently. In 1998 the bank had a total of US$ 625 million in bad loans and has managed to dispose or settle US$ 552 million since 2001. About half of the bad loans (US$ 312 million) was settled in 2004, enabling the bank to reduce its NPL to manageable levels (Incombank, 2006). Pre-2000 bad debt has now been almost completely cleared.

Risk management and corporate governance are still issues. Incombanks most pressing need is to improve its margins and raise capital to push it over the 8% CAR hurdle by 2010.

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3.3.2.3 Bank of Investment and Development: BIDV

Table 3-5. Bank of Investment and Development (Source: SBV, 2005; VinaCapital, 2006; BIDV, 2006) Focused businesses BIDV has a total exposure of about US$ 176.1 million in the property development market. Overall about 26% of its loan portfolio was to the construction sector in 2005 and it represents its largest sector exposure. The bank has an additional 4.9% exposure to the cement sector. The bank tends to focus on medium and long term project lending to SOEs. Historically BIDV was the principal conduit for major financing projects as the bank inherited most of the problem customers. Its combined loan book is bigger than Vietcombanks but has profits of less than a tenth of those of Vietcombank. Performance BIDV had an NPL ratio of 10.49% at the end of 2005 according to the official evaluation method. This number is significantly higher than the 2004 level due to the redefinition of bad debts under Decree 493, making it by

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far the weakest state bank in the sector. To cope with concerns about bad debts BIDV has set aside a management reserve of US$ 314.4 million as of end of 2005 (BIDV, 2006). BIDV has the worst returns amongst the large SOCBs which is a clear indication of its problematic balance sheet. The bank has rescheduled US$ 65.7 million of the loans to the seven largest property developers but this still represents only a fraction of its questionable loans (BIDV, 2006). BIDV had total assets of VND 131.8 trillion and an ROE of 10.5% at the end of 2005. The CAR rose from 2.16% in 2001 to 6.18% in 2005 (BIDV, 2006). The bank is set to equitise in 2007 and in preparation for that it has acquired a rating from Moodys and recently issued bonds (VET, March 2006). The bank has set a target for loan and asset growth in excess of 20% between now and 2010. Interestingly, given its low profitability and high level of NPLs, the bank seems less clear on setting a profit target. A poor quality loan book and low returns are part of the overall problem, the lack of Tier 2 capital is another. To address this problem BIDV has recently issued bonds worth a total of US$ 204.4 million with a maturity of 10-12 and 15 years (VET, March 2006). Challenges BIDV will be first, together with Agribank, to get help from the government with an expected capital injection of US$ 187-250 million in 2007 (BIDV, 2006). This is not considered to be enough to solve all of BIDVs problems. The real issue going forward is management quality and how to avoid making future bad loans in high risk sectors such as the construction industry. Hard decisions will have to be made and some long-standing customers cut off from funding. This will mark a major turning point for BIDV. Until then the banks progress will remain inconsistent and very vulnerable to any economic downturn. Their past strategy of indescriminate lending and expecting investors to give them the benefit of doubt could have only worked in an environment of very poor disclosure. BIDV appears to be the most vulnerable of all of Vietnams major banks (VinaCapital, 2006).

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BIDV has planned to list on the stock market by 2008. In preparation for that move the bank issued convertible bonds and received a rating from Moodys. The rating agency estimated the banks return on risk adjusted assets at a low 2.7% and gave the bank an E rating for financial strength. Nonetheless BIDV was given a Ba1 rating for VND deposits and a B1 for foreign currency deposits (VET, March 2006). 3.3.2.4 Agriculture and Rural Development Bank: Agribank (VBARD)

Table 3-6. Agribank (Source: SBV, 2005; VinaCapital, 2006; VBARD, 2006) Focused businesses Agribank is seen as more of a social than a commerical bank with deep roots in the countryside. Apart from its role as a commerical bank, Agribank is responsible for rural development by providing medium and long term credit in the agriculture, fishery and forestry sectors - in other words, soft loans. Performance At the end of 2006 Agribank had a total of 2,000 branches, a staff of 29,429 and total assets of US$ 11.37 billion. In 2006 the bank had a loan portfo-

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lio of US$ 9.7 billion (VBARD, 2006). In addition to providing loans to its traditional customers in the agricultural sector, Agribank seems to be targeting the SME lending market as well. This year the exposure to that sector has reached 29% of its total loans, or US$ 2.8 billion (VBARD, 2006). The bank also offers loans in the retail market and has plans to increase the weight of consumer loans from 10% to 30% (VBARD, 2006). In practice, most of these loans would be made to individual small farmers and, in fact, should be considered more like business improvement loans. Challenges The bank claims to have 10 million customers, but this number raises some doubt since it is greater than the number of accounts in the entire banking system. The bank aims to increase its assets by 25% per annum, its loan portfolio by 20-25%, and to reduce NPLs to less than 1%. It also hopes to increase profits by 10% a year (VBARD, 2006). Judging by recent results, they are doing quite well on the profit front, and it is expected that they will be able to continue to increase both profits and margins for the next two years. As long as the bank caters for underdeveloped regions, it plays a very important social role. If, however, it starts to compete in small towns and larger urban areas, after the rest of the state-owned sector has gone public, it may hurt the banking sector as a whole by crowding out the private sector. It is expected that the government will recapitalise Agribank in 2007 and inject US$ 312-375 million into the bank. It is not clear what the real extent of the NPL is at Agribank however, it must be similar to BIDV in scale. Farmers have had a tough time in recent years due SARS, bird flu, drought and floods (VinaCapital, 2006). There are no immediate plans to equitise the bank and it would require a mammoth effort and a lot of pain to clean it up for listing.

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3.3.2.5 Mekong Housing Bank (MHB)

Table 3-7. Mekong Housing Bank (Source: SBV, 2005; VinaCapital, 2006; MHB, 2006) Focused businesses Mekong Housing Bank is the smallest of the group. It was established in 1997 with a chartered capital of US$ 50 million. MHB has a nationwide network of 124 branches with headquaters in HCMC (MHB, 2006). The banks main function is to provide medium and long term financing to the housing market. As the name suggests, most of the banks operations are concentrated in the heavily populated Mekong region, the rice basket of Vietnam. Its rapid pace of expansion seems to be driven partly by managements ambitions and partly by the dire need for better housing in the delta region (VinaCapital, 2006). Performance The key indicators for growth are asset size, deposits and branches and not profits. At the beginning of 2005, MHB had assets of US$ 875 billion up 10% compared to the previous quarter. Loans and investments totalled US$ 853 million increasing 11% compared to the previous quarter (MHB, 2006).

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At the end of 2005, the deposit base was about VND 6.35 trillion, a plus of 72% y-o-y, the vast majority of these being in term deposits. The loan book totalled VND 8.56 trillion, up 55% compared to 2004 (MHB, 2006). The bank is very thinly capitalised with an equity base of only US$ 49 million at the end of 2006. In 2006, MHB increased an additional 50% in assets to US$ 1.18 billion and a 40% expansion of its loan portfolio. MHB offered only 0.62% interest per month (7.44% per annum) for three month term deposits, far lower than most competitors but seems to be able to use its branch network to reach customers not covered by other banks (MHB, 2006). Much of MHBs funding comes from the World Bank which explains the large size of the loan portfolio as compared to the modest size of its deposit. The deposit to loan ratio is 135%. Most of the banks loans are made to improve the quality of rural housing stock (MHB, 2006). Challenges MHB will probably equitise in 2007. The bank faces a hard task to convince investors that its social role will not detract from its ability to boost profitability in the future.80 While MHBs growth performance is very impressive, concern about its very low equity base and extremely low profit margins remains. The drive to boost assets and deposits has been given a higher priority compared to the improvement of its balance sheet and the increase of profit margins. Disclosure is very limited and the current quality of the loan portfolio is low. However, most of the loans are small in size and therefore the risk is fairly well spread compared to other state-owned banks which tend to lend a lot to a very few.

80  Just to note that the key indicators for growth are assets size, deposits and branches, not profits.

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3.3.3 Joint-Stock Banks (JSCBs) The establishment of JSCBs is another important development that accompanied the initial liberalization of the financial sector. There are about 3540 such banks at present.

Table 3-8. JSCBs valuation and forecast (Source: VinaCapital, 2006; SSC, 2007) Characteristics of JSCBs More flexible: JSCBs, which were set up in the 1990s, do not face administrative burdens, heritage issues and social lending pressures like the SOCBs. Thus, they are more flexible and can adapt themselves to changing market conditions. Wide range of products and services: JSCBs offer the full range of banking products and services to corporate and retail customers.

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Mixed ownership structure: The ownership structure of JSBs is mixed, ranging from purely private organizations to being jointly owned by state owned enterprises (SOEs), private groups and individuals. Low NPL: none of JSCBs are saddled with high levels of bad debts. Challenges of JSCBs Low capital base: Average capital is about US$ 20 million per bank so they cannot provide large loans. In the past two years JSCBs have made a concerted effort to increase their chartered capital by issuing shares. No specific positioning: The private sector banks are competing fiercely and many of them are choosing identical strategies. Resources are spread too thinly as they try to compete across the broadest range of businesses. The result is thin margins and meagre returns. Poor IT infrastructure: There is a great need for spending on IT to build core banking system, risk management and ATM software.81 Weak operational and management controls

It is worth mentioning that there is a big difference in term of chartered capital, market penetration, service quality, etc. between the top tier (Asia Commercial Bank, Sacombank) and the rest. The top tier are expanding their branch networks and loan portfolios aggressively, boast good management and have a clear product strategy to differentiate them from the competition. The second tier, which includes banks such as Techcombank, Eximbank and EAB, are more of a mixed bag. Techcombanks recent shift of strategy towards the retail market is seen as a significant positive move while EAB is leaning in the direction of SME lending. Smaller JSCBs such as Phu Nam Bank and VIB deserve an honorable mention because of their pursuit of niche strategies with strength in SME

81  As ACB has demonstrated, good information technology is a key competitive advantage in the Vietnamese bank sector. It provides the platform for offering and managing a wider array of products and services to customers (VinaCapital, 2006).

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lending and retail loans respectively (VinaCapital, 2006). Other smaller JSCBs are mainly limited to retail banking services such as remittances and collection / spending under customer authorisation. They are largely locked out of the commercial lending market due to lack of capital. Despite a round of restructurings and mergers in 1999-2001, JSCBs are still very fragmented. The number of JSCBs was reduced from 51 to a total of 36 banks currently in operation.82 3.3.3.1 Asia Commercial Bank

Table 3-9. Asia Commercial Bank ACB (Source: SBV, 2005; VinaCapital, 2006; ACB, 2006) Focused businesses ACB is the best-managed bank in Vietnam and has a clear lead in retail banking. By adding about 20-25 branches or sub-branches over the next twelve months, the bank intends to use its locations as a distribution platform for a wide range of products targeting the retail customer (ACB, 2006).
82  This number is still far too high and it is expected that it will halve over the next few years as another wave of consolidation is overdue.

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At the end of 2006, the bank had 2,892 employees, a y-o-y increase of 50% (ACB, 2006). Retail customers account for about 60% of their total lending, with the rest mostly in SME lending. ACB is strongly focused in the southern market and has no plans to increase its presence in the north for the time being. The bank also has some wholesale banking businesses covering large corporate customers such as EVN. Exposure to the real estate sector is minimal at about 3% (ACB, 2006). The retail business has been built around some key products such as car loans, mortgages, credit cards and, more recently, unsecured loans. The unsecured loans business enables customers to borrow up to US$ 12,580 at a monthly rate of 1.21.3% (or 14.4-15.6% per annum). Overall, the bank has a very low loan to deposit ration of 44%, far less than the average 60% ratio prevailing in Vietnam. This is a reflection of a generally cautious stance which has been rewarded by an NPL of below 1% (ACB, 2006). Performance As of 2006, ACB had assets of US$ 2.03 billion, up 32.9%, deposits of US$ 1.71 billion up 23% and outstanding loans of US$ 763.9 billion up 27.8%. The bank has a capital adequacy ratio of 12%. ACB has set itself an ROE target of 30% over the next five years (ACB, 2006). ACBs balance sheet reflects their conservative approach with about 50% invested in government securities and the rest lent out. Their approach to property collateral is also prudent. Adopting government valuations which are only 50% of market, they offer loans up to 50% of the assessed value of the property - 25% of market value (ACB, 2006). Challenges The biggest challenge facing ACB as a retail bank is how to improve access to credit information about its potential customers. The lack of reliability of third party services such as the Credit Information Centre (CIC) means that its overstretched credit department is forced to rely on itself. The bank is keen on the idea of an independent credit bureau as long as the government does not get too closely involved.

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ACB has been a market leader in the new, unsecured lending market using the DCF valuation method to assess its customers. In the medium term, ACBs strategy is to leverage its existing distribution platform, to increase the number of fee based services it offers customers such as brokerages (both real estate and securities) and investment, leasing, insurance and fee based banking services. The bank has already set up these businesses as subsidiaries and it may move to a holding company structure until 2010. Products such as leasing, insurance and investments carry higher margins and are seen as key to the banks future growth. The bank takes a niche strategy approach to market entry depending on where the gaps are.83 IT is seen as the key to developing and managing all of these different businesses, and ACB has made considerable investments in its development over the past few years. The bank has two major subsidiaries, ACB securities and ACB asset management. The management of the bank is widely considered to be one of the best and they have introduced incentive pay schemes for top and middle management based on targets such as profits and ROE. It is expected that ACB will list late in 2007 or early 2008.

83  For instance, in the leasing market ACB is mainly interested in big ticket items of over US$ 2 million whereas its strategy in the insurance market is to concentrate on low income, low ticket customers.

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3.3.3.2 Sacombank

Table 3-10. Sacombank (Source: SBV, 2005; VinaCapital, 2006; Sacombank, 2006) Focused businesses The Sacombank was formed in 1991, and up to 2006 had two foreign owners, the World Banks International Finance Corporation and Dragon Capital (Dragon Capital, 2006). Currently, REE owns 7.7% and ANZ recently bought a 10% stake and hinted it would be interested in raising its stake as part of its Asian expansion plan. Sacombank has a large, nationwide banking network with 128 branches and sub-branches. It employed 3,806 employees in 2006. The bank is focused mainly on the SME and retail markets and is rightly seen as the most aggressive of the JSCBs. Sacombank currently has a 4% market share as against ACBs 5% share with a strong focus on SME and retail loans. The bank has a strong retail franchise and recently started to offer 15-20 year mortgages through its real estate subsidiary. Sacombank is challenging both Vietcombank and ACB across a full product range in the retail market (Sacombank, 2006).

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Performance Sacombanks gross assets were US$ 1.2 billion as of 2006, up 30.7% yo-y. Gross profit has almost doubled to US$ 14.8 million over the same period. Sacombank is generally seen as more aggressive than ACB both in terms of lending policy and overall expansion policy. Its collateral policy is believed to be more flexible with lending, in some cases, of up to 70% of the value of the property used as collateral. Currently, income is split 70% interest income and 30% fee income (Sacombank, 2006). The latter comes mainly from treasury, trade finance remittances and financial investments. Sacombank has a CAR of 15% under VAS rules and an NPL of less than 1%. The bank has focussed on loans to highly profitable small businesses and the quality of the loan portfolio is high (Sacombank, 2006). Challenges Sacombank has recently collaborated with the ANZ Banking Group to set up a joint-venture in credit card services. It also holds a 51% stake in Vietfund Management, a joint-venture fund manager that operates the listed VND 300 billion VF1. The bank, which now also operates realty investment and asset management firms, has recently launched its finance leasing off shoot with VND 100 billion in capital. Sacombank is currently also seeking a license to launch a securities brokerage house with VND 300 billion in capital, having divested its 11% stake in HCMC securities (Sacombank, 2006). The banks relationship with ANZ is likely to expand over the next few years. It is expected that ANZs stake in Sacombank will increas as the law permits. A transfer of technology and product knowhow seems to be taking place which will serve to increase the banks competitiveness especially in the retail market.

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3.3.4 Foreign Banks & Joint Venture Banks The current legal and regulatory framework in Vietnam is heavily biased towards the local banks and financial institutions, with significant restrictions and limitations on market access, network expansion and scope of operations of foreign banks. The most obvious of these restrictions is that foreign banks cannot establish local subsidiaries, and thus must operate through branches and representative offices. As of the end of 2005, there were 28 foreign bank branches, four jointventure banks and three foreign-invested leasing companies established in Vietnam. The Vietnamese authorities are understood to be working towards lifting the restrictions on foreign banks operating in Vietnam in order to comply with the requirements of the 2001 US-Vietnamese Bilateral Trade Agreement (BTA) and more importantly, the requirements for entry into the WTO based on Vietnams entry to the WTO which was officially approved on 11 January 2007. One area that the amendments to the existing legislation is being considered is to allow foreign banks to establish subsidiaries with the same legal status as the Vietnamese banks.84 Focused businesses Foreign enterprises are the main market for the foreign banks. The most important measure of foreign bank lending growth is foreign direct investment, or more specifically, the setting up of industrial zones in Vietnam. Currently, there are 130 industrial zones attracting 4,516 projects valued at US$ 18 billion in foreign capital and 15 new zones are under construction. Foreign banks capitalize on this and it provides the bulk of their credit growth (VinaCapital, 2006). While many foreign banks have entered the Vietnamese market, few of them have expanded beyond one or two branches. Restrictions and difficulties in licensing are the reason.

84  At present, the limit on individual share ownership by foreign banks is 10%, with a maximum of 30% for all foreign investors.

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Performance At the end of 2005, foreign invested credit institutions had US$ 536 million in registered capital and almost US$ 6.3 billion in total assets, the latter, a y-o-y increase of 25% (SBV, 2006). Total pretax turnover of foreign invested and joint-venture bank branches had increased by an average of 45% up to the end of 2005. Total outstanding loans made by foreign banks had increased 30% up to the end of 2005, growing at double the rate of the overall banking system. These loans now total US$ 3.1 billion, or 9% of the total outstanding loans. Doubtful debt levels remain well controlled, accounting for only 0.06% of the total (SBV, 2006). Joint-venture banks outstanding loans had reached US$ 37.5 million up to the end of 2005, a 2% market share. Joint venture bank profits rose 15% to US$ 12.5 million (SBV, 2006). Challenges There are two ways for foreign banks to expand in the banking industry, organic growth and strategic investment in local banks. (1) Option: Organic growth Through organic, growth banks build their own business facilities, including infrastructure, human resources, equipment and network. Consequently, all foreign banks start on a modest scale. This is a traditional method, where the biggest drawback is time. This strategy has yielded steady growth but from a low base given the various restrictions in place. Foreign banks are restricted in mobilising capital, need capital of US$ 1.5 million to open a new branch and are limited in who they can lend to and the proportion of VND deposits they can accept (350 % of capital).85 But with the expectation of liberalisation, many foreign banks are setting up 100% owned subsidiaries to offer leasing, consumer lending and credit

85  HSBC, the largest foreign bank in Vietnam, has only two branches (HCMC and Hanoi) with a prescribed registered capital of US$ 30 million. Standard Chartered Bank, which has been in Vietnam since 1904, has also recently announced plans to open a second branch in HCMC.

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card services in the domestic market. Even so, until 2010 organic growth will be limited. As a result, foreign banks have asked the SBV to loosen restrictions on opening new branches and the proportion of deposits mobilised on VND. In other words, they are asking for the full implementation of most favoured nation treatment principles to satisfy WTO regulations. The SBV (2006) has approved a new law that will allow foreign banks to set up 100% owned banks (provided they have US$ 20 billion in assets, or US$ 10 billion in the case of a joint venture). But foreign banks will have to raise their registered capital to US$ 63 million, in line with local banks. Currently foreign banks have between US$ 15-30 million in registered capital (SBV, 2006). While there are no restrictions regarding the number of branches a foreign bank can set up, as mentioned before, they must add US$ 1.5 million in capital for every new branch. The SBV is considering relaxing this rule for the first five branches, which would cover all foreign banks currently operating in Vietnam. In theory, the new FIBs will be able to raise as much VND deposits as they can handle.The question remains, as always, whether they can do so in practice. There are basic differences between the business practices of local and foreign invested banks. First, foreign banks are happy to provide loans without mortgaged assets while local banks insist on collateral security. Foreign banks tend to be more client focused and skilled at cross-selling products. Fees tend to be higher, with local banks charging sources fees of 1-1.5% instead of the 2-2.5%, charged by FIBs as is the case with Citibank, HSBC, or Deutsche Bank (VinaCapital, 2006).86 (2) Option: Strategic investment The second route is to buy shares in local banks, and 2005 demonstrated major interest in this approach. Previously only long-established institutions such as the IFC and Dragon Capital had become strategic shareholders in domestic banks.

86  However, opinions still vary on banking trends and some foreign banks have said that limits on deposit capital mobilisation and branches will be fully removed after Vietnam has joint the WTO.

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By investing in existing banks, foreign banks take advantage of existing infrastructure and business networks to expand operations much more quickly. However, there are two problems with this approach: high prices and lack of control. The prices of Vietnamese banks, trading at about 5-7 times book value is very expensive compared to regional peers. Even with high growth potential and high ROEs the premium is hardly justified. Secondly, given that foreign banks are currently restricted to holding only 10% of a domestic bank, lack of operational control is another disadvantage. Most banks which bought stakes have done so in the hope that this restriction may eventually be lifted altogether; thus allowing for a majority stake.

Table 3-11. Recent investments by foreign banks in local JSBs (Source: Merrill Lynch, 2006) In 2005, three foreign banks purchased shares in three JSCBs. Namely, ANZ bought 10% of Sacombanks equity, Standard Chartered acquired a 10% stake in ACB and HSBC snapped up 10% of Techcombank. Recently Singapores Overseas Chinese Banking Corporation announced it would buy a 10% stake in VB bank for US$ 15.7 million, with an option to increase this to 20% by the end of 2007 (Merrill Lynch, 2006). EAB and Eximbank are also expected to sell stakes to foreigners soon. Strategic shareholding also has its limits - 10% for any one foreign shareholder and no more than a 30% stake for all foreigners combined. The 10% restriction will be raised to 20% soon but the 30% will remain firmly in place. Given that most of the attractive banks have already established foreign partners the desirable alternatives are quite limited.

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3.3.5 Competition in the banking industry Compared to other banking markets around the AsiaPac region, the level of competition within the Vietnamese banking sector is relatively low. This situation is largely attributable to the dominance of the four large SOCBs which, between them, control 75-80% of total bank sector assets (2004). While the growth of the jointstock banks since the beginning of the 1990s has been rapid, their growth has been constrained by the segmentation of the market the markets for SOCBs and JSCBs are apparently separated in terms of deposits and borrowers. Another factor contributing to the lack of competition amongst financial institutions has been the difficultly in introducing new products and services because the approval process of new products by the central bank can take anywhere from 3 months to over a year.

Figure 3-28. Customer segments served by types of banks

Constraints placed on the level of access and scope of operations of foreign banks has also impeded the level of financial sector competition.

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The recent investments made and technical assistance agreements signed by StanChart, ANZ and HSBC in joint-stock banks between 2005 and 2006 should also accelerate the level of competition in the banking sector, although at a comparatively modest pace. One area where reforms designed to improve competition are unlikely to change in the intermediate term is the Vietnamese rural financial sector a key area given that approximately 80% of the population lives in rural areas.87 The absence of competition to VBARD / VBSP (the main SOCBs operating in the rural sector) is primarily due to the very low profitability of this market as a result of the substantial state subsidies given to these banks to cover their operating and financial costs. In light of a quasi-monopoly and very thin margins of these banks, there is little incentive for innovation or for VBARD / VBSP to improve their performance.88 3.3.6 Conclusion The banking sector faces several key challenges until the market opening in 2010. The most important of these is the ability to compete with the foreign invasion expected after 2010. Much needs to be done to improve the competitive strength of the state-owned and private sector banks in the meantime. In particular, by focusing on: 1. Tendency of consolidation 2. Undercapitalisation 3. Raising capital 4. Invesment in information technology 5. Improving management and governance in the banking sector
87  As is the case in a number of emerging markets in Asia (e.g. China, India and Indonesia), SOCBs are the primary providers of financial services to the rural market. 88  It would be interesting to compare the experiences of the Agricultural Bank of China (ABC) and the VBARD / VBSP in terms of inefficiencies, asset quality and poor profitability, with Bank Rakyat Indonesia (BRI), as the latter is in a substantially stronger financial and operating position (VinaCapital, 2006).

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3.3.6.1 Tendency of consolidation Despite a round of restructurings and mergers in 1999-2001 the JSCBs are still very fragmented.89 The number of JSCBs was reduced from 51 to a total of 36 banks currently in operation.90 The State Bank of Vietnam has raised a concern about the fragmented nature of the private sector banks. SBV will introduce new regulations to force another round of consolidation in the near future. One way of doing this is to set high hurdles for any new established bank before it can get a license. All banks need to have chartered capital of US$ 63 million which is exceeded by the existing capital of only the very largest JSCBs such as ACB and Sacombank. All other existing banks fall far short and will need to scramble for new capital or merge in order to meet the new requirements. From next year, the SBV has circulated a draft proposal to raise the minimum capital level to about US$ 300 million. As a result, 50% of the JSCBs will have to face a merger or a takeover. In addition to higher capital requirements, banks will also have to demonstrate experience in banking governance. Banks will need to commit to Basel 2 standards from either 2008 or 2010. Currently, a corporate family can own up to 40% of a JSCB. One reason for the concern is that large corporations such as the giant utility Electricity of Vietnam (EVN) and the Vietnam Insurance Corporation have a strong interest in setting up bank subsidiaries.91

89 Too many banks are still chasing too small a slice of the pie (VinaCapital, 2006). 90  This number is still far too high and it is expected that it will halve over the next few years as another wave of consolidation is overdue. 91  The EVN currently holds a 40% stake in An Binh Urban JSCB. The SBV hardly welcomes new entrants in an already overcrowded marketplace unless they have the size, experience and funds to help the consolidation process. And they are also wary of conflicts of interest from large corporations owning pet banks. 91  Currently only about 11 out of every 1000 people in Vietnam have a credit history, a penetration rate of about 1%.

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3.3.6.2 Undercapitalisation One of the legacies of state ownership is a severe shortage of capital at the state banks, a quality shared by private sector commercial banks as well. Government restrictions on equity holdings combined with a bond market that hardly functions has made raising chartered capital very difficult for banks. Average capital adequacy ratios (CAR) at Vietnamese banks stood at 4.5% at the end of 2005 (Merrill Lynch, 2006).92 Admittedly with large scale raising of capital this year, this number is improving. With most of the state banks well below the minimum 8% capital adequacy ratio for Tier 2 capital, lack of access to the international capital markets has constrained their growth. And this valuation is based on a very generous reading of their NPLs. The JSCBs are in only a slightly better state with a handful able to cross the 8% hurdle rate. Moreover, given that the domestic capital markets are still in the early stages, raising new capital was the biggest challenge for all the banks. The stronger JSCBs have responded partly by selling shares to foreign strategic partners. Vietcombank and BIDV have both issued VND denominated domestic bonds at a 1-2% premium to sovereign debt. BIDV has obtained an international rating in preparation for a stock market listing and possible overseas bond series. Sacombank has raised some equity recently and most of the top tier of JSCBs have raised their capital substantially in the past twelve months. Further down the line, where profitability was lower and capital particularly limited the options were more limited. The SBV is reluctant to allow smaller banks to raise capital from foreign investors. Vietcombank, the second largest bank by assets, has chartered capital of US$ 487 million, BIDV about US$ 240 million. Amongst the JSCBs, Sacombank has chartered capital of US$ 118.6 million and ACB has capital of US$ 68.7 million (SBV, 2006). In recent years the top nine banks have been raising capital by about 40% annually. Going forward, all of the banks have a substantial need to raise additional capital, to shore up their Tier 2 capital base to bring them over the 8% CAR hurdle by 2010.

92  This compares with an average CAR of 13.1% in Asia-Pacific and 12.3% in South-east Asia.

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Most recently, the situation has changed dramatically. The stock market has exploded and bank shares have been the first choice for domestic and foreign investors. This has made access to additional capital significantly easier. In fact, access to capital became so easy that it lead to a risk of abuse by poorly managed banks. To address this problem, the SBV just introduced new regulations requiring banks seeking additional capital to get SBVs permission. 3.3.6.3 Raising capital One of the key challenges for the banking sector is to raise their tier 1 and tier 2 capital to the international standard by crossing the 8% CAR hurdle rate by 2010. The central bank is drafting a plan to inject US$ 687 million of government money into three banks between 2006-2008. Incombank, BIDV and Agribank have all expressed strong interest. According to the central bank, this injection will represent only part of the total US$ 1.25 billion the banks will need to reach the 8% hurdle. The balance, apart from a token US$ 99 million soft loan coming from the World Bank will have to be raised on the capital markets. To do so, the banks will need to raise billions of dollars in both debt and equity financing. Bond issuance is currently the only realistic option for the SOCBs and the best of the JSCBs. The second tier banks will have to rely on issuing equity capital until the ceiling rates on bond coupons are lifted. There are issues to be addressed on the equity side too. Foreign investment in commercial banks is regulated under decision 228 (issued on 1 December 1993). The SBV stipulated that total charter capital of JSCBs in Vietnam, held by foreign investors, must not exceed 30% and they cannot trade their shares the first five years. Finally, only the worlds top banks can be considered as potential investors and must be vetted by the government. What is at stake here is not just the 8% hurdle for capital adequacy. The banks ability to expand their lending base is constrained by the lack of long term capital. The result is a constraint on medium to long term lending and a deposit / lending mismatch. Since May 2003, the SBV has allowed commercial banks to lift the cap on their use of short term deposits mobilised to provide medium and long term capital loans from 25% to 30%. This is only a temporary solution.

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By the end of 2005, Vietcombank issued US$ 75 million in seven year domestic bonds at a coupon rate of 8.5%. BIDV has also recently completed a US$ 94 million VND denominated bond issue consisting of a 10-year bond with a coupon of 9.8% and a 15-year bond carrying a coupon of 10.20%. Both are priced at a spread of 1.05-1.26% over the Vietnamese government 5-year and 10-year bonds respectively, and both carry call options (VET, April 2006). The domestic markets appetite for bank paper has now been tested. The Vietcombank and BIDV issues were heavily oversubscribed by 250% with the BIDV offer. Moodys announced credit ratings for BIDV ahead of the offer, provide the bank with a stable outlook for both domestic and foreign currency deposit and a positive outlook for financial strength. It is estimated that the five SOCBs will have to raise about US$ 4.5 billion in capital over the next four years to exceed the 8% target by 2010 (VET, April 2006). Based on an assumption of constant annual lending growth of 15%, and an expectation that the banks will be able to raise 25% of the total additional capital needed through internal profit growth, banks will need to raise an additional US$ 3.5 billion through new equity or bonds. It is expected that the top five JSCBs will raise US$ 1.5 billion between 2006 and 2010 to keep ahead of the proposed new capital requirements (VET, April 2006). ACB and Sacombank will also have substantial capital needs going forward. ACB has recently increased its chartered capital from VND 948.32 billion to VND 1.1 trillion. VIB has increased its capital from VND 595 billion to VND 711 billion while Eximbank increased capital to VND 815 billion (VET, April 2006). Most of this fundraising has come from tapping existing shareholders for new money while also adding some new investors. 3.3.6.4 Investment in information technology Having up to date information technology (IT) is a key requirement for the Vietnamese bank sector. It provides the platform for offering and managing a wider array of products and services to clients. IT spending would seem to be one way to separate the winners from the losers, enabling banks to charge higher fees and offer a genuine service to their clients. There is a great need for spending on IT to build core banking systems, risk management and ATM software.

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However, IT spending at most banks in Asia, including Vietnam, is an unknown (VinaCapital, 2006). The numbers are not disclosed in annual reports and information is generally anecdotal. It is possible to take capital expenditure as a proxy, as IT spending tends to be a large portion of it. 93 However, there is no proven relationship between a higher IT spending and greater operating efficiency as a higher spending raises costs in the short term while the revenue gains come at a later stage only.94 In Vietnam, some larger banks such as Vietcombank spend 6% of revenues on IT (approximately 10% of operating expenses) and are planning to increase that ratio. Sacombank recently invested US$ 4 million in a new core banking system. Small joint-stock banks such as Habubank, however, have more modest budgets, spending only about 2-3% of revenues, probably insufficient to upgrade their systems.95 This gap needs to be closed if the Vietnamese banking sector wants to offer a comprehensive service to their clients. There are three spending patterns in IT investments among Vietnams banks (VinaCapital, 2006): -  The smallest banks focus on making basic upgrades to their existing infrastructure. -  The top tier state-owned banks continue to rely on government-supported budgets to allow them to undertake large-scale technology projects. -  In the middle tier, more dynamic joint-stock banks take a more aggressive approach to technology investments, resulting in a harmonious match between investments needed and available resources.

93  D ata from European banks is easier to come by and we have found that these banks spend an average of 10-30% of operating expenses on IT (VinaCapital, 2006). 94  Asian banks such as DBS, Kookmin, and Bank of China spend between 4.2% and 17.7% of operating expenses on IT with an average of about 11% (VinaCapital, 2006). 95  In general it is believed that Vietnamese banks are under-spending their Asian counterparts by approximately 30-40% (VinaCapital, 2006).

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3.3.6.5 Improving management and governance Independence in management is one of the most crucial factors in the reform of the SOCBs, but no less important is an immediate improvement in the SOCBs efficiency. The central banks role in approving and appointing directors in the state sector is a practice that must ended as must the interference of the regional central bank branches in local lending decisions. 96 There are two other issues relating to management. One is the reduction of operating costs and the other is the adoption of international standards and transparency. Bank margins have been quite low as a result of reliance on low margin lending business and the high percentage of non-commercial loans made in the past. As banks answer to shareholders they will have to focus more on profitability and expand their product base to increase margins. At the same time, the adoption of Basel 2 standards and the technology transfer from future strategic partners should enable Vietnamese banks to improve their transparency as they adopt more international standards for reporting and accounting. The Vietnamese banks current customer base and hence their strengths and weaknesses are largely a carry over from their former role within the state bank. The state sector accumulated substantial bad debts in the years immediately after the Asian crisis necessitating a large injection of government capital which took place in 2001-2003. Having been recapitalised, the SOBs have continued to grow rapidly in terms of deposits and assets. Bodies such as the World Bank and others have also offered considerable technical assistance to strengthen the banks management and operational capabilities. Despite progress made in re-organising the SOCBs prior to equitisation, supporting agencies have identified some

96  Once the incestuous relationship between the SBV and the state-owned sector has been replaced by the discipline of the marketplace, it is expected, that corporate governance in the banking sector will improve markedly (VinaCapital, 2006).

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areas that need further improvements before they can reach international standards. 97 The gaps in these areas can only be closed with the help of strategic investors or advisors, and the question is just how much knowledge transfer foreign investors will permit in return for only a 10%, or even 20%, stake in a bank (VinaCapital, 2006).

3.4 SWOT and critical business issues

In this part, the results of the analysis of the banking environment, the banking industry, and the banking market are presented. This provides a general overview of the situation, and the challenges the country and, more specifically, the banking sector in Vietnam is facing. The results of this part serve as a basis for the surveys about the corporate governance practice in the banking sector which are discussed in Chapter 4. In order to be able to develop relevant recommendations addressing the specific needs and opportunities of the banking industry in the current complex, rapidly and drastically changing politico-economic environment, the results of the empirical study will be analyzed using a specially developed SWOT structure. Specifically, the four components of the SWOT analysis will be subdivided into three dimensions (Banking Environment, Banking Market, Banking Industry) and then, each will be further subdivided, as appropriate, into several criteria. In addition, as mentioned above, because of the rapid and fundamental changes in the entire country, including the political, economic and fiscal environments, the SWOT analysis needs to include an External and Internal Change factor. On the one hand, the external changes (CH-e) which impact on Opportunities and Threats, and on the other hand, the internal changes (CH-i), which impact on Strengths and Weaknesses in the banking industry (Mayer, 2006).

97  Such as Organisation and management; Financial capacity; Risk and liability management; New products and services; Management information services; NPL resolution; Human resources development.

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3.4.1 Opportunities and Threats of the Banking Sector in Vietnam Figure 3-29. below summarizes the Opportunities and Threats incorporating the dimension and factor breakouts outlined above.

Figure 3-29. Overview of Opportunities and Threats

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Figure 3-30. Strengths and Weaknesses of the Banking

Sector in Vietnam

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3.4.2 Strengths and Weaknesses of the Banking Sector in Vietnam Strengths and Weaknesses have been grouped into three dimensions market position, market offer, and resources (Gruenig/Kuehn, 2006). To better adapt this analytical tool to the specifics of the Vietnamese banking industry, we further refined the three dimensions by breaking each of them down into specific criteria as shown in the Strengths and Weaknesses matrix illustrated in the Figure 3-30. Figure 3-31. below identifies the major external and internal potential change factors which could have a significant impact on the Vietnamese banking industry and which will be the basis of a scenario analysis later in this document.
CHe (External Change)
-

Chi (Internal Change)

-

Opportunities

The rapid introduction of a state of the art IT system A quick infusion of the necessary capital required to modernize operations, solve NPL related problems and fund new products and services The financial collapse of one of the major Vietnamese banks which would lead to a dramatic loss of trust on the part of customers and a likely in reversal in the market oriented government policies

Reversal of current market oriented Government policies Sudden and complete liberalization of the banking industry and a sudden influx of much stronger competition

Figure 3-31. The External Change (CHe) and the Internal Change (CHi)

Weaknesses

Threats

Global economic or fiscal downturn (significant drop in oil prices, significant disruption in oil supply, fiscal crisis in China, major military conflicts in Iran)

Strengths

The ability of a major Western bank to form a strategic partnerships and to provide technical and managerial assistance as well as willingness to inject the necessary additional capital to be able to fully leverage market opportunities.

The appointment of an exceptionally experienced and successful Western bank executive to head one of the major SOCBs The rapid introduction and implementation of a sound corporate governance system

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3.4.3 Critical business issues based on the SWOT Analysis The critical business issues have a fundamental impact on the performance and also the future of the company, thus they need to be addressed in order to enable banks to overcome their weaknesses, circumvent threats and take advantage of the opportunities and to leverage their strengths. Figure 3-32. lists some of the major issues behind the SWOT analysis which the banking industry as a whole and each individual bank has to address.
CBIs Corporate governance Description Corporate governance is lacking in most companies. To operate successfully and compete in a liberalized banking environment, banks must establish a corporate governance system that is consistent with global industry standards and expectations Most of the Vietnamese banks, including some of the largest ones, lack a sufficiently sophisticated and effective business systems and infrastructure (e.g. IT, HR, Risk Management) to support modern and competitive banking operations and, especially, the rapid growth in the size and complexity of the products and services demanded by the market place. Many of the existing banking professionals lack the education, experience and knowledge required to lead and manage a modern banking business effectively. The existing products and services are far fewer than those offered in the West and are increasingly unable to meet the expanding needs of an expanding economy, expanding businesses and a growing, better educated, wealthier, customer base. Most of the banks do not have business plans and strategies built based on a corporate SWOT analysis which would provide the blue print for a competitive business model in a rapidly expanding and changing banking market. Many, if not the majority of the banks, are undercapitalized to be able to fund their existing businesses, let alone to take advantage of the growing opportunities and the accompanying financial demands placed on them. Banks need to have a professional management team and an active and capable governance structure in place whose goal is overall business optimization rather than to reflect the interests of any one particular shareholder

Business infrastructure and systems

Skills and abilities Products and services

Business strategy

Financial resources

Dependence on major shareholders

Figure 3-32. Formulation of critical business issues

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CHAPTER 4:  PRIMARY DATA ANALYSIS OF CORPORATE GOVERNANCE IN THE VIETNAMESE BANKING SECTOR
Based on the results of analysis conducted in Chapter 2 and Chapter 3, this empirical research focuses on the issue of Corporate Governance, especially in the Banking sector. The research is designed based on certain criteria that we call areas of focus (see also 4.4) such as Vision & Strategy, Structure, Culture, Leadership, Systems, Information and Communication.

Figure 4-1. Structure of the thesis overview Chapter 4

4.1 Background
In 2005, when we were preparing for the Corporate Governance event organized by SECO for the State Securities Commission of Vietnam (SSC) which was to take place on 6 January 2006 Corporate Governance was a new issue in Vietnam. It was so new that there was no term for it in the Vietnamese corporate language, and there were no official guidelines in this regard. Governmental institutions such as the Ministry of Finance and the State Bank of Vietnam (SBV) translated the term Corporate Governance into Vietnamese in a way that was equivalent to Company

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Management (in Vietnamese: Qun Tr Cng Ty). While translating the book New Corporate Governance, by Prof. Dr. Martin Hilb, we introduced the term Qun Tr Hi ng Doanh Nghip which is descriptive of the entire connotation of Corporate Governance. As a general observation, it was obvious that the participants of the Corporate Governance event on 6 January 2006 had a very rudimentary level of comprehension of the Corporate Governance concept. A recent World Bank survey confirmed this impression (IFC-Report, 2006). Only 23% of the 85 respondents said they had a certain understanding of Corporate Governance, though most company directors commented that the concept was yet to be adopted in Vietnam. This is due to the fact that the economy still retains important non-market elements. This is because the government continues to own and control many enterprises in terms of providing capital, access to raw material, or even to go as far as dictating the price. In addition, the lack of a level playing field for the private corporate sector as well as between listed and unlisted companies is another negative factor. Finally, Vietnam still has a wide range of ownership structures, each of them governed by a different set of laws.98 During and after the event addressing Corporate Governance mentioned above and with the support of SECO, World bank (IFC), SSC as the first governmental organization to address the issue started to create official guidelines on Corporate Governance for listed companies (IFC-Report, 2006). Within the frame of the empirical research, we had conducted two surveys about the issue Corporate Governance. The first survey (from now on called First Survey) deals with the overall situation of corporate governance in Vietnam that took place during the above mentioned Corporate Governance event. However, we also combined the results of our surveys with the survey results of others to get the whole pictures of the issue of Corporate Governance in Vietnam.99

98 World bank-Report issued in 2005. 99 These surveys are for example from IFC, VCCI, ING.

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The second survey (from now on called the Second Survey) was conducted during the first quarter of 2007. The idea was to assess the progress that has been achieved in the area of Corporate Governance especially in the banking sector in Vietnam since the aforementioned event.

4.2 F  irst Survey: Survey about the overall situation in Vietnam

This survey was designed as a standardized questionnaire on Corporate Governance in Vietnam and it took place during the Corporate Governance event on 6 January 2006. 4.2.1 Objectives of the First Survey The survey was a first (Swiss) standardized questionnaire on Corporate Governance in Vietnam. The objectives of the First Survey were as follows: -  Gaining an overview on Corporate Governances issues in Vietnam such as Ownership structure; Structure of the Board of Directors; Systems of management applied; Corporate culture; Selection, Evaluation, Remuneration and Development of Board members; board meetings. -  Examining the systems which are used to direct and control the firms in Vietnam 4.2.2 Targeted group All participants were Chairmen, members of the Boards of Directors, and members of Top Managements from the listed or soon be listed companies. 4.2.3 Research Methodology A questionnaire with 12 questions was handed out to the participants of the Corporate Governance Event. There were around 80 participants. The event was very well received and was generally thought to have been very successful and effective. The topics of the questionnaire were as follows: 1. Number of board members in the company

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2. Ownership structure (e.g. company listed on the stock exchange) 3.  Structure of the Board of Directors of the company (Board with or without committee like Audit Committee, Nomination Committee, Compensation Committee) 4.  Systems applied on the level of the Board of Directors (e.g. Strategic planning, Monitoring system, Strategic control for evaluation of the strategic implementation , Risk Management System, Financial Reporting, Auditing, Selection concept, Remuneration concept, Succession planning) 5.  Corporate culture (e.g. customer oriented, trust oriented, bureaucratic, performance oriented) 6.  Evaluation of Board of Directors (e.g. internal, external, self-evaluation) 7.  Criteria used to select Board members and members of Top Management (e.g. professional, leadership, social, political, networking competence) 8.  Ownership structure (e.g. Board members were representatives of stakeholders like shareholders, employees, state, customers) 9.  Development of Board members and members of Top Management (favoured topics like Strategic Management, Finance and Controlling, Auditing, Marketing, Human Resources, Risk Management, Business Information Technology, 36 Stratagems) 10.  Remuneration of board members (e.g. fixed, variable, honorary compensation) 11. Board meetings

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4.2.4 Overview about the respondents 53 questionnaires were handed out and 45 responses, or 85.9%, were collected.100 As illustrated in Figure 4-2., 30% of the respondents were chairmen or chairwomen, 28% were members of boards of directors and 42% were members of top management.

Directors 19% Chairman / Chairwoman 30%

Members of Top Management 23% Members of BoD 28%

Figure 4-2. Personal data of the respondents

The respondents came from 45 companies: 12 were listed companies; 20 companies were to be listed; and 13 were not listed.

100  We had set an assumption that one person represents one firm, because the questionnaire response was completely anonymous. 100 Details of the questionnaire see Annex.

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Status of the participated firms

29%

27%

Listed Will be listed in the future Will not be listed

44%

Figure 4-3. Status of the participated firm

4.3 Second Survey in the banking sector

Since the Corporate Governance event on 6 January 2006 in HCMC, we learned that several companies, which were listed at the Stock Exchange or which were prepared to be listed were about to introduce Corporate Governance. In the banking sector, there were some joint stock banks, including Asia Commercial Bank (ACB) and Sacombank, which had introduced a light version of Corporate Governance concept. We assumed that there had to be some improvement in the awareness and knowledge of Corporate Governance in the subsequent 12 months following the Corporate Governance event. For this reason, we have decided to conduct a further survey about this issue. We concentrated exclusively on the banking sector based on the analysis conducted in Chapter 2 and Chapter 3, and also based on the First Survey. 4.3.1 Objectives of the Second Survey The objective of the Second Survey was to find out, what the changes or improvements were in the last 12 months after the Corporate Governance event of 6 January 2006 concerning the issue Corporate Governance especially in the banking sector in Vietnam.

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4.3.2 Targeted group Our interview partners were Chairmen or Board members of 5 banks, both state-owned and Joint Stock Banks. In some cases, the interviewees were also members of top management. 4.3.3 Research Methodology A semi-structured questionnaire (see Annex III) was sent to the interview partners before so that they could get an idea what the survey was about. However, the interviewer had to conduct the interviews and fill in the questionnaire during the interview by himself. The interviews took place at the head quarters of the related banks and lasted around three hours. In two cases, the interviewer had to the phone call again in order to continue the interviews because the information required could not delivered immediately. It is also important to state that each bank contributed only part of the topics mentioned below, because the interviewees either didnt have or didnt want to provide the information. Topics of the questionnaire were as follows 101 1.  Bio-social data of the members of Board of the related banks (number of board members, gender, ethnic, position, average age, education) 2.  Ownership structure (e.g. SOCB, company listed on the stock exchange) 3. S  tructure of board of directors of the company (Board with or without committee like Audit Committee, Nomination Committee, Compensation Committee) 4.  Strategic situation of the related Banks (Strategic planning, Monitoring system, Strategic control for evaluation of the strategic implementation)

101 For details of the questionnaire see Annex II.

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5.  Management systems such as Risk Management System, Financial Reporting, Auditing, Selection, Evaluation, Remuneration 6. Board culture 7.  Criteria used to select board members (e.g. professional, leadership, social, political, networking competence) 8. Development of Board members and members of top management 9.  Remuneration of Board members (e.g. fixed, variable, honorary compensation) 10.  Information and Communication (such Board meetings, companywide communication, external communication) 4.3.4 Overview about the respondents Because the Banks that participated in this survey wished to keep their anonymity, we have avoided using their name. We number the related banks according to the chronological sequence in which we conducted the survey, e.g. Bank1 or Bank2. In the Figure 4-4., there is a brief overview about these banks which took part in this interview.

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Gender National cultures Positions Remarks

Name of Banks Bank1

Listed

11

10

10

58

Chartered Capital (US$ m)

69 Shareholders were mostly state-owned companies and governmental institutions, but the Bank was a JSCB The Bank was a SOCB; Has several foreign strategic partners and also receives TAA, i.e. transfer of technology and know how was ongoing The bank was very profitable The Bank was still SOCB, but it will be listed in 2008; it received support from SECO for the restructuring program It was a small Bank with no clear direction; However, in the months to come, the bank would increase the chartered capital to around US$65 m in order to meet the requirements of the SBV 120 112 50 33

Ownership status

Total members

Non-executive
6 5

Bank2

Listed

11

57

Bank3 Bank4

OTC SOCB

11 4

9 3

2 1

11 4

0 0

57 54

Bank5

OTC

51

Figure 4-4. Some facts about the banks BoD in the Second Survey
As we can see from Figure 4-4., the numbers of board members in most of the banks varied from 9 to 11. All the members have a university degree. However, all the board members in the banks here do not have professional experience in a modern bank in Western countries. Recently, Bank1

Average age

Non-VN

Deputy

female

Male

VN

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and Bank2 also have foreigners in their Board. They are representative of foreign strategic partners such as Investment Funds, Foreign Banks. The numbers of female members are still low. In 2 banks, the chairmen are no longer CEOs at the same time, but they still do the tasks of a CEO.

4.4  Summary of the current situation and comparison with the standards mainly in the banking sector
For the discussion of corporate governance practice, we propose the following areas of focus on the board level: Vision and Strategy, Board Culture, Board Structure, Leadership, Systems, Processes (see Hilb, 2006; Dinh, 2006). For issues regarding interaction between individual members of management and different management levels we recommend further areas of focus, such as Relationship, Information and Communications (see Dinh, 2006).

Stru

cture

lationships Re

Benefits u R e s o r c es

Leadership

Cultu

re

Vision

m ste Sy

Figure 4-5. Areas of focus for the discussion of

corporate governance practice (Source: Dinh, 2006)

Pr

oc es

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4.4.1 Vision & Strategy Current situation: All the banks which participated in the Second Survey were of the opinion that having a strategic plan and a strategic planning process was essential for the success of the bank. However, due to the short history and rapid development of the banking sector in Vietnam, most of the banks had not set up a strategy planning process. The BoD and top management still lacked a thorough understanding of what a strategic plan was and how a strategic planning process is conducted including who is responsible for what activity.102 During the interviews, they could verbalize a clear vision of their company. Bank1: The vision was cited by the Chairman during the interview: We are thriving to a respected financial services group: offering Retail banking, Private Banking, Business Banking and Investment banking. Furthermore, we will also have a Finance company, Insurance company, Asset Management company and Securities company. To achieve this vision, we have to increase the chartered capital, to develop the skills of key people and to cooperate with domestic and international partners for the transfer of technology and management know-how. Currently, this vision is only communicated to the level of middle management. Bank2: Also the vision was cited by the Chairman during the interview: The vision of the Bank for next five years is to be a leading Joint Stock Commercial Bank (JSCB), and to be in the third or fourth position in the

102 I  n a certain bank we interviewed the founder of the bank. Moreover, the Chairman of the Board asked his CEO to present a strategy of the Bank. The CEO retired a few days to his office. Then he presented the new strategy to the Chairman which was than accepted.

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banking sector in Vietnam. That means that we will outpace one or two SOCBs.103 In order to achieve this vision, we will increase the market share through opening more branches nation-wide, by offering more retail banking products, by changing the marketing concept (until now, the customers came to the Bank; in future we will actively contact our potential customers, in other words, we will become more customer oriented), through the creation of more financial and forex products (in cooperation with Life Insurance and Fund Management Companies). We will also place emphasis on improving the human resources situation.104 One of the most important competitive advantages of our Bank is having three foreign strategic investors: IFC, Standard Chartered Bank, and Dragon Capital.105 The vision and the new strategy of Bank2 are communicated to the middle management through several communication channels such as in housemagazine, meetings, emails and also team building activities and events. Bank3: The vision of the bank is to belong to the Top Ten Bank in Vietnam and to be present in 64 Provinces of the country. We are different than other banks in the aspect that we do not take Vietcombank as a benchmark. In the next five years, we will set up a Jewellery company and an In-house University, and have branches in the surrounding countries such as in China, Cambodia and Laos in order to serve the growing needs of the customers. In order to achieve these goals, we have to improve the professionalism, set up the state-of-the-art IT system,106 establish new branches nation

103 A  s stated before (see 3.3 Banking Industry) the 5 SOCBs have around 70% of the market share. 104 I  n this respect, the bank applies several tools for example in the remuneration system; the bank will introduce call option, generous bonus to motivate people to stay. The bank is building up a training centre in order to develop the skills of the middle and top management. On the other hand, the bank also buys talents from the competitors. 105 3  0 % of the chartered capital is contributed by the three strategic foreign investors. While Dragon Capital invests the most important seed capital in the bank, Standard Chartered and IFC provide Technical Assistance to improve the technology, professional and management skills. 106 Currently the bank has invested US$ 5 million in the data warehouse.

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wide, and build up sophisticated brandings,107 and to develop the Human Resources and to strengthen the financial basis.108 As the results from the Second Survey show, the stated vision and strategies are different from the version published in the brochures or websites of the banks. The interviewees have also admitted that the real vision only existed in the minds of some members of the Board and top management, but was not yet communicated widely to the entire company. Our suggestions: According to Hilb, the composition of the board, and the board culture, board structure and success measures have to be aligned (Hilb, 2006). Therefore, in the strategy development process (see Figure 4-6.), the BoD and top management have to share the work. A clear delineation of the roles of the BoD and of the top management is critical to the success of the bank.
Implementation
Strategy planning process

Ratification

Monitoring

Phase IV:
(x)

Phase III:

Initiation

Phase II:

Strategic levels Normative Strategic Operative Board Management Board Management Board Management
Legend: (x): currently applied by the Banks xx: recommended

(x) xx (x) (x) xx (x) xx (x) (x) xx

(x) xx

Figure 4-6. Involvement of the BoD and of the top management in the
strategy process (see also Hilb, 2005)

107  For example, Hoa Viet (Chinese-Vietnamese) brand, 8th March Brand (for women only). 108  Recently, the bank has increased the chartered capital from US$ 175 millions to US$ 280 millions. And the growth rate of the chartered capital is around 50 % yearly. Currently, the Tier 1 is 9%, thus complying with the Basel I.

strategy

Phase I:

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Phase I: Strategy initiation In the case of Vietnam, since most of the banks would be just starting to implement a strategy planning process, we recommend, that the process be initiated by the BoD (together with top management). Based on the change in the banking environment, in the banking market and in the banking industry, the banks have to review their existing vision and mission statements and the corporate as well as business strategy of the company (Gruenig/Kuehn, 2006). The strategy development process is then divided into several steps (Lombriser/Alplanalp, 2005).
Strategy assessment Strategy development The overall environment, the market and the industry as well as the bank itself shall be analyzed. This step consists of the development of the vision and mission statements, the corporate strategy and business strategy (and functional strategies - for each department). Strategy implementation Monitoring strategy implementation This is the realization of the strategic objectives through the operationalisation of the plan. This step includes the following areas: (1) change in the relevant business environment; (2) review of the strategy effectiveness; (3) progress control of the strategy implementation.

Figure 4-7. Steps in the strategy process

Step 1: Strategy assessment The analysis and projections for the external business environment define the risks and opportunities for the company. An internal corporate analysis reveals its core competencies, strengths and weaknesses. The SWOT analytical and planning tool is used in the process. The SWOT analysis needs to include an External and Internal Change factor: the external changes (CHe) impact on Opportunities and Threats in the banking industry, and the internal changes (CH-i), impact on the Strengths and Weaknesses of the company (Mayer, 2006). Based on these results, the critical business issues can be identified. These critical business issues have a fundamental impact

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on the performance of the company and thus need to be addressed in order to enable the banks to overcome their weaknesses, to circumvent threats and take advantage of the opportunities and to leverage their strengths.

Decision group Project leader Members of the board and managers responsible for the businesses included in the project Optionally: Selected members of the working group Optionally: Consultants

Main tasks Determines the objectives and general conditions of the project Discusses and approves the results of analysis Discusses the strategic options and makes the selection Approves the final documents

Steering committee Project leader Leaders of the working groups Project coordinator Optionally: Consultants

Main tasks Keeps the project on course Adapts project organisation if necessary Determines and assesses options for the corporate strategy Makes the presentations before the decision group

Working group Leader of the working group Selected members of the management team responsible for the specific business Optionally: Consultants Main tasks Carries out strategic analysis Determines and assesses options for one of businessthe strategies Formulates some of the strategic documents

Working group Leader of the working group Selected members of the management team responsible for the specific business Optionally: Consultants

Working group Leader of the working group Selected members of the management team responsible for the specific business Optionally: Consultants

Figure 4-8. Composition of the strategy project team

(Source: Gruenig/Kuehn, 2006) The strategy assessment is followed by the development of strategic alternatives and the identification of the primary strategy which becomes the strategic plan chosen for implementation. We recommend that the strategy planning process be conducted by a strategy project team as outlined in the Figure 4-8.

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The strategy project team is lead by the steering committee, which consists of one or several members of the board and of top management. The project team is supported by several workgroups. In addition, the team can also be assisted by external consultants who can contribute (Gruenig/Kuehn, 2006): to project management, planning methods, and assist with the decision-making process. The results of the strategy development project are then presented in a steering committee meeting. Based on the strategy recommendations of the project team, the members of board and the top management who are represented in the Decision Group then decide on the banks strategy. Step 2: Strategy development The strategy development also consists of several stages: vision and mission statements, corporate strategy, business strategy (Lombriser/Aplanalp, 2005): Vision and mission statements: The first step in the strategy development process is the formulation of the vision and mission statements of the company. The corporate mission and vision are the foundations of the strategy development process and are reflected in each stage of the development process. This ensures strategic consistency throughout the plan. These abstract terms have to be transformed into a plan about how to realize the desired future. Corporate strategy: the corporate strategy must guarantee that the company [here: bank] will target attractive markets where it can build and maintain an advantageous competitive position. The corporate strategy thus determines the long-term orientation and development of corporate activities (Gruenig/Kuehn, 2006). In principle, the corporate strategy determines which businesses the company will continue to operate or withdraw from, and the new businesses it will set up. The corporate strategy also provides information about the amount of investment required in order to maintain or enlarge the strategic business (Lombriser/Abplanalp, 2005). Business strategy: The Business strategy provides the framework within which the concrete competitive advantages at the level of the offer and at the level of resources are determined (Gruenig/Kuehn, 2006).

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According to Porters analysis, sustainable competitive advantage can only be achieved through low cost or through differentiation in the market (Porter, 1998). Porter links these two basic types of competitive advantage with the target scope of activities. Therefore, there are four basic competitive strategies, namely cost leadership within a broad target market, cost leadership within a narrow target market, differentiation within a broad target market and differentiation within a narrow target market. Phase II: Strategy approval The board selects the most promising strategic option benefiting all stakeholders and approves its implementation. The approval process also includes the allocation of the required resources, establishing important milestones in the implementation process and the identification of key information requirements of all the relevant stakeholder groups (Hilb, 2005). Phase III: Strategy implementation Despite a thorough strategic analysis and the development of a viable strategic plan based on the banks competitive advantage(s), success cannot be achieved if the implementation is not well-prepared and properly executed. In strategy implementation, it is necessary to distinguish between the realization needs which arise directly from the strategies,109 and the indirectly derived measures needed for adjustment and support.110

109 E  xamples: Sales of an unprofitable business as a consequence of a new corporate strategy; introduction of direct delivery to large end-customers according to new business strategy requirements. 110  Examples: Training courses to improve understanding of the new strategies to adjustments to organizational structure to accommodate newly-defined business fields.

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It is also useful to distinguish between measures related to material requirements 111 and those related to personnel 112 (Gruenig/Kuehn, 2006). Distinction can also be made between implementation through strategic programs and the simple incorporation of the new strategy into day-to-day management (Gruenig/Kuehn, 2006). Thus, the business policies allocate resources, which are usually incorporated in a budget, long-term, medium-term, and short-term implementation plans, or the managements tasks. The actual strategy implementation takes place in order to realize the plans. It generally comprises of the delegation of tasks, the alignment of the organization toward the common objectives, and a budgeting process. It should be mentioned that the strategy project team can be converted into the Department of Strategy and Organization. This Department would be responsible for the coaching and production of the Strategic Medium Term Plan of the bank, the Technical Medium Term Plans and the annual Business Plan. Responsibility for the organization structure of the bank tends to be with the strategy and planning group as they have an overview of the entire bank and its future direction and business. They should thus be able to structure the bank to fit its future business needs. Phase IV: Monitoring strategy implementation The monitoring of strategy implementation has to be done at every board meeting. The board monitors key indicators and progress against important milestones and should take appropriate corrective action if there is significant divergence from the approved strategy. (Hilb, 2005).

111  Examples: Development of new products, introduction of a new reporting system adjusted to the new strategy. 112  The Bank must ensure that employees are willing and able to implement strategies for example by making the information available. As already known from the banks that participated in the interviews, senior management even keeps their vision and strategies secret, which makes it difficult for employees to contribute to successful implementation.

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The process of monitoring strategy implementation has to include the following areas (Lombriser/Alplanalp, 2005):  Change in the relevant business environment (overall politico-economic environment, market, industry) and its impact on the company and its incorporation into the strategy implementation process;  Review of the strategy effectiveness including the success factors and the strategic alternatives;113 The progress control of the strategy implementation
Early detection - internal development - external development

Review of Strategy Premises - Environment - Market - Industry

Review of strategy Effectiveness - Success factors - Strategic alternative

Progress control of Strategy implementation - Achievement of objectives (qualitative and quantitative) - Progress of measures and projects

Elaboration of causes for current or future divergences Areas of causes - Changes of premises - Insufficient or false strategy - Strategic objective setting (too low / high) Areas of causes (cont.) - Insufficient or false resource deployment - Too ambitious project objectives - Lack of efficiency, lack of motivation, lack of performance - Unexpected resistance

New or adapted objectives and strategies

- Immediate measures - Set of measures or of projects

Figure 4-9. Strategic control (Source Lombriser/Alplanalp, 2005; Hilb, 2005)

113 I  nstitutionalization of a regular strategy check; comprehensiveness of strategy proposal; integration of fundamental requirements of the vision; mid-term and long-term strategic objectives; consistency of strategies; ethical aspect of strategy; feasibility of strategy, contribution of strategy to the long-term success; negative consequences of the worst case scenarios is considered (Hilb, 2006)

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The causes for the current and possible future divergences should also be identified. After this step, the necessity of developing new (or revised) objectives and strategies should also be decided. 4.4.2 Organisational Structure and Governance Current situation: In this section, we take a closer look at the Committees at the Board level (such as Audit Committee resp. internal Audit Function; Committee for Nomination & Remuneration; Risk Management Committee) and also at the level of top management. Committees at the Board level In our First Survey, 32% had Audit committees (12 firms), 8% had Nomination committee (3 firms), 13% had Compensation committee (5 firms), 47% had several committees (18 firms)114. Figure 4-10. illustrates the firms with committees.

Audit committee; 12; 32%

Others; 18; 47%

Nomination committee; 3; 8%

Compensation; 5; 13%

Figure 4-10. The Vietnamese boards showing the distribution of

different committees

114  The other committees are: Supervisory committee, monitoring committee, strategy committee, Investment committee.

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Bank1: The Supervisory Board was elected by the Annual General Meeting (AGM). They were representatives of the shareholders. However, they needed to be approved by the Board of Directors. Bank2: On the level of the BoD there were the following committees: Credit Committee, Investment Committee. These two committees were composed of the members of the BoD and top management.115 The Supervisory Board was elected by the shareholders at the AGM.116 They were usually independent, i.e. they were not employees or executive members of the bank. Some of them had an office at the bank. They could co-operate with the Auditing Committee which included Internal Auditing Department and the External Auditing Teams. They could give their recommendations to the BoD and Top Management, but they had to report directly to the AGM. The Chairman and the CEO had clearly distinguished responsibilities and duties. While the Chairman was the legal representative of the bank at the State Bank of Vietnam and other governmental authorities, the CEO represented the interests of customers, shareholders, employees and society. At this bank, neither the Chairman nor the CEO was more important than the other person. They acted as a team to bring the benefit to stakeholders. It is also interesting to note that the members of the top management were not on the Board.

115  According to the Chairman of Bank2, the members of the Supervisory Board must have the following abilities: successful track records, integrity, and knowledge of accounting and financial management. 116  The Top Management team of Bank2 consisted of a CEO and 6 Deputy CEOs. One of the Deputy CEOs was a standing member, who could represent the CEO in all matters as needed. He made decisions and represents the CEO when the CEO was unavailable. This served as a way to mitigate risk. He served the role of a co-CEO. The remaining 5 Deputy CEOs were also the heads of different divisions.

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Shareholder General Meeting Supervisory Board Board of Directors Credit Committee Nomination & Remuneration Committee Top Management Investment Committee Audit Committee

Figure 4-11. Committees at Bank2

Bank3: The bank has recently become a listed company. Therefore, the BoD had to act in the interest of the stakeholder groups. The benefit to deliver to the stakeholder groups is understood as added value to the public, to the shareholders, to the employees.117 The board consisted of 11 members, of which 2 were women and 3 were expatriates. The bank also had a special appointment policy: in top and middle management, if the position of the director was a man, than his deputy had to be a woman or vice versa. The reason, according to the chairman, was that they had to complement each other. The assignment period was also limited to four years at most. Another special regulation was that each year, each branch director had to take a three-week vacation. During this time, he was represented by a mobile director from headquarters. The deputy was not allowed to represent him. The mobile director had to write a field report to the BoD and top management. This was considered as a measure of Internal Audit. After the period of four years, they returned to headquarters and attended a three-month-training programme. Afterwards, they could either return to their former position or were transferred to another position. During the training programme, they were under observation of the Nomination Committee and Remuneration Committee.

117  According to the chairman, customers are considered as partners, not stakeholders, - a definition that indicated that the concept of stakeholders is not yet clear.

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Bank4: There were several Governmental entities involved in the ownership of SOCBs (see Figure 4-12. and also Figure 2-3.). The Ministry of Finance provided capital; the Ministry for Labour and Social Invalids approved the salary and benefit policies for the employees of the SOCBs (see also Remuneration Committee); the SBV set the guidelines and managed the SOCBs. Conflicts between the BoD and the top management in SOCBs were thus inevitable: As this bank was a SOCB, the Supervisory Board of the Bank was appointed by the SBV-Governor, because the state was the sole owner of the bank. According to the legal requirements, the Supervisory Board should be composed of at least three to five members. However, this Bank had only one. And the Supervisory Board had to report directly to the Chairman. The BoD was responsible for setting the policies, but usually, such policies were not applicable in a rapidly changing environment. Top management had to implement such policies, but they did not have adequate authorities to adjust the outdated policies. According to the Chairman, professional and sound Corporate Governance complying with international standards can be established after a successful equitization projected for 2008.
Finance Ministry Ministry for Labor and Social Invalid

State Bank of Vietnam

Board of Directors Supervisory Board Top Management

Credit Committee

Investment Committee

Figure 4-12. Corporate structure of a SOCB based on the example

of Bank4

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Bank5: It is also interesting to know that in the Supervisory board, all the members are female. The reason is unknown. They are appointed by AGM. Theoretically, they report to the AGM, but practically, they report directly to the chairman. They do not have another position in the company. The AGM also decides on their remuneration. Audit Committee: the internal Audit Function According to the VCCI-Survey 38% of companies have an internal audit function, however, they do not have an Audit Committee, and 23% do not have an audit committee or an internal audit function. 9% of companies have an Audit Committee; however the Committee Members are also members of top management, which might impair their objectiveness and independence. Again in the VCCI-Survey, 75% of participating pharmaceutical companies have an internal audit function; this group is in the first position. Financial Institutions (FIS) are in second position, with 56%. Companies in transportation, trading or telecommunication industry have a relatively low proportion of companies with an internal audit function.

Consultancy Others Pharma FIS Hotel Transportation Trading Manufacturing Telecommunication 0% 10% 20% 30%

33% 40% 75% 56% 50% 43% 43% 50% 40% 40% 50% 60% 70% 80%

Figure 4-13. Companies in the VCCI-Survey with an internal

audit function

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The stock exchange required the establishment of control and supervisory mechanisms such as internal audit and control. 118

Foreign 19% Joint Stock 37%

Private 16%

SOEs 28%

Figure 4-14. Companies which do not have Audit committees

(Source: VCCI, 2006) Bank3: At the Board level, the Audit Committee was composed of four completely independent members and reported to the Supervisory Board. They also worked closely with the external audit company. At the level of top management, the Internal Auditing team was right under the CEO and reported directly to him. Bank4: The interviewed bank was one of the five SOCBs. The BoD consisted of four members. However, only two members were responsible for strategic and operational tasks and duties. The remaining two members were decoration, meaning that they did not have any responsibilities on the board. Bank4: The bank did not have an Audit Committee, but only an Internal Auditing team. This team consists of 11 members and is under the CEO. There was no Risk Committee and the function of Risk Management was also not available. Except for the credit risk, they considered the business of the bank as not being risky. The NPL is 1,38 %.119
118  In our First Survey, most of the respondents came from listed or soon to be listed companies: according to our question 2 out of 45 companies, 12 were listed, 20 will soon be listed and only 13 will not be listed. 119  Bad debt is defined according to the law as when the borrowers are not able to pay back

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According to our Second Survey, there has been an essential improvement in the last 12 months in the JSCBs: The Audit Committee was located at the level of Board. In the SOCBs, there is still no Nomination and Compensation committee at company level the decision is made at ministerial level - by the related governmental authorities.120 Risk Management Committee According to the VCCI-Survey, 85% of the companies which participated in the survey perform risk assessment when setting strategic objectives. However, only 50% of them (23 companies) prioritize risks according to the likelihood of occurrence and the impact on the organization. Although 85% of the companies stated that they do perform a risk assessment when setting strategic objectives, only very few of them (27% companies) can identify both inherent risk and residual risk within their risk assessment process, and 38% of these companies do not have any formal risk assessment process at all. In our Second Survey, the following findings are collected: Bank2: The Bank had a Risk Management Committee which supervises and supports the daily liquidity and balance of deposits and lending. However, the system and processes of Risk Management were still not in a position to match with the problems that come up as the following story illustrated: In response to our question, what was the biggest risk that bank had experienced recently, Bank2 told the following story: There was a rumour in the market, that the CEO of the bank stole a large amount of cash and disap-

within 12 months after the redemption date. Now the bank uses a method to circumvent the legal regulations mentioned before. Instead of making a one-year contract with the borrower, the bank fixes the lending period for three years. However, the bank informs the borrower that it will get back the lending sum within one year. In the worst case, the bank can get its lending in the third year: Such lending is not considered according to the law as Bad Debt. 120  In the banking industry, it is the State Bank of Vietnam together with the Ministry of Finance and the Ministry for Labours, Invalids and Social Affairs.

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peared. The bank knew the story and as it turned out to be just a rumour, it did not pay attention, because it considered it irrelevant. One morning, the public found a dead cat in front of the banks headquarters according to the belief of local people, a dead cat is a symbol of an unlucky event. A few hours later, the dead cat was still there, and the public believed that the bank must be in big trouble. Within hours, the customers stormed the bank and withdrew their deposits, which almost led the bank to illiquidity and disaster. From that time on, the bank had learned that they had to pay attention to public relations and be able to handle crisis management. Bank3: This bank has introduced new functions to cover risk management, NPL management through an Asset Management Company, and a Treasury Department. This bank has not constituted an ALCO. Furthermore, Bank3 has also not empowered the Risk Management Centre with the management of liquidity risk that remains the responsibility of the Planning Department. This bank has not introduced an Organisation and Methods Department to standardise procedural development that remains within the domain of individual departments. Besides, Bank3 has not introduced a Branch Operations Department with the consequence that branches still report not only on risks, but also on other issues separately to all head office departments. Also in other banks, the Risk Management process still has a lot of room for improvement. Our suggestions: According to the Vietnamese regulations (see Decree 49), the shareholders or investors in the company have a specific and limited role. They receive the Annual Report and Accounts and are motivated to ask questions. The shareholders general meeting should also appoint members of the Board of Directors and set their salaries. They might also receive the Strategic Plan (which has already been approved by the Board of Directors) and they can also amend governing statutes and an addition or a reduction in shares. They can also approve extraordinary transactions outside the normal course of business of the bank. However, the shareholders have no role in the management and decision making of the bank.

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The primary reason for the restricted role of the shareholders is that there is an essential conflict of interest between the shareholders of a bank and the Board of Directors of a bank. The investors, which may be a better term to use than shareholders, will naturally wish to maximise the value and return from their investment and thus will press the Board of Directors to earn as much income as possible and pay the maximum dividend (INGReport, 29). This may force the directors to agree to a greater degree of risk than is prudent and deplete the capital adequacy of the bank. The Board of Directors The Board of Directors has a primary duty to protect the interests of all stakeholders in the bank, in particular the depositors and thus needs to be sheltered from undue shareholder influence to take undue risks for a quick financial gain and possibly long term problems. The proposed revision of Decree 49 sets out detailed powers and duties for the board of directors. The BoD is a senior decision making body of the bank (usually comprises of 7 or 9 experienced and knowledgeable professionals). The BoD decides on all important issues relating to the organization, management and operation of the bank in the interests of all stakeholders, in particular the depositors. The BoD is responsible for the safety of the bank, the profitability of the bank and the policies and structure of the bank (ING-Report, 2006).121 The BoD should be composed of experienced but independent banking professionals to guard against potential conflicts of interest and maintain the independence of decision making. Committees of the Board of Directors The Board shall has at least the committees required by the rules of the NYSE, currently an audit committee, a compensation committee, a nominating committee, and a risk resolution committee.

121  They are not responsible for the implementation of these policies; just for ensuring that their decisions are actually implemented (ING-Report, 2006).

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Shareholder General Meeting

Board of Directors Supervisory Committee (Audit Committee) Nomination Committee Top Management Risk Resolution Committee

Remuneratio Committee

Figure 4-15. Committees at the Board level

(Source: ING-Report) Supervisory Committee The supervisory committee is nominated by the shareholders general meeting and should represent the interest of the shareholders. However, in Vietnam in some cases, the members of supervisory committee must be approved by the BoD and by the top management. Certainly, the BoD and top management would approve only those candidates, who are also representatives of the interests of the BoD and top management. Therefore, we suggest that the board members to be proposed in the Supervisory Committee should not be approved by the board of directors and top management so that they can work independently, but by the shareholder general meeting. In this case, the shareholders have to have a real interest to engage in the company and also assume their power. Furthermore, to ensure that the members of the supervisory board are not exposed to undue pressure, they should not work in the company, especially under the CEO. Thus, the supervisory committee should report directly to the shareholders general meeting so that if any fraud is found within the bank, it can be reported to the highest authority in the bank without any interference.

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Committee for Nomination & Remuneration The Committee for Nomination & Remuneration will identify possible candidates for the roles of chairman, but also members of the board and the top management. The Committee for Nomination & Remuneration recommends appointments to the Board of Directors for the approval of shareholders. They can also work together with an outside board search consultant to get the list of possible candidates (Hilb, 2005). A formal performance assessment of the board members should be conducted by the chairman this can be an informal feedback talk (Hilb, 2005,). However, the Committee for Nomination & Remuneration would also include making recommendations on the remuneration and development of directors. Risk Resolution Committee The Risk Resolution Committee looks at and decides on loan and market risk write offs that are recommended by the top management. In our view, they should also have a larger role in approving the policies for general credit, market and operational risk of the bank and subsidiaries. They are also supported by other committees of top management (e.g. Asset and Liability Committee, Credit Committee, IT Steering Committee, Risk Management Committee). Top Management Top management is responsible for the day-to-day operation of the bank. It consists entirely of executives of the bank. Some Heads of Department are also members of the Board of Management. The top management has a number of committees to assist them in their daily decision making.

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BoD

Top Management ALCO Credit Committee

Risk Management Committee

IT Steering Committee

Figure 4-16. Committees on the Top Management level

The Chief Executive Officer (CEO) The CEO is the head of the executive management of the bank. Until now, In Vietnam the CEO is usually a member of the Board of Directors. However, the company size in Vietnam is still on a small scale. Moreover, the BoD still has a high reputation in the business world. Due to the decision power and hands-on experience of the BoD and the CEO, the partners of the company or the authorities often want to deal with them only (because the CEO is usually also a member of board). Therefore we propose that at least in the years to come, the CEO should also be member of board. The CEO also proposes and supports all initiatives submitted to the Board of Directors. Furthermore, the CEO is also responsible for the implementation of all decisions and the smooth day-to-day running of the bank. ALCO (Asset and Liability Committee) ALCO approves all policies and limits relating to capital adequacy, funding, liquidity, open market positions and balance sheet structure (essentially all liability and treasury decisions that are proposed by the Risk Management Group and the ALCO Support Department of the Financial Group). None of its authorities are delegated. Treasury and Trading Group are given limits within which to trade.

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The ALCO Support Department provides information and analysis to the ALCO on all Asset and Liability Management issues but in particular with regard to capital adequacy and balance sheet structure which are not ALM issues; these are closely looked at by the Market Risk Management Department of the Risk Management Group. Furthermore the ALCO Support Department liaises directly with the Treasury and Trading Group closely monitoring the daily liquidity position of the bank as well as assisting with funds transfer pricing and capital allocation. The Credit Committee The Credit Committee is the senior decision making body on all individual credit limits. It may delegate some authorities to the Risk Management Group who may in turn delegate some authorities to its own departments and the Retail and Networks Group (branch limits). The IT Steering Committee The decisions to be made regarding IT are highly complex and usually very expensive. Moreover in Vietnam, the development level of IT is still in a very early stage. The top management cannot be expected to be technical experts. The IT Committee usually comprises of a member of the Board of Management as Chairman, the head of IT, the Chief Financial Officer and possibly a representative of the external auditor. The IT Committee looks at all issues regarding IT, in particular the IT strategy and development programme, and makes recommendations to the Board of Management prior to approval of the Board of Directors. The bank should investigate the current and future possibilities in hardware and communication infrastructure; make a cost benefit analysis and selection; develop a reliable IT structure enabling the implementation of all future systems and applications; and install a communication network to all branches. Risk Management Committee (RMC) The RMC establishes and monitors all the units that have discretionary authority within the bank and subsidiaries to approve limits for credit, market and operational risk.

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The RMC also recommends to the Risk Resolution Committee of the Board of Directors the general credit, market and operational risk policies of the bank and subsidiaries. Furthermore, the RMC monitors the quality and composition of the loan portfolio and ties it in with decisions made by the ALCO on capital adequacy, liquidity, structure of the balance sheet and open market positions etc. Risk Management can become a core competence of the banks to build the long term stability of the bank, its competitiveness in the face of increasing international competition and the maximization of profits.
Risk Management Group (Chief Risk Officer)

Credit Division (Chief Credit Officer)

Financial Institutions Division

Market Risk Management Division

Operational Risk Management Division

Figure 4-17. Risk Management Group

(See also ING-Report, 2006) Primary responsibility rests with the Risk Management Group, mainly the Chief Risk Officer, to propose a framework within which the bank takes credit, market and operational risks. These proposals are then approved by the Risk Management Committee of the Board of Management and ratified by the Risk Resolution Committee. Market Risk Management Division This division measures the liquidity, foreign currency, interest rate, commodity and equity open positions being run by the bank and proposes trading and Asset and Liability Management limits to the ALCO.

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Operational Risk Division The Operational Risk Division submits recommendations on control of operational risk to Board of Directors and facilitates operational risk management processes and controls. This will include all internal treasury dealing limits such as stop-loss limits, intra-day positions and individual dealers limits. Earlier deliverables have dealt with the role of this division in considerable detail. Credit Division Review all credit applications from Front Office Groups for individual, group, sector or country limits. This will include equity investments as they are loans without a maturity limit. Facilities will be approved under discretionary limits or submitted to Credit Committee for approval. The Credit Division is divided into a number of Credit Departments either by customer sector, customer location or customer size.122 The banks should introduce a new corporate structure that reduces spans of control to allow top management to concentrate on strategic issues, increases the delegation of responsibility, clarifies reporting lines and chains of command, clearly differentiates between line management and functional relationships, removes the potential for conflicts of interest, groups departments that are closely functionally related under the management of a deputy director, and introduces new functions that are required for successful reform and re-engineering of banks business and effective risk management as a prerequisite for corporate plan implementation (ING-Report, 2006).
122 As a typical example of what the Credit Divisions do (ING, 2006):   The Business Development Officer in the Wholesale Banking Group will negotiate a new loan with one of the customers for whom he or she is responsible.  They will then prepare the credit application and credit analysis and submit it to one of the Credit Departments who will look at it from a risk/reward viewpoint. Is the bank being paid enough to take on all the risks that come with this proposed facility? It would be comparatively rare for any application to be turned down purely on the grounds of risk as the Business Development Officer will have some knowledge of the risks acceptable to the bank.  There may well be discussion between the Business Development Officer and the Credit Division on the credit analysis, the conclusions drawn, the structure of the loan, the rate being charged the customer and so forth  When they are in agreement the proposal is submitted for approval. The Credit Division will have some discretionary authorities of its own or will make a recommendation to sanction the loan to a Credit Committee.

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4.4.3. Leadership Current situation: The results of our interviews and surveys have shown that the board members (including SOEs and SOCBs) have the following characteristics: - Gender: Most of them are male - Age: At least 45 years old -  Nationality: National Vietnamese (there are currently no OverseasVietnamese) -  Political orientation: Mostly members of the Communist Party (all board members in the SOEs and SOCBs have to be members of Communist Party); in non-state owned companies it is not compulsory. - Education: Most of them have a university degree -  Professional background: Current or former chairmen / CEOs of other companies. Here we are also interested to know about the size of the board in different types of companies in Vietnam such as state-owned or joint stock companies.
40 35 30

Percentage

25 20 15 10 5 0

3 members

4 members

5 members

6 members

7 members

8 members

9 members

Number of members of boards

Figure 4-18. Number of members of boards in Vietnam

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According to our First Survey, the number of board members varied from 3 to 9. About 38% of the responding companies had 5 board members, 23% had 6 members and 12% have 7 members. Of the 5 banks that participated in the Second Survey, 4 banks had 9-11 members. It is interesting to note that SOCBs had a higher number than the JSCBs. According to our First Survey, about 66.7% board members represented their shareholders interests and 62.2% represented the interests of the state. It is to be remembered that the state was still the largest shareholder in most of the listed and largest companies in Vietnam. The representatives of the strategic partners (investment funds, investors with big financial stake) played more important roles on the boards. The representatives of employees, of customers or of associations were still minorities on the Vietnamese boards.

70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00%

Shareholders 30

Employee 1

State 28

Customer 1

Strategic partner 5

Others 1

Figure 4-19. Combined structure of the boards of directors

In our Second Survey, we have discussed with the Board members, especially with the Chairmen their tasks and also the tasks of the Board members. Bank1: The Chairman had been serving the second terms in the current position. In his stewardship, he had already four CEOs working with him. The tasks of the Chairman were very diverse and challenging. One of the tasks was to co-ordinate different members of the BoD. It should be mentioned here, that most of members considered themselves as very

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important for they had high positions in other companies or institutions which were investors of this bank. For this reason, it was very demanding and delicate to get them working for the benefit of the bank, and not only for the profit of the investors they represented or for their own interest. On one hand, the Chairman had to call the board members to formal meetings. On the other hand, he also had to inform them or convince them to make certain decision in informal one-to-one meetings. Furthermore, as representative of the shareholders he had to call for and chair the General Shareholders Meeting. His task was also to set the strategic direction for the company. Moreover, he was also responsible for nominating the members of the Top Management and for controlling daily expenses and costs. He also approved the budget remuneration for the Board Members and Members of Top Management after the Nomination and Remuneration Committee have prepared the decisions. With projects of strategic relevance for the company, he had to initiate and network internally and externally in order to get the projects continued. The chairman was also the legal representative of the bank. It should also be mentioned here that the Chairman is also the CEO of another large SOE. The time he spends for the CEO position the SOE is 50 % and as chairman 50%. Bank3: The bank has recently become a listed company. The Chairman was also the founder of the bank. He was also the Chief of Compliance Officer. In the strategic planning project, his task was to initiate the project, ratify the strategy and monitor the strategy implementation. The Board consisted of 11 members, of which 2 were women and 3 were expatriates. The bank also had a special appointment policy: in the Top and Middle Management, if the position of the director was a man, then his deputy had to be a woman or vice versa. The reason, according to the chairman, was that they had to complement each other. The Chairman considers himself as a leader, but he had to perform tasks which the members of the Top Management should do. His tasks were therefore very diverse: there were daily jobs which came up in the Bank, and according to him, nobody could perform more efficiently. Just to name

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some examples: opening the new branch; building up and maintaining relations with the local authorities and international partners; selecting providers of technology and services; initiating a strategic planning project. In order to do all these tasks efficiently, the Chairman reported that members of the Top Management should have four competences: power in par with his position; ability to convince; integrity, networking skills. Bank5: The task of the Chairman is to take care of the strategic planning and supervise the (daily) operations of the Top Management, Head the Credit Committee and be a member of the Investment Committee. He also chaired 5 BoD meetings a year and called the irregular meetings when something happened unexpectedly that needed dealing with immediately. Our suggestions: There is no such thing as an ideal board composition. However, the banks in Vietnam are mostly of medium size, so we recommend that a team of the BoD should have 5 to 7 members in order to work effectively and efficiently. Moreover, the board should be structured in a manner that ensures the interest of all shareholders is represented fairly and objectively. The current stipulation is that at least one third of the Boards membership should comprise Independent Non-Executive Directors, and the number of Executive Directors must not exceed 40% of the total membership (ING-Report, 2005). We also recommend that the team of the BoD should be diverse concerning demographic data, know how, and team roles (see also Hilb, 2005). Therefore, a board evaluation (self- and external) should be conducted to identify the strengths and weaknesses of the board. In the case of Bank3, the Board is well aware of the relevance of the board composition. However, the solution based on only the difference of gender is also not satisfied.123 We also recommend that there should be a clear distribution of tasks between the chairmen, members of the Board and members of Top

123 T  he Bank also had a special appointment policy: in the Top and Middle Management, if the position of the director was a man, than his deputy had to be a woman or vice versa.

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Management. As stated in the banks surveyed, the Chairmen still do most of the tasks that should be in the responsibility of the members of Top Management. The Board is usually responsible for setting out the banks policies and business direction through participation and endorsement of its vision, mission, strategies, business plans and targets, and budgets, ensuring that they are efficiently and effectively implemented by management to achieve desired results, creating business value, and maximizing wealth to shareholders (ING-Report, 2006). 4.4.4 Board culture Current situation: Before we assess the culture of the board, we should have a closer look at the corporate culture of the companies. According to our First Survey, 31% considered themselves as customer oriented, and 17 % as trust oriented. Only 8% characterized themselves as bureaucratic.
Others 10% Customer oriented 31% Perfomance oriented 34%

Trust oriented 17% Bureaucratic 8%

Figure 4-20. Corporate culture of the questioned companies

In the VCCI-Survey, 38% of the participating companies declared that in their company there was a code of conduct in place, and each year employees had to sign a letter confirming that they will follow the code of conduct

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and will be responsible for any breaches of the code. 32% did have a code of conduct but in practice, management did not show a strong commitment to high ethical standards. In our Second Survey, we have received another picture of the culture of the banks, but also of the board. In some banks, there is one person or a few key members who keep the power in their hands and make strategically relevant decisions by themselves without having consulted other members or committees. The other members, especially the non-executive members, like representatives of foreign investment funds, usually do not have any influence on the boards decision and in the decision making process. As stated in the Second Survey, the culture of board in most banks is not cooperative and not performance-oriented, especially in the SOCBs: the culture of board reflects the obsolete attitude of the centrally planned economy. Usually, the members of board are assigned by the state and the omnipresent Communist Party to represent their expectations and enact their will. The assigned members are poorly paid. Thus, such members give the impression of being very important, because the position is considered as very prestigious, but they did not bring the expected performance. Furthermore, the obsolete attitude of the assigned members is not accustomed to accepting the opinion of others. In some cases, they act according to the slogan divide et impera by putting the seeds of mistrust in the team, especially when they want to achieve their personal interest. Usually, when the members of the BoD are appointed onto the board, they have already reached a certain age that they have nothing more to lose, but their individual benefit. With all the SOCBs, all of the members are not only from the same political party, of the same gender but also from the same ethnicity. The need to open up this backward looking culture is low. In a Bank that participated in the Second Survey, most of the members are even from the same family. The culture of the board is obsolete and is based on the size of capital contribution.

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Our suggestions: Therefore, we propose to build up a culture that considers the needs and expectations of all stakeholder groups, not only of the shareholders. The board members should not break into fractions, and fight against each other, but respect each other. In the transition state that Vietnam is now, a clear code of conduct would be very useful. There are many cases where insider information has been misused for personal profit. The sensitive information is transferred to family members or friends, who are speculators on the stock market. There are several regulations in Vietnam concerning these issues, however, the legal enforcement is still not fully implemented. In the banking sector, building trust is essential as we have witnessed in the collapse of credit cooperatives around 1987 in Vietnam. The goal is to build trust not only within the board, but across the company and also with other stakeholder groups. 4.4.5. Systems utilized by BoDs to fulfill their responsibilities It is quite interesting to read the results of the First Survey: 11.1% or (5) of the 45 firms interviewed do not have (or do not utilize) any management systems. The other 88.9% utilize at least one specific management system.
16 14 12 10 8 6 4 2 0
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St ra

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Figure 4-21. The applied Management tools applied in the

board of directors

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In the following, we will review some of the relevant management systems utilized by bank BoDs. Here we focus on the Human Resources Systems: (1) Selection; (2) Remuneration; (3) Evaluation; (4) Development of Board members and Top Management. 4.4.5.1 Selection of members of the BoD and Top Management Current situation: In our First Survey It is impressive to see that about 75% of the responding firms selected the members of their boards based on networking. It is not surprising that there is a Vietnamese saying that Without network, no work fulfilled!

80.00% 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Professional competence 10 Leadership competence 8 Social competence 6 Political competence 11 Availability of a large network 34 Others: 5

Figure 4-22. Required criteria to be selected as a member

of board of directors Bank1: Most of the shareholders are state-owned companies and institutions (e.g. People Committee of a District in HCMC or Trade department of HCMC). However, this Bank is not an SOCB. The BoD is composed of representatives of such organizations. Recently, there were some representatives of private companies, which are major shareholders of the Bank1. According to the expectations of the chairman, the BoD should be made up of professionally competent members.

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Bank2: One of the selection criteria is that the members of the Board had to be the representatives of the large shareholders. If members were shareholders themselves, they usually had or needed to have according to the requirements very good reputation and certain competencies. Examples of such competencies are strategic and conceptual thinking, leadership skills, networking. It is also important to mention here that these members were entrepreneurs. The Chairman has indicated that in the near future, the Board intended to nominate independent but competent members. Bank3: Because this bank was founded by a group of entrepreneurs, the first BoD was also composed of the founders. As they came together and invested together, they must harmonize well with each other (in Vietnamese: Hn phi hp). Other selection criteria have to (besides financial contribution and a wide network) comply with the legal requirements, such as educational background, professional abilities, and experience. Independent members have been allowed to join the board since 2007. Thus, the bank planned to nominate some more independent members. According to the Chairman, each development stage of the bank brought along certain problems to solve and challenges to face, therefore, the composition of members also had to change in order to match the new situation and developments. Bank4: As this Bank is an SOCB, the selection process is very simple: all the members of the BoD and of the Top Management were appointed by the governor of the State Bank of Vietnam (SBV). The appointment criteria were as follows: First of all, according to the succession planning of the SBV, the nominated member had been the candidate for such a position in the succession plan. Each year, there was a meeting of high ranking officers of the SBV and associated SOCBs. Then each officer proposed potential candidates for the promotion. The Top Management of SBV evaluated the proposed candidates according to their abilities, their political attitudes, their professional and social behaviour in the last period (e.g. last year). Then the candidates were narrowed down to the ones with the most promising potential. The short listed candidates would be announced in the meeting of officers and asked in an open survey about their opinions. Usually, there was no rejection or criticism of the candidates. The meeting attendees assumed that the short-

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listed candidates were qualified based on the evaluation of the Top Management. The short-listed candidates would be presented to the SBV-Governor, who kept them in the succession planning database. If there were positions vacant, then the candidates would be appointed. This appointment process seems to be very transparent and democratic. However, the so-called transparency and accountability of the evaluation by the Top Management of the SBV and also the objectivity of the appointment by the Governor, when a position is vacant, are questionable. Due to the strict regulations of the state and owner of the bank, according to the Chairman, there were, in theory, two ways to improve the effectiveness and efficiency of the bank: to replace key people or to change the organization structure. However, in an SOCB, it was nearly impossible to replace the key people, because they were appointed by the SBV-Governor. If the appointed key person was not competent enough to take over a position, the SOCB, in order to resolve the problem, nominated a professional expert to assist the key person sent by the SBV-Governor or would modify slightly the organization structure.124 According to the Chairman, the Bank was well aware of the shortcomings of the central appointment process.125 However, improvements could only be efficiently introduced after the banks would become fully equitized and especially after the Initial Public Offering (IPO). In the first phase, the state would still be a major shareholder and could therefore appoint only one or two representatives of the state on the Board. This would allow the Bank to introduce a professional Corporate Governance. From our First Survey, the number of board members varied from 3 to 9. About 38% of the responding companies had seven board members.126
124 F  or example, the Bank has currently two HR-Departments. The official one is in charge of remuneration policies, for insurance issues, for writing reports to the SBV, if there are needs again for the key people. The unofficial one is in charge of the real issues of the HR-Department. 125 N  owadays, when SOCBs has a key vacant position, they have to contact the SBV to ask them to provide Human Resources. The appointment by the SBV is not necessarily complied with by the need of the banks concerning professional abilities. 126 It is interesting to note that SOCBs had a higher number than the JSCBs.

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Bank3: The board consists of 11 members, of which 2 are women and 3 are foreigners. Our suggestions for selection: A Board that is composed of the experience of former members of top management with the diverse skills of fully independent external members is one that is best positioned to carry out the governance responsibilities given to it by shareholders. We believe that this approach has many advantages. Former executives of the bank, with their widespread relationships, with experience and know-how of complex business activities and processes are often in a better position to challenge management decisions. Moreover, as they do not have any significant business commitments outside of the bank or external directorships they have the resources and time necessary to dedicate themselves to their comprehensive responsibilities as Board members (see also UBS, 2007). However, whether they are fully external members or former members of top management, they should have gone through thorough selection criteria. This enables the bank to identify the right members for a competent Board team. Selection criteria are proposed as follows:
Personality competence Integrity Having excellent reputation Situative flexibility Open for learning Stress resistance Professional competence Profound experience in banking and finance Mastery of strategic thinking Understanding of global matters Social competence Building up and maintai n relations Political networking Leadership competence Problem solver Listening skills Coaching ability

Figure 4-23. Example of a selection criteria list for board members

(see also Hilb, 2006)

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In the area of professional competence, we recommend that also candidates from professional backgrounds other than finance and banking should be considered in order to build up a diverse team, for example candidates with IT, engineering and human resources. Currently, in Vietnam social competence is more important than other competences, because the other business partners wish to deal especially with people with certain networks and even with a specific political background. However, in the future, we are convinced that other competences will gain their weight of relevance. Selection of Chairman and Vice-Chairmen The Board shall, after each Shareholder General Meeting, appoint the Chairman and one or more Vice-Chairmen from among its members. The Board believes that the Chairman and at least one Vice Chairman should have professional backgrounds as bankers. Selection of Directors The Board is responsible for selecting the nominees to be proposed to the Shareholder General Meeting for election. The Nominating Committee shall review the proposals to be submitted to the Board. Based on the recommendations of the Nominating Committee, the Board shall establish criteria for the selection of new Board and Board committee members.127 When proposing a candidate for nomination, the Board shall assess whether other Board mandates held by the candidate could lead to conflicts of interests. The Board does not believe that it should establish a strict limitation for additional Board mandates, but rather evaluate the individual Board members situation, availability and other obligations. The Chairman, on behalf of the Board, shall extend an invitation to the nominee to join the Board and stand for election by shareholders at the Shareholder General Meeting.

127  UBS has also proposed the following: These criteria include, among others, personal qualities and characteristics, professional backgrounds and track records, the ability and willingness to commit adequate time to the Board and committee matters, diversity of viewpoints, experience and demographics, and specific knowledge and experience for individual committee memberships (www.ubs.com).

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4.4.5.2 Remuneration of board members Current situation: 56% of the firms that participated in the First Survey have a fixed remuneration system for the members of their boards of directors, 40% pay their members of boards with variable compensation system and only 4% of board members have an honorary position only.

Honorary, 2, 4%

Variable , 18, 40% Fix, 25, 56%

Figure 4-24. Remuneration systems for board members

Bank1: The non-executive members of BoD did not receive a monthly fixed salary. However, the standing members receive a fixed allowance of around US$ 1000 / month. All of the BoD members received expenses and fees of around US$ 300-500 for each meeting. Recently, an additional financial benefit was added which allowed them to buy a certain number of shares with a face value (par value) of around US$ 12,000 with a lock-up time of one year. Bank 2: The board members did not receive a fixed salary, but an allowance for meetings which take place four times a year. They have no right to purchase shares at par-value. The reason was that the Board members are sent by the major shareholders and from there, they already receive a salary. The standing members of Board (in this bank, there are 4) receive a monthly salary, not as BoD members, but as Head or Vice-head of other committees (e.g. credit committee, investment committee).

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Bank3: All the Board members have an allowance of around US$ 20000 a year. The standing members of the Board who are also heads of other committees (e.g. Credit Committee, Investment Committee, and Nomination Committee) receive a regular salary. If the Bank would like to nominate two Independents Directors in the future, the remuneration system will be improved. Bank5: The members of Board do not have a fixed salary, but allowances. The allowance has to be approved by the AGM. The Chairman and Vicechairman receive the salary as Head of Credit Committee resp. as head of Investment Committee. All the BoD members and members of Top Management and Supervisory Board are allowed to buy all together 1% of chartered capital at par value. The lock-up time is three years. If a member leaves the company before, so he or she has to return the share at the par value plus the lending rate of the Bank. Our suggestions: The executive members of the Board shall conduct a review annually of the components and amount of Board compensation in relation to other similarly situated companies. Board compensation should be consistent with market practices (Hilb, 2006) but should not be set at a level that would call into question the Boards objectivity and the independence of its members. The executive members of the Board approve the overall compensation for the non-executive directors of the Board. In Vietnam, we recommend that compensation of independent board members should be partly paid in companys stock in order to align the board members interests with those of shareholders.128 4.4.5.3 Evaluation of members of Board and Top Management Current situation: According to our First Survey, 38 % of Board members were evaluated internally, 7 % had self evaluation and only 3 % had an external system
128 E  ither the board members could purchase shares at par-value (with lock-up time for one year) or their salary is paid in shares.

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(e.g. by customers or by the governmental authorities); however, 22% were evaluated by external consultants and 30% of the Vietnamese boards had not been evaluated.

Foreign evaluated, 22%

Not evaluated yet, 30%

Self evaluated, 7% External evaluated, 3% Internal evaluated, 38%

Figure 4-25. Performance evaluation of board members

Bank 2: According to our interview, until now, no board member evaluation has been conducted. One reason is that the bank does not have an evaluation system. Furthermore another reason is that members of the Board do not receive financial benefits and they are considered as honourable people by the major investors. According to the customs in Vietnam, it is not common to evaluate people in such status and high ranking positions. However, this will change soon when the bank intends to hire additional independent members. Our suggestions: As already conducted in one bank that was surveyed, it is also possible that the Board members can be assessed by the Chairman. We recommend that such an assessment should be carried out by the individual as a self-assessment, then between the Chairman each Board member in a so-called Assessment Talk (Hilb, 2006). Hilb (2006) also recommends that a formal assessment should be conducted when a member is about to resign or when a severance package is to be negotiated. It is also possible that the Board members can elect to have a 360 Degree Feedback Assessment by an unbiased consulting firm, and decide to whom a brief feedback questionnaire is to be sent for analysis (Hilb, 2006).

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4.4.5.4 Development of board members Current situation: It is obvious that the training situation for the members of boards can be significantly improved. The result of questionnaire showed that 19% of the companies interviewed indicate that strategic management is a desired topic of advanced training for board members, followed by Finance & Controlling with 15 % and by Auditing with 13 %. We also found out in discussions with different experts or in Vietnam that most of the members of board did not have a sound education in modern management. Some of them had a educational background as engineers or as economists but trained in the former socialistic countries such as Poland, Eastern Germany or Russia.

Others, 4 , 7% 36 Stratagems , 9, 15%

Strategic Management , 12, 19%

Information Technology , 3 , 5% Risk Management , 8, 13% Human Resources, 6, 10%

Finance & Controlling , 9, 15%

Auditing , 8, 13%

Marketing , 2, 3%

Figure 4-26. Desired topic of advanced training for the members of boards Our suggestions: Ideally, the needs for the development of board members can be identified by the Assessment of Board Members. The development measures should bring the benefit not only to the board members, but also help to make the undertaking of his or her tasks in the company more effective and efficient. In other words, it should also bring the benefit to the company and not just be a measure to motivate the board members.

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To do so, the banks should define and document the procedures for training needs assessment consistent with the board development policy. The banks should also carry out a training needs assessment and document and prioritise requirements categorised by management, technical and universal training needs. Furthermore, it is also important that the banks review and finalise a training curriculum based on a detailed needs assessment and identify any external training needs. The banks should contract with consultants for the preparation of courses and course materials, supervising and guiding the development as required. 4.4.6 Information and communications Current situation: Company-wide communication According to our Second Surveys, there are quite few banks which have implemented clear and effective communication procedures. In several cases, the standing members of the BoD advise the top management just verbally about their decisions. And if any communication troubles appear, the top management must be responsible for these communication errors. The reason is that top management has to take responsibility for their underwritten signatures. The VCCI-Survey also found out that only 53% of the companies communicate their enterprise-wide objectives to all employees, and staff understand and work towards these objectives and know what they need to do to achieve the objectives. Board meetings The number of board meetings varies significantly. About 33.33% of the firms interviewed have 4 board meetings, 8.89% have 3 board meetings, 20% have 2 board meetings and 13.33% have only 1 board meeting per year. It is also interesting to note that 24.44% Vietnamese boards hold a meeting only if it is required.

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Only when needed, 11, 24%

4 board meeting per year , 15, 34%

1 board meeting per year , 6, 13% 3 board meeting per year , 4, 9%

2 board meeting per year, 9, 20%

Figure 4-27. Number of board meetings per year

According to the IFC-Survey, Board of Management meetings, and written minutes are prepared and approved after each meeting. However, only 62% of joint stock firms did the same, with 35% saying that their Board meetings are more informally structured, although more than 90% prepared and approved minutes. Across the sub-sample on non-SOEs, roughly 65% of firms conceded that senior executives, who were not members of the Board, nonetheless routinely attended Board of Management meetings. This was true for more than three-quarters of equitized companies and half of the joint stock firms surveyed. Virtually all of the equitized firms surveyed have formal agendas prepared and circulated before. Written policies and an organization chart with detailed reporting line play an important role in ensuring the effectiveness of information and communication flow to the companys management. The main reason for this fact is that, relevant information may not be identified and communicated in a timely manner to decision makers, if management does not follow the companys policies and organization chart.

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Our suggestions: Company-wide information and communication It is clear that if employees are unsure of their roles and responsibilities and there is no written job description, the relevant information cannot be identified and communicated in a timely manner to the companys management. The bank must ensure that employees are willing and able to implement strategies for example by making the information available. As already known from the Banks that participated in the interviews, the Top Management even keeps their vision and strategies secret, which makes it difficult for employees to contribute to successful implementation. Best practices show that to ensure the effectiveness of information and communication flow the company would have to have clear procedures on information flows, and an organization chart showing detailed reporting lines. Management of the company should follow the policies and procedures put in practice. Board meetings We recommend that there should be formal internal meetings, which should take place on pre-determined days. The meetings should be wellprepared.129 Hilb (2006) suggests the following process: The CEO reports along the extended information checklist about the most important events of the past period and about the most important objectives of the sub-units of the organization. At the end of the board session, the chairman and the CEO discuss all information arising out of the meeting that should be forwarded to the management. It is important to know that 80 to 90 percent of the chairmans role happens outside of board meetings (Ward, cited in Hilb, 2006).

129  Mller (cited in Hilb, 2005) recommends the following methods for directing meetings: (1) assume preparation, (2) introduce each agenda item, (3) integrate or synthesize the contributions, (4) formulate motions clearly, (5) deal with important issues first, (6) clearly state proportions of votes or breakdown of opinions, (7) keep to schedule (8) explain the context and highlight the implication of each item, (9) propose a schedule of communication, (10) assess and define confidentiality.

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4.5 Recommendations mainly for the banking sector

We have conducted the empirical research based on the two surveys according to the areas of focus. However, these two surveys provided only fragments of the complex issue of Corporate Governance. That is the reason why we also included surveys conducted by others in order to deliver a complete picture. In our surveys we have found out, that many areas in the corporate governance can be significantly improved. We consider it as crucial that the shortcomings in the Corporate Governance situation in Vietnam are known and that we could make the recommendations to the (current and future) board members and members of top management. If the countrys corporate sector wants to avoid the repetition of scandals in the future, and wants to create efficient and competitive business entities which can compete successfully with their overseas peers, both, in international markets as well as in an increasingly liberalized domestic market, then they have to create a more robust, sustainable, larger business. In order to achieve these goals, it is important to introduce and implement a modern approach to corporate governance practices - the New Corporate Governance. For the successful development, implementation and evaluation Corporate Governance, we recommend that any change in the areas of focus should factor in the interests of the stakeholder groups, such as employees, customers, shareholders, partners and communities. By saying that, we hope that our recommendations would help to improve the corporate situation in Vietnam.

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Areas of focus Vision and strategy:

Recommendations A clear delineation of the roles of the BoD and of the top Management is critical to the success. The external consultants can help with project management, with planning methods and support in the decision making process. It is crucial that the content of the vision and strategy are communicated to the relevant stakeholder groups and do not just remain in the head of the board members and members of top management. The board structure should be designed that the interests of all stakeholders are considered and protected. Until now in Vietnam, only the interests of the owners / shareholders are considered. The banks should also introduce related committees as discussed either at the level of board or at the level of top management in order to ensure the effectiveness, transparency and accountability. The banks should also introduce a corporate structure that reduces spans of control to allow board members and members of top management to concentrate on strategic issues, increase the delegation of responsibility, clarifies reporting lines and chains of command, clearly differentiates between line management and functional relationships, removes the potential for conflicts of interests that is common in Vietnam. Composition of the Board should reflect not only demographic data, but also the know-how and team-roles. The size of the Board should be lean enough that problems can be discussed effectively and efficiently and decisions can be made quickly. There should be a clear distribution of tasks between the chairman and other board members and members of top management. He should not get involved (too much) in the daily business as it is the case in Vietnam.

Board Structure:

Leadership:

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Board Culture:

Banks should build up a culture where the needs and expectation of all stakeholders are considered: A culture of trust and of integrity should be introduced at the board level (but also across the company). Most of the banks have somehow certain management systems. However, the systems should help to make the company transparent, effective and efficient. State-of-the-art systems can also help to provide the employees with the necessary knowledge and skills that serve as motivation for them. Process structure determines which tasks and in which sequential order they have to be accomplished. According to Rueegg-Stuerm (2005) there are 3 levels of processes: management processes, business processes and support processes. The adequate processes and procedures help to do the right things but also to do the things right, thus increasing the benefit for all the stakeholders. Information and communication is still a huge challenge for most companies in Vietnam. The banks must ensure that the stakeholders receive the required information that they can contribute to the success of the company. According to Hilb (2005), communication should follow 4 principles: (1) completeness, (2) objectivity, (3) comprehensibility, and (4) timeliness.

Systems:

Processes:

Information and Communication:

Figure 4-28. Recommendations based on the areas of focus

There is clear evidence that the enactment of good corporate governance can have a tangible positive impact on the following issues130: - A companys efficiency and operational performance;

130  For example, see studies by CLSA, McKinsey and the World Bank, profiled briefly in Recommendations on Good Corporate Governance Practices in Vietnam, p. 3.

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-  Its ability to access finance, particularly from investors and capital markets; - The reduction of risk related to its day-to-day operations; - Its compliance with laws and regulations; and - The degree to which it can protect itself from corrupt practices. The cumulative result can be larger investment, higher growth, and greater employment creation.131 As a consequence, studies show that investors are more interested in investments in and are willing to pay more for shares in companies which are perceived to conform to higher corporate governance standards.132

131 Corporate Governance and Development, p. 14. 132  Conversely, investors will pay less, or may simply choose not to invest at all, in firms that display poor corporate governance practices. Put another way, companies that adhere to higher standards of corporate governance tend to be rewarded with lower costs of capital and higher share price valuations.

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CHAPTER 5:

IMPLICATIONS

Based on the analysis and survey findings outlined in the previous sections, we conclude with some recommendations to promote better corporate governance practices in Vietnam. However, it should be emphasized again that the term Corporate Governance is very new in Vietnam. Therefore, we should keep in mind that the concept of corporate governance is a relatively broad one, and that it often seems to mean different things to different people. Also, the concept is not yet well established or well understood in Vietnam. It would probably be better to identify and focus on specific, higher priority issues within the broad array of corporate governance from a practical or implementation point of view as well as from the standpoint of research and training. In this sense, it is important to find out, where the most pressing needs for intervention are, and where the optimum gains from such interventions could, more readily, be achieved.

Chapter 1: Introduction

Chapter 2: Theory about Corporate Governance 2.1 Governance theories 2.2 Characteristics

Chapter 3: Secondary Data Analysis

Chapter 4: Primary Data Analysis

Chapter 5: Implications

1.1 Background

3.1 Environment
3.4. SWOT / CBI

4.1 Background

5.1 Research
4.5 Recommendations

1.5 Conclusion

2.4 Conclusion

1.2 Objectives

2.3 Research framework

- Secondary data analysis - Primary data analysis

4.2 First survey

3.2 Market

5.2 Teaching

1.3 Structure

4.3 Second survey

S ituational
2.4 Board Vision 3.1 Board Selection

S trategic I ntegrated

1.4 Research approach

1.2 Internal Context

4.2 2.1 Risk Board 4.1 Composition Auditing Mgmt 3.4 3.2 Keep it 1.1 Board controlled Board External Development Feedback 4.3 Context 4.4 CommuniControlling cation 2.3 Board 3.3 Structure 2.2 Board Board Compensation Culture

5.3 Practice 3.3 Industry 4.4 Summary

Figure 5-1. Structure of the thesis overview Chapter 5

In this part, we want to highlight the implications for research, teaching, and practice.

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5.1 Implications for research

As this survey represents one of the first research projects on corporate governance in Vietnam, we deliberately tried to span most of the corporate governance issues that are proposed in the concept New Corporate Governance by Martin Hilb (Hilb, 2005). In doing so, we hope we have been able to identify some of the specific areas where there is a greater need for intervention and initiative. However, there is, clearly, a need for further, more focused diagnostic studies on this topic in Vietnam. In particular, it would be worth taking a closer look at the more specific corporate governance problems faced by the SOE and non-state sectors (see also IFC-Report, 2006). A clear focus on these issues could then serve as useful input for the conceptualization and design of an action plan for corporate governance in Vietnam. In the SOE sector, we have identified problems such as ambivalent cultures of the Board, potential conflicts of interest, confused board structures, unclear roles and tasks of the members of the Board and of committees as well as of top management. In the non-state sector, other topics that would benefit from further research include the apparent weaknesses of supervisory committees in many private firms as well as the considerable overlap that exists between senior executives and members of the Boards of Management. In this research, the roles of diverse stakeholder groups, such as employees, customers, society, minority shareholders, have been discussed, but not in details. These groups in Vietnam need to be further researched. Other industries in Vietnam, such as schools, hospitals, SMEs, Family Businesses, and Cooperatives also need to be included in future research.

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5. 2 Implications for teaching

In our study, we also found out, that the members of boards, of supervisory boards and also of top management need practical training in specific corporate governance themes and issues such as Strategic Management, Risk Management, Change Management, Auditing and Accounting and modern tools of Human Resource Management. Furthermore, it is also necessary to design targeted board programs, such as Bank Governance, Educational Governance, Hospital Governance, Governance for SMEs (Hilb, 2005, 212). These board programs should not only be for people who are already members of boards, of supervisory boards and of top management, but also future members.133 These efforts should help on the one hand to provide the existing members with the adequate knowledge and skills to perform their tasks effectively and on the other hand, to broaden the pool of qualified and capable individuals who can serve as members of boards in the future. In addition, there is a need to support policy and legislative interventions which are intended to strengthen the legal and regulatory framework for corporate governance. These efforts include a range of initiatives (see also IFC-Report, 2006): -  Advocacy work in promoting good corporate governance practices within the business community, -  Implementation campaigns. of training programs and public awareness

133  It does not make sense to have created the functions of the BoD, Supervisory Boards and Committees if the members are not sufficiently trained to perform their duties adequately. In 2003, Singapore found that a boom in initial public offerings had resulted in a shortage of board directors, with some individuals sitting on ten or more company boards - in addition to their full-time jobs. (See also The Business Times, Singapore, 19 November 2003 cited in IFC, 2006).

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5.3 Implications for practice

As pointed out earlier in the paper, there are currently 3,600 equitised SOEs and there are an additional 1,500 expected to be equitized by 2010 (Vietnam Tiger Fund, 2007). It is worth stressing that the largest companies in Vietnam will become equitised SOEs for example, VMS, BIDV, Vietcombank, Sabeco and Habeco. Therefore, any efforts to improve corporate governance standards in Vietnam should focus initially on larger business entities, the majority of which tend to be SOEs. As the private sector 134 in Vietnam matures and expands, more non-state firms will develop into large corporate entities. However at present, it may be advisable to focus particular attention on (equitised) SOEs. We are confident, that the pursuit of better corporate governance practices converges with the ongoing equitisation campaign. This is evidenced by the fact that SOEs destined for equitisation have introduced and are implementing good corporate governance practices because they are convinced that this will be a critical factor in their ability to attract investors. New investors are expected to be willing to buy shares of partially equitising SOEs at valuations acceptable to the government only if there are improved corporate governance standards that better protect the interests of minority shareholders. The equitisation process does seem to be a vehicle for advancing good corporate governance standards within firms in Vietnam. Our survey results suggest several areas of focus for future progress, such as vision and strategy, structure of board, culture of board, leadership, systems, processes, information and communication. For the successful development, implementation and evaluation of corporate governance, we recommend that any change in the area of focus should factor in the interests of the stakeholders groups.

134  Notwithstanding their future growth and sustainable development prospects, which depend partly on good corporate governance, their immediate need to improve such practices is clearly limited.

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If members of the board and of the top management are conscious of the fact that improved corporate governance practices will lessen their exposure to various operational risks and improve business performance, and if shareholders can see that improved corporate governance practices will help enhance the value of their investments, then the introduction and implementation of corporate governance practices are more likely to be embraced and genuinely internalized in the day-to-day operations of companies. This logic suggests that a consciousness-raising and advocacy campaign would be a useful complement and support to any regulatory initiatives. We also suggest that initiatives to improve corporate governance practices in Vietnam should represent a concerted effort on the part of all stakeholders government and regulatory agencies, companies (their management) and shareholders / investors (see also IFC-Report, 2006). 135 This will require the combined efforts of multiple government agencies and other relevant organisations.

135 T  he experience of SECO has showed that combined efforts of multiple government agencies and other relevant organizations increase the chance for success. The concerted actions panning the following institutions: the State Bank of Vietnam, the Ministry of Finance, the Ministry of Planning & Investment, the State Securities Commission (SSC), the Ministry of Justice, the Vietnam Chamber of Commerce & Industry (VCCI), some business associations, etc.

183

ANNEX ANNEX I : Interviewers List ANNEX II : First Survey ANNEX III : Second Survey Reference

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Annex I: Interviewers list

No.
1 2 3

Name Dr. To Ngoc Hung Mr. Ly Xuan Hai Mr. Huynh Nghia Hiep Mr. Nguyen The Nang Mr. Nguyen Huy Tua Mr. Do Huy Hoai Mr. Truong Hai Hung

Organization

Locations Remarks

Academy of Bank ACB ACB Bao Minh Insurance Company BIDV BIDV Securities Company Calyon Investment Bank Capital Mobilization Department of Ministry of Finance Deutsche Bank

Hanoi HCMC HCMC

Director President & CEO Executive Vice President Executive Vice President and Member of Board Director Managing Director Director/ Head of Capital Market Director/ University Professor Chief Country Officer Chairman of Eximbank CEO

4 5 6

HCMC Hanoi Hanoi

HCMC

Dr. Le Van Hung Mr. Lawrence J. Wolfe Mr. Nguyen Thanh Long

Hanoi

HCMC

10

Eximbank Halong Canned Food Stock Corporation Hanoi Construction Investment Holcim Vietnam Holcim Vietnam

HCMC

11

Mr. Tran Xuan My

HCMC

12

Ms. Nguyen Thi Hoa Mr. Nguyen Trung Hau Ms. Nguyen Anh Hoa

Hanoi

Chairwoman/CEO

13 14

HCMC HCMC

Terminal Manager HR Manager

185

15

Beat Waefler Honorar Consul Mr. Vo Minh Tuan

Honorar Consul in HCMC Incombank

HCMC

Board members of several companies Deputy Managing Director Executive Chairman of Mekong Housing Bank Vice Chairman/ CEO of Military Bank CEO HR Director Supervisor Founder and Chairman of Sacombank CEO

16

HCMC

17

Mr. Huynh Nam Dung

MHB

HCMC

18

Mr. Le Van Be Mr. Pierre Schaufelberger Mr. Le Duc Thuan Mr. Le Anh Thi Mr. Dang Van Thanh

Military Bank

Hanoi

19 20 21

Nestl Vietnam Nestl Vietnam PriceWaterHouseCoopers Sacombank Sacombank Securities Company Seaprodex Real Estate

HCMC HCMC HCMC

22

HCMC

23

Mr. Nguyen Ho Nam Mr. Dao Van Thinh Dr. Ngo Chung

HCMC

24

HCMC

CEO Organization and HR Deputy Director Former Bank Governor Deputy Governor Director of Development Strategy

25

State Bank of Vietnam

Hanoi

26

Dr. Cao Si Kiem

State Bank of Vietnam

Hanoi

27

Mr. Dang Thanh Binh

State Bank of Vietnam

Hanoi

28

Dr. Le Xuan Nghia

State Bank of Vietnam

Hanoi

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29

Ms. Bui Thi Thanh Huong

State Securities Commission

Hanoi

Director of Securities Business Department Director of Securities Science Research and Training Center Director of Research and Training Center Deputy General Director Director

30

Dr. Tran Quoc Tuan

State Securities Commission

HCMC

31

Dr. Dao Le Minh

State Securities Commission State Treasury/ Ministry of Finance Thang Long Securities Company VIB

Hanoi

32

Mr. Nguyen Dinh Son

Hanoi

33

Mr. Nguyen Duc Thang

HCMC

34

Mr. Trinh Van Tuan

HCMC

Chairman CEO of Viet A Bank Chairman of Viet A Bank Chairman of Vietcombank Professor and Vice Rector CEO

35

Mr. Pham Van Hung

Viet A Bank

HCMC

36

Mr. Do Cong Chinh

Viet A Bank

HCMC

37

Mr. Nguyen Hoa Binh

Vietcombank Vietnam Buddhist University Vigatexco

Hanoi

38

Dr. Le Manh That Ms. Nguyen Thi Phong Huyen

HCMC

39

HCMC

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ANNEX II: First Survey Questionnaire of Corporate Governance January 6th 2006
Questions 1.  Which position (s) do you have in your company? (You can choose several answers) Chairman Member of board Managing Director (CEO) Member of top management Others: 2.  How many members of board are there in your company: members? 3. Ist your company listed on the stock exchange? Yes Intended in the future No

4. How is the board of directors of your company constructed? Board without committee Board with committee: Audit committee Nomination committee Compensation committee Other committee 5. Which system do you apply in your board of directors: Strategic planning Monitoring system Strategic control for evaluation of the strategic implementation

188

Risk Management System Financial Reporting Auditing Selection concept Remuneration concept Succession planning Other system

6  How could you characterize your corporate culture? (You can choose more than one answer) Customer oriented Trust oriented Bureaucratic Performance oriented Others

7.  How is the board of directors of your company evaluated? (You could choose more than one answer) Internal evaluated External evaluated Self evaluation Foreign evaluation Not evaluated yet

8.  Which criteria are used to select the member of boards of directors? (You could choose more than one answer) Professional competence Leadership competence Social competence Political competence Availability of a large network Others:

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9.  Which group of stakeholders have representative in the board of directors? (You could choose more than one answer) Shareholders Employee State Costumer Others: 10.  Which topics of advanced training should be interesting for the board of directors in Vietnam? (You could choose more than one answer) Strategic Management Finance und Controlling Auditing Marketing Human Resources Risk Management IT 36 Strategeme Others: 11.  How is the structure of remuneration system of the members of boards? Fix Variable Honorary (without compensation) Others: 12. How often is the board meeting in your company? One for year Only, when we have needs

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ANNEX III:

Second Survey Fact sheet [COMPANY]

Descriptions Remarks

Criteria About the bank - Name of the bank: - Types of company forms: - Founding year: - Number of employees - Products (or Strategic Business Units): - Number of branches - Sales (USD) - Sales per Strategic Busines Unit): - Non Performance Loans (NPL) ratio - Revenue growth (2005-2006) - EBT (USD) - Pretax profit margin - Net Profit Margin - Shareholder's equity (chartered capital) - ROE - ROA - PE - year to be equitized / listed - Future perspective About the BoD - Number of members of BoD - gender - Age - Education Special abilities - Support from government and SBV - Strategic partnership

e.g. new businesses

e.g. Relationship to political decision makers e.g. with foreign banks

Strengths, e.g. - Strong capital basic - Very fast asset growth in the last 5 years - Strong hidden reserves - Complement capital resources - Rapid expansion of branch-network - Best mortgage bank Weaknesses, e.g. - Low reputation - Low profitability ratios - No suitable IT system - Weak credit management system - Primitive Asset / Liability Management - Lack of product diversity Concentration of funding base Narrow geographical focus Lack of professional and high-potentials

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ANNEX III:

Second Survey

Importance
Very unimportant Very important Unimportant

Satisfaction
Very unsatisfied Very satisfied

Evaluation criteria of the board

1 Strategy 1.1 Clarity of vision and values 1.2 Involvement of BoD in the setting of vision 1.3 Involvement of BoD in strategy formulation 1.4 Involvement of BoD in the decision of strategic course 1.5 Involvement of BoD in the implementation of strategy 1.6 Involvement of BoD in the strategic control

1 Do you as a board member know clearly the vision and mission statements of your company? 1.a Please indicate the vision of your company in some words:

1.b Please indicate the values of your company:

1.c

Please indicate the mission statements of your company:

2 How is the vision creation process in your company?

3 What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"

Unsatisfied

Important

Satisfied

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ANNEX III:

Second Survey

Strategy 1 How does the strategy differ from the local competitor (see also exhibit "Strategic Option")?

2 What competitive pressure do you expect when foreign service providers can provide financial services under any legal form (100% foreign-owned, branches, Joint-Ventures, strategic partnership)?

3 By 2010, Vietnam will fulfill the national treatment under BTA, under which there will be no more restrictions, especially on US banks. What is your bank's strategy between now and 2010 to cope with the situation?

4 For new services that have neber been available in Vietnam, like money brokering, trade in derivatives, do you fear that free access for foreign banks would take away opportunities for Vietnamese banks / institutions in providing these services?

5 Do you expect that the restrictions for non-bank financial institutions to provide banking services will be dismantled in the future, given the possibilities provided ty technology and other development?

6 Does your bank have a strategy to diversify into new services?

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ANNEX III:

Second Survey

Risk Management 1 About Risks and Opportunities of the banks 1.a Please indicate the greatest risks of the bank:

1.b

Please indicate the greatest opportunities:

1.c

please indicate different types of risks (see table "risk matrix"): Environment:

Market:

Customers:

Industry:

Internal risks:

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ANNEX III:
Types of Risks Environment WTO accession Political instability

Second Survey Table: Rick Matrix

Impact on performance 1 2 3 4 5 Probability of Occurrence 1 2 3 4 5

Slow down in reform Economic slowdown Frequent changes of bank-related policies Technological development Social tension Currency Market

Product offerings Capital shortage No branches in foreign markets

Customers

Bad debts (non-performing loans) Credit card fraud Lack of confidence in the bank Absence of consumer credit bureau

Industry

Losing market share to foreign banks Fierce competition of local banks in a few segments Brain drain from Vietnamese banks

Internal risks Retain capable employees IT break-down Capital shortage Succession planning Fraud and corruption Risk and liability Management (RLM) Lack of vision of the top management Lack of professionalism of staff Narrow revenue base

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ANNEX III:

Second Survey

Importance
Very unimportant Very important Unimportant

Satisfaction
Very unsatisfied Very satisfied

Evaluation criteria of the board

3 Board structure 3.1 Enforcement of strategy-compliant company structure 3.2 Delegation of authority to senior management 3.3 Effective decision-implementation 3.4 Effective performance of Audit Committee 3.5 Effective performance of N&RC 3.6 Effective performance of BS&RC 3.7 Supervision of control mechanisms of the group

What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"

Unsatisfied

Important

Satisfied

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ANNEX III:

Second Survey

Importance
Very unimportant Very important Unimportant

Satisfaction
Very unsatisfied Very satisfied

4 Board culture 4.1 Clarity of code of ethical conduct 4.2 Team spirit of the board 4.3 Culture of trust of the board 4.4 Skills to consider the opinion of management 4.5 Constructive communication with management 4.6 Participative decision-finding approach 4.7 Checks and balances throughout the board 4.8 Integrity of board members

What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"

Unsatisfied

Important

Satisfied

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ANNEX III:

Second Survey

Importance
Very unimportant Very important Unimportant

Satisfaction
Very unsatisfied Very satisfied

Evaluation criteria of the board

5 Board composition 5.2 Board diversity 5.3 Balanced composition based on functional competences 5.4 Balanced composition based on market know how 5.5 Balanced composition based on product know how 5.6 Independence of board members 1 o o 2 o Optimal numbers of board members Number of female board members Number of male board members Board diversity Educational backgound - level - highest title acquired - functional focus area o Professional backgound - years with working experience - years in leading positions - years at board o 3 o Ethnic backgound Competences (several answers possible) What for competences do you think that a member of board should have? - Political networking - Functional competences - Market know-how - Product know-how - Family relations - Educational background - Leadership quality - Integrity 4 5.1 Optimal number of board members

Unsatisfied

Important

Satisfied

What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"

198

ANNEX III:

Second Survey

Importance
Very unimportant Very important Unimportant

Satisfaction
Very unsatisfied Very satisfied

Evaluation criteria of the board

6 Board meeting 6.1 Leadership role of chairman 6.2 Chairing of board meetings 6.3 Optimal use of relevant communication technologies 6.4 Control tasks of chairman 6.5 Optimal number of meetings of Audit Committee 6.6 Optimal number of meetings of NRC 6.7 Optimal number of meetings of BS & RC 6.7 Initation of use of external consultants by board 6.8 Records of board meetings 1

Does the board get regular (e.g. quarterly) information on the financial situation of the company?

Does the financial reporting contain statements on all financial indicators (company value, cash flow, profitability, liquidity)?

Is the extent of the reporting fine-tuned (not to much, not too little)?

Does the board get regular information on non-financial indicators (e.g. market shares, employee satisfaction, competitor behavior)?

Is strategic control enabled though reports on significant deviations of the strategy implementation?

Which information technologies do you use to communicate with the board?

What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"

Unsatisfied

Important

Satisfied

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ANNEX III:

Second Survey

Importance
Very unimportant Very important Unimportant

Satisfaction
Very unsatisfied Very satisfied

Evaluation criteria of the board

7 Board and Senior Management 7.1 Professional selection of board members 7.2 Professional selection of senior management 7.3 Fair performance evaluation of board members 7.4 Fair performance evaluation of senior management 7.5 Performance-based compensation of board members 7.6 Performance-based compensation of senior management 7.7 Executive training of board members 7.8 Executive training of senior management 7.9 Coaching of senior management by board

Unsatisfied

Important

Satisfied

Yes 1 Is the salary of BoD of your company devided into the fixed part and variable part ?

What is the percentage of fixed part ?

3 o o o o o o o o o 4

What contains the variable part ? provision of provision of provision of provision of provision of provision of provision of provision of provision of home allowance company car private healthcare benefit hospital membership program medical check up dental care life insurance club membership stock plan

What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"

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ANNEX III:

Second Survey

Importance
Very unimportant Very important Unimportant

Satisfaction
Very unsatisfied Very satisfied

Evaluation criteria of the board

8 Responsibity of Board towards stakeholder 8.1 Optimal representation of shareholders interests 8.2 Optimal representation of interests of key customers 8.3 Optimal representation of interests of personnel 8.4 Optimal handling of public relations 8.5 Risk management 8.6 External audit 8.7 Internal audit 8.8 Communication between external and internal audit 8.9 Prepared response to potential take-over offer

What would you suggest to improve the satisfaction rate, if indicated "unsatisfied or very unsatisfied"

Unsatisfied

Important

Satisfied

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Curriculum Vitae
Bao Toan Tran was born in Vietnam, but has lived many years in Switzerland and is a Swiss citizen. In Switzerland and Luxembourg, he worked in private banking, asset and fund management for Credite Suisse, for Banque Gnrale du Luxembourg and for Aargauische Kantonalbank, where he was Senior Portfolio Manager and Head of Equities Research. In 2005, he returned to live and work in Vietnam and has since been involved in several projects in the banking industry and for the State Securities Commission. Mr. Tran is one of the original founders of Viet Capital, which is one of leading fund managers and investment banks in Vietnam, and currently serves as its Vice-Chairman. He is responsible for overall investment strategy and business development. Prior to founding Viet Capital, he was one of Directors at Vietnam Holding, a Swiss-based fund dedicated to opportunistic investments in Vietnam and listed on the London AIM.