Vietnam’s banking sector: investment scope in 2024

Dealing with weak lending institutions and stalled projects remains a challenge for Vietnamese regulators, even though a proposal was drawn up last year to raise the foreign investment ceiling.

At the same time, mergers and acquisitions (M&A) in Vietnam’s banking sector are gaining momentum, and 2024 will bring both opportunities and challenges.

In this article, we discuss the key growth drivers of the Vietnamese banking sector, significant transactions, the shift towards privatization, challenges and opportunities for investors, and emerging trends in the alternative lending market.

Record growth in 2023

In 2023, Vietnamese banks recorded significant deposit growth, reaching over USD 562.5 trillion, an increase of 14% compared to 2022. This marks the fastest growth in the history of the industry, reflecting strong consumer confidence in the stability and security of Vietnamese banks . This confidence has spurred increased activity in the industry in terms of mergers and acquisitions.

Outstanding M&A transactions

Over the past five years, high-value transactions have become increasingly common in Vietnam’s banking sector. A standout deal was Japan’s Sumitomo Mitsui Banking Corporation’s nearly $1.5 billion investment in VPBank last year.

Similarly, in 2019, BIDV bank established cooperation with South Korea’s KEB Hana Bank in a transaction worth over USD 756 million. These transactions highlight the growing interest of foreign investors in the Vietnamese banking sector.

State ownership and privatization

As of December 2022, the state’s shareholding in the major commercial banks was significant: 80.9% in BIDV, 74.8% in Vietcombank, 64.46% in Vietinbank and 100% in Agribank.

Pursuant to Decision No. 986/QĐ-TTg, the government intends to reduce its share to at least 51% by 2025, further opening the sector to private and foreign investment.

Factors influencing mergers and acquisitions in the Vietnamese banking sector

Weak credit institutions in a high-growth economy

Several domestic banks, including DongABank, CBBank and Ocean Bank, faced negative equity and significant bad loans. As of May 2023, the National Bank of Vietnam (SBV) has placed these banks under special management and is actively seeking interested buyers.

To attract foreign investment, SBV has proposed raising the upper limit on foreign ownership in domestic banks from 30 to 49 percent for acquirers of poorly performing banks. As part of this strategy, banks such as Vietcombank and Military Bank intend to take over struggling institutions such as DongABank and Oceanbank, respectively.

Regarding Vietnam’s economic performance, Deputy Prime Minister Le Minh Khai provided a status update on May 20 and noted the stability of the economy in the first four months of 2024, with controlled inflation. Moreover, GDP growth in the first quarter reached 5.66 percent, the highest in three years, and the scale of the economy reached $430 billion, “placing Vietnam among upper-middle-income countries.”

The average consumer price index (CPI) increased by 3.93% year on year. Foreign direct investment realized reached $6.28 billion, up 7.4 percent, marking the highest growth in five years. Several large corporations appear to be involved in investing in Vietnam in sectors such as electronics, chips, semiconductors and renewable energy.

Rising bank costs in the face of tighter monetary conditions

SBV data showed that corporate deposits fell by around 2.4% at the end of January. compared to the end of the previous year and amounted to VND 6,670 trillion ($262.29 billion), marking the first monthly decline in over two years. Individual deposits also fell by 0.5 percent, totaling VND 6,500 trillion.

SBV aims to achieve 15 percent lending growth this year, but by the end of March, bank lending had only increased by 1.34 percent compared to December 2023. Vietnam’s lending growth usually accelerates in the second half of the year when demand increases .

Depositors experienced several rounds of interest rate cuts last year as banks dealt with increased risk and a surge in bad debts amid prolonged turmoil in the real estate sector.

However, the situation is changing. According to a bank employee in an interview with Vietnam Technology and Commercial Joint Stock Bank, on May 8, it raised interest rates on all deposit terms by 0.1-0.4 percentage points. Asia News Channel. This adjustment brought the interest rate on short-term deposits to a range of 4.55%. up to 4.95 percent

Can Van Luc, government adviser and economist at the Investment and Development Bank of Vietnam, said banks in Vietnam are increasing their deposits in anticipation of the typical increase in loan demand later in the year.

Willie Tanoto, senior director at Fitch Ratings, commented that recent deposit rate increases by local banks “reflect tightening monetary conditions, not an increase in systemic stress.”

Diversification of financial products

Vietnam’s rapidly growing consumer class is driving demand for a variety of financial products. Digital banking and e-wallets have significantly expanded the customer base of domestic banks, making them attractive acquisition targets for foreign investors looking for quick entry into the market.

Taking over existing banks allows foreign investors to quickly expand their offer of financial products. This diversification can increase profitability and customer satisfaction while offering more opportunities for upselling and cross-selling.

Growing foreign investments

Foreign direct investment (FDI) in Vietnam increased sharply in 2023, with FDI disbursed reaching an estimated USD 23.18 million, an increase of 3.5% compared to the previous year. In the banking sector, significant FDI includes Sumitomo Mitsui Banking Corporation’s $1.5 billion investment in VPBank and AEON Group’s $175.2 million acquisition of Postal Finance Company Limited.

Challenges facing foreign investors in the banking industry

Difficulty in assessment

Evaluating smaller banks can be challenging due to inconsistent financial reporting and delays. The use of Vietnam Accounting Standards (VAS) versus International Financial Reporting Standards (IFRS) further complicates the assessment as most global investors are accustomed to IFRS.

Cultural differences

Cultural and operational differences between Vietnamese and foreign banks also pose challenges. These include differences in management styles and corporate culture, which may impact the post-acquisition integration process.

Trends in the payment and lending sector in Vietnam

Digital payments boom

The growth of Vietnam’s e-commerce and fintech sector has spurred the development of digital payments. In 2023, Vietnam recorded the fastest growth in digital payments in Southeast Asia, up 19% from the previous year. This growth is expected to continue at 13% CAGR until 2025, supported by the joint efforts of the State Bank, the Ministry of Public Security and the Ministry of Information and Communications.

Alternative loans and the “buy now, pay later” phenomenon.

The alternative lending market in Vietnam is expected to expand at a compound annual growth rate (CAGR) of 19.3%, from USD 304.7 million in 2022 to USD 818.7 million in 2027.

The growing domestic fintech ecosystem, coupled with the entry and expansion of regional and global players, is strengthening the competitive landscape.

Small and medium-sized enterprises (SMEs) in Vietnam are increasingly turning to alternative lenders due to the challenges and costs associated with accessing traditional credit. For example, Funding Societies, a Singapore-based financial platform, entered the Vietnamese market in 2022 and has since provided over $70 million in financing in Vietnam to SMEs across a variety of industries, including agriculture, services and construction. According to an April 2023 report, Funding Societies have provided $3 billion in financing to SMEs across more than 5 million transactions in Southeast Asia.

Additionally, the growing buy now, pay later (BNPL) market is providing a boost by offering consumers flexible, short-term lending solutions. According to an industry report published by ResearchAndMarkets in April 2024, BNPL payments in Vietnam are expected to reach USD 3.33 billion this year, with an annual growth rate of 41.8%.

Outlook for 2024

With domestic banks seeking capital, a growing consumer market, strong SME financing needs, and emerging challengers to traditional banking institutions, foreign investors will find ample growth opportunities in the Vietnamese market. However, walking a tight regulatory tightrope can temper initial enthusiasm and means due diligence is essential.

For detailed guidance, foreign lending and lending companies and investors interested in exploring opportunities in the banking industry can consult the business consulting experts at the Vietnamese offices of Dezan Shira & Associates.

(1 US dollar = 25,430 dong).