Q2 2014 www.businessmonitor.com VIETNAM COMMERCIAL BANKING REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN 1758-454X Published by:Business Monitor International Vietnam Commercial Banking Report Q2 2014 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: February 2014 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2014 Business Monitor International All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Commercial Banking Report Q2 2014 CONTENTS BMI Industry View Table: Commercial Banking Sector Indicators Table: Commercial Banking Sector Key Ratios, February 2013 Table: Annual Growth Rate Projections 2013-2018 (%) Table: Ranking Out Of 71 Countries Reviewed In 2014 Table: Commercial Banking Sector Indicators, 2011-2018 SWOT Commercial Banking Political 10 Economic 11 Business Environment 12 Industry Forecast 13 Industry Risk Reward Ratings 18 Asia Commercial Banking Risk/Reward Ratings 18 Table: Asia Commercial Banking Risk/Reward Ratings 19 Market Overview 20 Asia Commercial Banking Outlook 20 Table: Banks' Bond Portfolios, 2012 20 Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP ratios, 2014 20 Table: Comparison of Total Assets & Client Loans & Client Deposits (US$bn) 21 Table: Comparison of US$ Per Capita Deposits, 2014 22 Macroeconomic Forecast 22 Table: Vietnam - Economic Activity 26 Competitive Landscape 27 Market Structure 27 Protagonists 27 Table: Protagonists In Vietnam's Commercial Banking Sector 27 Definition Of The Commercial Banking Universe 27 List Of Banks 28 Table: Financial Institutions In Vietnam 28 Company Profile 30 Bank for Foreign Trade of Vietnam (Vietcombank) 30 Table: Stock Market Indicator 32 Table: Balance Sheet (VNDmn) 32 Table: Balance Sheet (US$mn) 33 Table: Key Ratios (%) 33 VietinBank 34 Table: Stock Market Indicators 36 © Business Monitor International Page Vietnam Commercial Banking Report Q2 2014 Table: Balance Sheet (VNDmn) 36 Table: Balance Sheet (US$mn) 37 Table: Key Ratios (%) 37 Agribank 38 Table: Balance Sheet (VNDmn) 40 Table: Balance Sheet (US$mn) 40 Table: Key Ratios (%) 40 Asia Commercial Bank 41 Table: Stock Market Indicators 42 Table: Balance Sheet (VNDmn) 43 Table: Balance Sheet (US$mn) 43 Table: Key Ratios (%) 43 Eximbank 44 Table: Stock Market Indicators 46 Table: Balance Sheet (VNDmn) 46 Table: Balance Sheet (US$mn) 46 Table: Key Ratios (%) 47 Housing Development Commercial Joint Stock Bank (HDBank) 48 Sacombank 50 Table: Stock Market Indicators 52 Table: Balance Sheet (VNDmn) 52 Table: Balance Sheet (US$mn) 53 Table: Key Ratios (%) 53 Regional Overview 54 Asia Commercial Banking Overview 54 Global Industry Overview 59 Global Commercial Banking Outlook 59 Regional Outlooks 60 Demographic Forecast 64 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 65 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 66 Table: Vietnam's Key Population Ratios, 1990-2020 67 Table: Vietnam's Rural And Urban Population, 1990-2020 67 Methodology 68 Industry Forecast Methodology 68 Sector Specific Methodology 69 Risk/Reward Ratings Methodology 70 Sector Specific Methodology 71 Table: Commercial Banking Risk/Reward Rating Indicators 71 Weighting 72 Table: Weighting Of Indicators 72 © Business Monitor International Page Vietnam Commercial Banking Report Q2 2014 BMI Industry View Table: Commercial Banking Sector Indicators Total assets Date Client loans Bond portfolio Liabilities and capital Other Capital Client deposits Other February 2012, VNDbn 3,388,150 2,772,420 278,421 337,309 3,388,150 560,003 2,483,817 344,330 February 2013, VNDbn 3,930,528 3,070,100 497,352 363,076 3,930,528 588,974 3,169,132 172,422 % change y-o-y 16.0% 10.7% 78.6% 7.6% 16.0% 5.2% 27.6% -49.9% February 2012, US$bn 162.6 133.1 13.4 16.2 162.6 26.9 119.2 16.5 February 2013, US$bn 187.6 146.5 23.7 17.3 187.6 28.1 151.2 8.2 15.3% 10.1% 77.6% 7.0% 15.3% 4.6% 26.9% -50.2% % change y-o-y Source: BMI; Central banks; Regulators Table: Commercial Banking Sector Key Ratios, February 2013 Loan/deposit ratio Loan/asset ratio Loan/GDP ratio GDP Per Capita, US$ Deposits per capita, US$ 96.88% 78.11% 92.69% 1,903.4 1,663.0 Falling Falling Falling n.a n.a Source: BMI; Central banks; Regulators Table: Annual Growth Rate Projections 2013-2018 (%) Assets Loans Deposits Annual Growth Rate 11 CAGR 12 10 Ranking 22 31 44 Source: BMI; Central banks; Regulators © Business Monitor International Page Vietnam Commercial Banking Report Q2 2014 Table: Ranking Out Of 71 Countries Reviewed In 2014 Loan/deposit ratio Loan/asset ratio Loan/GDP ratio 19 19 Local currency asset growth Local currency loan growth Local currency deposit growth 19 23 28 Source: BMI; Central banks; Regulators Table: Commercial Banking Sector Indicators, 2011-2018 2011 Total assets, VNDbn Total assets, US$bn Client loans, VNDbn Client loans, US$bn Client deposits, VNDbn Client deposits, US$bn 2012 2013e 2014f 2015f 2016f 2017f 2018f 3,437,893 3,917,557 4,466,015 5,091,257 5,753,121 6,443,495 7,152,280 7,939,030 163.4 188.0 212.7 247.6 283.0 320.6 359.4 403.0 2,829,890 3,077,700 3,447,024 3,860,667 4,285,340 4,713,874 5,138,123 5,600,554 134.5 147.7 164.1 187.7 210.8 234.5 258.2 284.3 2,483,357 3,080,455 3,388,501 3,693,466 3,988,943 4,268,169 4,524,259 4,795,715 118.1 147.8 161.4 179.6 196.2 212.3 227.3 243.4 e/f = estimate/forecast Source: BMI; Central banks; Regulators © Business Monitor International Page Vietnam Commercial Banking Report Q2 2014 SWOT Commercial Banking Vietnam Commercial Banking SWOT Strengths ■ Untapped market with potential for increased participation of foreign banks ■ Large population with a high savings rate and potential for income growth ■ The Vietnamese government aims to speed up the process of privatising state-owned banks, which will help modernise the industry ■ State-owned banks will play a lesser role going forward, and the risks associated with state-directed lending will decrease over time Weaknesses ■ Domestic banks continue to lag behind their foreign peers in terms of financial strength and the technological curve ■ Accounting standards lag far behind international standards and the lack of transparency entails significant risks for foreign investors ■ Small banks have an overwhelming exposure to real estate and individual loans, resulting in highly skewed and risky loan portfolios Opportunities ■ The population is still underbanked, with significant potential for adopting cash-free payment systems and new mobile banking technologies ■ Rising income levels and deepening capital markets could give rise to opportunities in more sophisticated financial products and growth for the local asset management industry Threats ■ Track record of macroeconomic instability threatens the credibility of the government and could potentially drive economic policy away from further liberalisation ■ The high level of government debt risks triggering a fiscal crisis, undermining confidence in the banking sector © Business Monitor International Page Vietnam Commercial Banking Report Q2 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and we not expect major shifts in policy direction over the next five years The oneparty system is generally conducive to short-term political stability ■ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party ■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials ■ Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system Threats ■ Macroeconomic instabilities continue to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule ■ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable ■ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage © Business Monitor International Page 10 Vietnam Commercial Banking Report Q2 2014 Global Industry Overview Global Commercial Banking Outlook We are forecasting accelerating loan growth in 2014 in 40 of 72 commercial banking sectors covered by BMI, led by developed countries including the US, UK, and various eurozone member states Conversely, in many emerging markets, we project decelerating loan growth, including in China, India, and Brazil (emerging European banking sectors including Russia are notable exceptions) In line with this divergence, one of our global themes for 2014 is that emerging market countries face a credit hangover at some point in the immediate future Developed markets have undergone a severe deleveraging since 2008, starting with the US and spreading to Europe At the same time, emerging markets have ramped up credit growth, and the level of private credit as a percentage of GDP in several countries (Turkey, Brazil, and the Philippines, to name a few) While emerging market private sector credit-to-GDP is still low by developed world standards, at approximately 100.5% of GDP versus 199% for developed countries, its recent acceleration has been breathtaking, rising from just 65% of GDP in 2008 Dangerously Above Trend Emerging Markets Private Credit As % of GDP Source: BiS, BMI © Business Monitor International Page 59 Vietnam Commercial Banking Report Q2 2014 Now, it looks as though there is likely to be a reversal of fortune, with the private sector in developed markets reasonably leveraged, if not under-leveraged in some cases, with emerging markets on aggregate set to see credit-to-GDP growth moderate In Asia, while China's bubble is perhaps the most concerning, loans to the household sector have also surged in the ASEAN countries of Singapore, Malaysia, and Thailand Even though interest burdens remain low in general thanks to low real interest rates, they are nonetheless creeping higher The virtuous cycle - falling interest rates fuelling more borrowing, accelerating growth and improving the creditworthiness of households and governments - may well begin reversing in 2014 The increase in US interest rates will continue to force an across-the-board reassessment of the structural macroeconomic picture in many key markets, and test the vulnerabilities of several major banking sectors Regional Outlooks US And Eurozone: We expect US commercial banking sector client loan growth to accelerate in 2014, as stronger real GDP growth buoys consumer confidence and businesses increase investment to meet rising demand Amidst a backdrop of rising interest rates and a reduction in quantitative easing, we believe banks will begin to shift their historically large cash assets into lending In Europe, a new era beckons for eurozone banking as the European Central Bank is due to take over supervision of national credit institutions in 2014, which will herald the next stage of economic integration Though certainly a step in the right direction towards euro federalism, reforms geared towards banking union will likely mirror the mistakes made at the birth of the euro By failing to forge a credible framework for risk sharing across the bloc, the end result will be a banking union in which federal level supervision has improved but the economic and political foundations of the euro remain weak and vulnerable to fracturing Emerging Asia: One of the major concerns for the global outlook is the prevalence of unsustainable lending in the Chinese banking sector Moral hazard within the banking system - namely, the government's implicit backstop for lending - has been a major factor in allowing the Chinese credit boom to continue to its current level, and the new government appears in favour of tacking this issue In doing so, however, this looks set to create instability in the banking system, which in turn is likely to undermine economic growth over the coming quarters, if not years This quarter, our Asia team has focused on South Asian banking sector opportunities While South Asian banking systems are similar in many ways, with relatively low penetration rates, rapid growth, and a heavy focus on lending to the public sector, there are a number of important differences We see Sri Lanka's low share of total banking sector assets as positive for long-term banking sector and economic growth, while Pakistan's excessive public sector credit exposure is a major risk Bangladesh's low exposure to government credit, meanwhile, is a significant positive, notwithstanding the risks posed by ongoing political unrest © Business Monitor International Page 60 Vietnam Commercial Banking Report Q2 2014 Emerging Europe: While emerging European banks were not immune to the tightening of global credit conditions in the second half of 2013, they proved more resilient than both LatAm and emerging Asian banking sectors, a symptom of significant deleveraging since 2008 This places the sector in a good position to capitalise on improving demand for credit from both commercial and consumer segments in 2014, with positive implications for profit margins However, credit growth will remain relatively tepid for most of the region compared to pre-2008 levels, implying a limit to both profitability and share price performance for locally-listed regional lenders There will also be significant sub-regional divergence performance this year and next, with Central European and Baltic lenders on a stronger footing than their South East European peers, whereas Russian and Turkish banks face their own idiosyncratic challenges Significant Progress Loan-To-Deposit Ratios For Selected CE and Baltic Economies Source: Respective Central Banks, BMI Latin America: Latin America's commercial banking sectors hold enormous growth potential over the long term, as a larger share of the population moves out of the grey economy and demand for financial services rises As a result, despite forecasting more moderate economic growth trajectories in the majority of Latin American economies over the next two years, we believe that banking sector asset growth will remain relatively elevated throughout the region In the near term, we believe that a major challenge confronting © Business Monitor International Page 61 Vietnam Commercial Banking Report Q2 2014 retail banks in Latin America will be shifting monetary policy cycles and rising local interest rates This could stifle demand and increase asset quality risks, requiring higher provisions for delinquencies and squeezing banks' profit margins Commercial Banking Will Play An Increasingly Important Role Latin America - Banking Sector Assets, % of GDP Note: e/f=BMI estimate/forecast; Source: BMI, Respective central banks/banking supervisory authorities Sub-Saharan Africa: We are optimistic about the prospects for Sub-Saharan Africa banking sectors believing that asset growth will be strong in the years ahead, particularly in those countries where sector penetration remains low However, asset expansion will not be without its challenges High interest rates will continue to exclude many would-be borrowers and banks will continue to face difficulties in assessing credit-worthiness The informal nature of many SSA economies and corporate governance weaknesses also present challenges Middle East And North Africa: The outlook for the banking sector in the Middle East is relatively bright over 2014 and beyond We expect a slight convergence in growth rates across the region, mostly due to base effects, but the GCC will remain the outperformer The Gulf countries, particularly Saudi Arabia and Qatar, will be buoyed by heavy government spending, especially on large-scale infrastructure projects Elsewhere, © Business Monitor International Page 62 Vietnam Commercial Banking Report Q2 2014 we are forecasting an uptick in banking sector assets on the back of low base effects and, in the case of Egypt and Iran, a decrease in political risks © Business Monitor International Page 63 Vietnam Commercial Banking Report Q2 2014 Demographic Forecast Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split Population Pyramid 2013 (LHS) And 2013 Versus 2050 (RHS) Source: World Bank, UN, BMI © Business Monitor International Page 64 Vietnam Commercial Banking Report Q2 2014 Population Indicators Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050 Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2013e 2015f 2020f 68,910 76,020 80,888 84,948 89,047 91,680 93,387 97,057 0-4 years 9,315 9,323 7,128 6,898 7,229 7,152 7,012 6,575 5-9 years 8,606 9,212 9,253 7,023 6,791 7,052 7,181 6,968 10-14 years 7,857 8,541 9,162 9,117 6,899 6,619 6,757 7,147 15-19 years 7,359 7,788 8,492 9,050 9,011 7,686 6,866 6,726 20-24 years 6,644 7,222 7,673 8,333 8,874 9,148 8,936 6,802 25-29 years 6,006 6,470 7,065 7,471 8,112 8,528 8,772 8,837 30-34 years 5,138 5,890 6,352 6,910 7,286 7,703 8,022 8,680 35-39 years 3,888 5,065 5,803 6,242 6,763 7,011 7,208 7,940 40-44 years 2,463 3,826 4,994 5,719 6,147 6,472 6,685 7,127 45-49 years 2,017 2,409 3,753 4,935 5,648 5,894 6,054 6,589 50-54 years 1,968 1,959 2,346 3,700 4,855 5,306 5,521 5,926 55-59 years 2,046 1,891 1,885 2,237 3,542 4,278 4,677 5,330 60-64 years 1,669 1,934 1,790 1,734 2,068 2,795 3,352 4,444 65-69 years 1,412 1,522 1,771 1,610 1,562 1,673 1,906 3,104 70-74 years 1,028 1,216 1,322 1,530 1,399 1,360 1,379 1,695 Total © Business Monitor International Page 65 Vietnam Commercial Banking Report Q2 2014 Vietnam's Population By Age Group, 1990-2020 ('000) - Continued 1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 752 819 984 1,080 1,263 1,219 1,167 1,160 80-84 years 430 536 597 732 815 919 964 900 85-89 years 224 261 336 385 483 517 546 654 90-94 years 71 108 132 177 210 245 268 306 95-99 years 16 25 41 53 74 83 89 115 100+ years 12 17 21 24 30 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 13.52 12.26 8.81 8.12 8.12 7.80 7.51 6.77 5-9 years 12.49 12.12 11.44 8.27 7.63 7.69 7.69 7.18 10-14 years 11.40 11.23 11.33 10.73 7.75 7.22 7.24 7.36 15-19 years 10.68 10.25 10.50 10.65 10.12 8.38 7.35 6.93 20-24 years 9.64 9.50 9.49 9.81 9.97 9.98 9.57 7.01 25-29 years 8.72 8.51 8.73 8.79 9.11 9.30 9.39 9.11 30-34 years 7.46 7.75 7.85 8.13 8.18 8.40 8.59 8.94 35-39 years 5.64 6.66 7.17 7.35 7.60 7.65 7.72 8.18 40-44 years 3.57 5.03 6.17 6.73 6.90 7.06 7.16 7.34 45-49 years 2.93 3.17 4.64 5.81 6.34 6.43 6.48 6.79 50-54 years 2.86 2.58 2.90 4.36 5.45 5.79 5.91 6.11 55-59 years 2.97 2.49 2.33 2.63 3.98 4.67 5.01 5.49 60-64 years 2.42 2.54 2.21 2.04 2.32 3.05 3.59 4.58 65-69 years 2.05 2.00 2.19 1.89 1.75 1.83 2.04 3.20 70-74 years 1.49 1.60 1.63 1.80 1.57 1.48 1.48 1.75 75-79 years 1.09 1.08 1.22 1.27 1.42 1.33 1.25 1.19 80-84 years 0.62 0.70 0.74 0.86 0.91 1.00 1.03 0.93 85-89 years 0.32 0.34 0.42 0.45 0.54 0.56 0.58 0.67 90-94 years 0.10 0.14 0.16 0.21 0.24 0.27 0.29 0.32 95-99 years 0.02 0.03 0.05 0.06 0.08 0.09 0.10 0.12 © Business Monitor International Page 66 Vietnam Commercial Banking Report Q2 2014 Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued 1990 100+ years 1995 2000 2005 2010 2013e 2015f 2020f 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.03 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Key Population Ratios, 1990-2020 1990 Dependent population, total, '000 2000 2005 2010 2013e 75.8 Dependent ratio, % of total working age 1995 71.0 61.3 50.8 42.9 41.4 2015f 2020f 41.3 41.9 29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655 Active population, % of total 56.9 Active population, total, '000 58.5 62.0 66.3 70.0 70.7 70.8 70.5 39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402 Youth population, % of total working age 65.8 Youth population, total, '000 60.9 50.9 40.9 33.6 32.1 31.7 30.2 25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690 Pensionable population, % of total working age 10.0 10.3 9.9 9.3 9.3 9.6 11.6 3,934 Pensionable population, total, '000 10.1 4,491 5,190 5,579 5,823 6,037 6,343 7,965 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 20.3 22.2 24.4 27.3 30.4 32.3 33.6 36.9 Rural population, % of total 79.7 77.8 75.6 72.7 69.6 67.7 66.4 63.1 Urban population, total, '000 13,958 16,867 19,716 23,175 27,064 29,632 31,384 35,771 Rural population, total, '000 54,952 59,153 61,172 61,773 61,983 62,048 62,003 61,286 e/f = BMI estimate/forecast Source: World Bank, UN, BMI © Business Monitor International Page 67 Vietnam Commercial Banking Report Q2 2014 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined Common to our analysis of every industry, is the use of vector autoregressions Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis Such single-variable analysis is called univariate modelling We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA) In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact Effective forecasting depends on appropriately selected regression models BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account; ■ Testing the directional movement and magnitude of coefficients; ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); and ■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity © Business Monitor International Page 68 Vietnam Commercial Banking Report Q2 2014 BMI uses the selected best model to perform forecasting It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Sector Specific Methodology BMI's Commercial Banking Report series is closely integrated with our analysis of country risk, macroeconomic trends and financial markets As such, the reports draw heavily on our extensive economic data set, which includes up to 550 indicators per country, as well as our in depth view of each local market We collate our commercial banking databank from official sources (including central banks and regulators) wherever possible, and only fall back on secondary sources where all attempts to secure primary data have failed Company data is sourced, in the first instance, from company reports, with central bank, regulator or trade association data only used as a backup ■ The reports focus on total assets, client loans and client deposits ■ Total assets are analogous to the combined balance sheet assets of all commercial banks in a particular country They not incorporate the balance sheet of the central bank of the country in question ■ Client loans are loans to non-bank clients They include loans to public sector and state-owned enterprises However, they generally not include loans to governments, government (or nongovernment) bonds held or loans to central banks ■ Client deposits are deposits from the non-bank public They generally include deposits from public sector and state-owned enterprises However, they only include government deposits if these are significant ■ We take into account capital items and bond portfolios The former include shareholders funds, and subordinated debt that may be counted as capital The latter includes government and non-government bonds In quantifying the collective balance sheets of a particular country, we assume that three equations hold true: ■ Total assets = total liabilities and capital ■ Total assets = client loans + bond portfolio + other assets ■ Total liabilities and capital = capital items + client deposits + other liabilities In terms of the equations, other assets and other liabilities are balancing items that ensure equations two and three can be reconciled with equation one In practice, other assets and other liabilities are analogous to inter-bank transactions In some cases, such transactions are generally with foreign banks © Business Monitor International Page 69 Vietnam Commercial Banking Report Q2 2014 In most countries for which we have compiled figures, building societies/thrifts are an insignificant part of the banking landscape, and we not include them in our figures The US is the main exception to this In some cases, total assets and client loans include significant amounts that are owned or that have been lent to customers in another country In some cases, client deposits include significant amounts that have been deposited by residents of another country Such cross-border business is particularly important in major financial centres such as Singapore and Hong Kong, the richer OECD countries and certain countries in Central and Eastern Europe Risk/Reward Ratings Methodology BMI's Risk/Reward Ratings (RRR) provide a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market The RRR system divides into two distinct areas: Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development This is further broken down into two sub categories: ■ Industry Rewards (this is an industry specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors) ■ Country Rewards (this is a country specific category, and the score factors in favourable political and economic conditions for the industry) Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period This is further broken down into two sub categories: ■ Industry Risks (this is an industry specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry, and the relative maturity of a market) ■ Industry Risks (this is a country specific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score) We take a weighted average, combining market and country risks, or market and country rewards These two results in turn provide an overall Risk/Reward Rating, which is used to create our regional ranking system for the risks and rewards of involvement in a specific industry in a particular country © Business Monitor International Page 70 Vietnam Commercial Banking Report Q2 2014 For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall risk/reward rating a weighted average of the total score Importantly, as most of the countries and territories evaluated are considered by BMI to be 'emerging markets', our rating is revised on a quarterly basis This ensures that the rating draws on the latest information and data across our broad range of sources, and the expertise of our analysts BMI's approach in assessing the risk/reward balance for infrastructure industry investors globally is fourfold: ■ First, we identify factors (in terms of current industry/country trends and forecast industry/country growth) that represent opportunities to would-be investors ■ Second, we identify country and industry-specific traits that pose or could pose operational risks to would-be investors ■ Third, we attempt, where possible, to identify objective indicators that may serve as proxies for issues/ trends to avoid subjectivity ■ Finally, we use BMI's proprietary Country Risk Ratings (CRR) in a nuanced manner to ensure that only the aspects most relevant to the infrastructure industry are incorporated Overall, the system offers an industry-leading, comparative insight into the opportunities/risks for companies across the globe Sector Specific Methodology In constructing these ratings, the following indicators have been used Almost all indicators are objectively based Table: Commercial Banking Risk/Reward Rating Indicators Indicator Rationale Banking Market Rewards Estimated total assets, 2013 Indication of overall sector attractiveness Large markets are considered more attractive than small ones Estimated growth in total assets, 2013-2017 Indication of growth potential The greater the likely absolute growth in total assets, the higher the score Estimated growth in client loans, 2013-2017 Indication of the scope for expansion in profits through intermediation Country Rewards GDP per capita A proxy for wealth High-income states receive better scores than low-income states Active population Those aged 16-64 in each state, as a % of total population A high proportion suggests that the market is comparatively more attractive Corporate tax A measure of the general fiscal drag on profits © Business Monitor International Page 71 Vietnam Commercial Banking Report Q2 2014 Commercial Banking Risk/Reward Rating Indicators - Continued Indicator Rationale GDP volatility Standard deviation of growth over seven-year economic cycle A proxy for economic stability Risks Banking Market risks Regulatory framework and industry development Subjective evaluation of de facto/de jure regulations on overall development of the banking sector Regulatory framework and competitive environment Subjective evaluation of the impact of the regulatory environment on the competitive landscape Country Risks Short-term financial risk Rating from CRR, evaluating currency volatility Policy continuity Rating from CRR, evaluating the risk of a sharp change in the broad direction of government policy Legal framework Rating from CRR, to denote strength of legal institutions in each state Security of investment can be a key risk in some emerging markets Bureaucracy Rating from CRR to denote ease of conducting business in the state Source: BMI Weighting Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal weight Consequently, the following weights have been adopted: Table: Weighting Of Indicators Component Rewards Weighting, % 70, of which Industry Rewards 60 Country Rewards 40 Risks 30, of which Industry Risks 40 Country Risks 60 Source: BMI © Business Monitor International Page 72 Reproduced with permission of the copyright owner Further reproduction prohibited without permission ... banks; Regulators © Business Monitor International Page Vietnam Commercial Banking Report Q2 2014 SWOT Commercial Banking Vietnam Commercial Banking SWOT Strengths ■ Untapped market with potential... Business Monitor International Page 17 Vietnam Commercial Banking Report Q2 2014 Industry Risk Reward Ratings Asia Commercial Banking Risk/Reward Ratings Commercial Banking Risk/Reward Rating Methodology... Page 26 Vietnam Commercial Banking Report Q2 2014 Competitive Landscape Market Structure Protagonists Table: Protagonists In Vietnam'' s Commercial Banking Sector Central bank: State Bank of Vietnam