VinaCapital's latest market commentary report notes greater interest from foreign investors should foreign ownership limits be eased.

One or two large foreign banks will increase their existing stakes or take on new holdings in Vietnamese banks after the relaxation of foreign ownership in domestic lenders, according to VinaCapital’s latest market commentary report.

The banking sector is one of three critical areas in need of restructuring over the 2016-2020 period, in addition to State-owned enterprises (SOEs) and public investment. Still, the banking system is yet to recover from its 2011 crisis, when the State-owned shipping company Vinashin went belly up. A proper solution to combat bad debts is yet to be found, while banks’ financial figures are still unsteady at best, making the sector the hardest to restructure.

“While there has been some progress in strengthening State-owned banks, the pace of reforms has been slow and the consensus is that much more needs to be done in terms of consolidating banks, cleaning up non-performing loans, and otherwise strengthening the system as a whole,” the report’s authors wrote.

But a solution for the sector’s recapitalization needs has appeared, as Vietnam will increase the limits on foreign ownership in banks as early as this year to hasten the overhaul of the country’s banking system and further attract overseas investments to boost economic growth, Prime Minister Nguyen Xuan Phuc told foreign media on January 13.

While the Prime Minister didn’t specify the new ceiling to be introduced, which currently stands at 30 per cent, he indicated that the government may completely sell the more troubled banks. “Right now, if there are any foreign investors interested in buying any of our under-performing banks, we will sell them entirely,” he said.

The opening up of Vietnam’s banks to more foreign investment is expected to speed up the country’s rise to emerging-market status and boost a stock index that’s already near a nine-year high. Still, much will depend on where the ownership limit threshold is set, as strategic investors will only be interested if they can take substantial stakes and influence management, according to Mr. Attila Vajda, Managing Director at Project Asia Research and Consulting Pte in Ho Chi Minh City.

“The relaxation of foreign ownership limit in banks might possibly be decided for each individual case,” Executive Chairman of Dragon Capital, Mr. Dominic Scriven, said.

As for bad debt settlement, VinaCapital believes laws will be changed to allow the Vietnam Asset Management Corporation (VAMC) to better fulfil its mandate, as it has been hamstrung in terms of how it can sell the distressed assets it has bought.

This year, the core mission of the banking sector is the restructuring of five commercial banks. That includes the three “zero dong” banks that the State Bank of Vietnam (SBV) acquired in 2015, as well as Dong A Bank and Sacombank. Some senior executives from State-owned banks have now become leaders of these distressed banks, with Vietinbank executives appointed to manage OceanBank and GPBank while Vietcombank Deputy CEO Mr. Nguyen Van Tuan joined VNCB in March 2015.

Regarding the banking sector’s outlook, “healthy economic growth plus a recovery in the real estate market are likely to lead to a slower non-performing loan formation, at least in the short term,” according to Fitch Ratings. Liquidity and funding conditions should continue to be supported by local currency stability and benign inflation.

On the economic front, provided there is no repeat of the drought of 2016 or other disasters, natural or man-made, VinaCapital’s Chief Economist believes that 2017’s GDP growth will come in at 6.5 per cent, inflation 5.5 per cent, and credit growth 16-18 per cent, while the Vietnam dong will stand at VND23,200 per USD.