Maritime Bank forecasting smoother seas ahead

With the expected credit growth of only 10-12 per cent this year, Maritime Bank general director Atul Malik told VIR’s Trinh Trang that a diversified source of revenue would bring the bank sustainable profits.

After three months in your role, what challenges have you found working in Vietnam?

In Vietnam, there are some best global practices and there are some practices that are completely local, so the combination is necessary. There are a lot of similarities in both practices, for instance, Vietnamese companies often focus on human resource management and owners of Vietnamese companies have similar visions as other company owners in the world. However, sometimes Vietnamese companies focus on market share more than profitability.

Are there lots of opportunities for Maritime Bank, given 2012 is a challenging year?
Maritime Bank has good strategy, which is relevant to Vietnam market. Second, we have qualified people. We have ability to attract qualified staffs and retain them, a stable Maritime Bank executive board is evidence of this. Third, we focus a lot on execution, when you have a good strategy, the most important is to execute that strategy well.
Maritime Bank is also restructuring. We are doing strategic review on all business lines we are doing, we identify which business line we believe have high growth and high potential profit and invest in it. For example, we are enhancing retail, lending to houses, developing credit cards. They are very important for us, so we put resources in these business lines and stop business lines that are not profitable.

Lending, which is the main source of profit for Vietnamese banks, was very slow in the first half of this year. What is your management direction until the year-end to help Maritime Bank achieve its year-plan profitability target?
This year although Maritime Bank is granted a credit growth limit of 17 per cent, Maritime Bank expected to use only 10-12 per cent only. But I think diversified source of revenue can help to meet our goal. For example, besides credit activities, we launch the wealth management business, bancassurance, credit cards, we will focus on retail banking and we get fees from that.
To achieve the year-plan goal, besides diversified source of revenue, you have to be efficient in managing the bank. If credit growth is not good enough, but you can manage your expense not to go as fast as revenue, your profit will be very good.

So how is Maritime Bank efficiently managing non-performing loans?
We have a very extensive risk management department, we make sure new loans will be really good, make sure new customers have a good business model.
We also help other existing customers, which are in a tough time and just have temporary liquidity problems, but their business module is good for medium and long term. For those customers, we dropped interest rates, extended the deadline of the loan and gave them financial advice when necessary.
Both global and domestic demand is not very high so companies must try to become more efficient and manage their expenses. Moreover, because domestic interest rates are falling, customers can compete better with other exporters in other countries. Maritime Bank will go with our customers to help them manage through the downturn.

Do you think establishing a national asset management company to deal with banking system non-performing loans (NPLs) is necessary?
I agreed with the idea to establish an asset management company. However, the State Bank is still considering when it is set up. It will not be an easy task and it will take time as deciding the price of loans, which kind of discount, using which pricing perception are big questions and very complicated. I don’t know how much capital is enough for that company as we must look at the entire economy and all banks’ NPLs to know how much the company can buy, especially when current NPLs are growing rapidly.

Cross-ownership leaves tangled web

Fulbright Economics Teaching Program director of research Vu Thanh Tu Anh explains why solving cross-ownership problems should be a top priority in the government’s plan to restructure the local banking system.

“The banking system’s problems mentioned above were partly caused by banks’ bending the law by using cross-ownership.”
– Vu Thanh Tu Anh
Fulbright Economics Teaching Program director of research

The period 2006-2011 witnessed sharp growth in Vietnam’s banking system in both quantity and capital. This growth was coupled by a widespread cross-ownership in the banking sector, meaning many joint stock commercial banks and state-owned commercial banks (SOCBs) started owning other banks. Many state-owned enterprises (SOEs) and private business groups also joined this wave and became big shareholders in many commercial banks.

Normally, cross-ownership among firms exists in direct way such as firm X buys firm Y and vice versa. However, cross-ownership may also exist indirectly. For instance, an investor or group of investors owns both bank A and bank B. Then bank A and bank B is cross-owned. This indirect cross-ownership is less transparent and difficult to control than the direct one.

Almost all economic groups and state-owned corporations own banks. Vietnam Posts and Telecommunications Group (VNPT) owns Maritime Bank and LienVietPostBank, Vietnam Electricity (EVN) owns ABBank, Viettel Telecom Company owns Military Bank, Vinacomin and Rubber Corporation owns Saigon-Hanoi Bank, and  PetroVietnam owns OceanBank. Except for Mekong Housing Bank, all other four SOCBs, namely BIDV, Vietcombank, VietinBank and Agribank, also own other banks.

At the same time, in the non-state owned sector, cross-ownership exists in two forms – banks own banks and enterprises own banks.

Currently, Maritime Bank, owned by the Agribank, manages Military Bank and Mekong Development Bank. More complicatedly, ACB owns Eximbank, while Eximbank owns Sacombank. ACB also owns other banks such as DaiA Bank, Kien Long Bank and VietBank.

Cross-ownership has its own positive impact as it helps stimulate mutual understanding between banks and enterprises. At the same time, it forms a stable ownership and governance structure in banks and enterprises.

However, cross-ownership has negative impact which can be seen in increasing troublesome problems of the banking sector in recent years. The most serious impact is that banks use cross ownership to evade banking safety requirements issued by the State Bank.

First, under Decree 141/2006/ND-CP on banks’ minimum capital, total chartered capital of a bank must be VND1 trillion ($48 million) in 2008 and VND3 trillion ($144 million) in 2010. Thanks to cross ownership, shareholder of bank A can borrow from Bank B to contribute capital to bank A. Conversely, bank B shareholders can borrow from bank A to contribute capital to bank B. Using borrowings as bank capital contribution has created artificial capital increases in banks.

Second, the credit limit requirement has been disable by cross-ownership. A typical example is that state-owned commercial banks were approved by the State Bank to provide state-owned enterprises a loan amount, which exceeded the maximum regulated amount.

The credit allocated to the SOEs by SOCBs over the credit limit, but still approved by the State Bank, is a prime example. In addition, regulations on credit to restricted borrowers are also violated. An enterprise, while not allowed to borrow directly from the bank it owns, can get around the regulation by borrowing from other banks which are owned by that enterprise’ bank, thanks to cross-ownership. Third, based on experience from the global financial crisis and under the Law on Credit Institutions 2010 as well as Circular 13/2010/TT-NHNN, the investment banking activities must be separated from those of commercial banks. Accordingly, a bank must not provide credit to companies with securities business activities.

However, instead of providing loans directly, bank A, who owns bank B, can buy bank B’s bonds. Then bank B can lend or invest in investment securities of bank A’s fund management company and securities company.

Fourth, the central bank’s regulations on loan classification and provisioning can be falsified by cross-ownership.

When a customer becomes insolvent, bank A can reschedule the payment of the customer’s debt, instead of classifying this loan and use proper provision for it. Because loan rescheduling is closely supervised by State Bank, Bank A can entrust bank B an amount of money so that bank B can lend to bank A’s customer.

The “bending the law” activities have contributed to the banking system’s long-lasting problems since 2008, with interest rate races, from which a number of banks have to merge or be acquired.

A particularly important problem is non-performing loans in the banking system. Until now, even State Bank – the country’s central bank, does not have accurate non-performing loans data of the local banking sector. The banking system’s problems mentioned above were partly caused by banks’ bending the law by using cross-ownership. Therefore, the overall picture of the banking sector, in which who is the end-owner and how much is non-performing loans of each bank, was obscured by cross-ownership. This can derail the government’s plan to restructure the banking system, which will be able to achieve the right targets.

Moreover, as analysed above, cross-ownership which is less transparent and uncontrollable has been commonly used by many commercial banks to avoid the safety requirements of State Bank.

Solving cross-ownership among banks and enterprises should therefore be a top priority in the government’s plan to restructure the banking system.