• Retail banking will become a much larger part of Vietnamese banks’ portfolio by 2020, but aggressive retail lending may leave many prone to credit risks 
  • While local banks developed strong segmentation models, the understanding of segments is still some way to go 
  • Economies of scale, profitability and developing a comprehensive service proposition remain major challenges

The retail financial services industry in Vietnam will become the top growth market in 2017 in the Asia Pacific. It is expected to surge by 29% in regards to retail assets compared to 2016. Vietnamese banks are shifting from corporates to retail, amid ample deposits and low corporate credit growth.

Economic growth is gaining momentum after facing the bad debt crisis between 2012 and 2013, which depressed top line growth and caused high non-performing loans (NPL).

Need to differentiate due to steep price competition

Retail banking only started to grow in 2015, and banks articulated their new 2020 strategy in 2016. The strategy which involved board members and CEOs of local banks, for the first time, addressed the need to make retail banking a key growth driver. The Vietnamese retail banking market, after seeing the launch of new and basic products, is shifting its focus from sales to market share and pricing. The State Bank of Vietnam wants to see more consolidation and under World Trade Organisation’s (WTO) rules, foreign players in retail financial services market will be granted full access by 2018. While banks are building up their asset portfolio, longer term interest rate pricing capabilities and asset classes without collateral are emerging.

In this early stage of retail banking evolution, Vietnam banks are differentiating themselves by launching more sophisticated products such as cash and liquidity management tools for SMEs or new asset classes in wealth management. However, local banks are already trapped in a destructive pricing loop. They are pressurised to maintain net interest rates ranging from 2.3% to 4.6%.

In addition, banks are seeking opportunities to cross-sell to existing customers, and to introduce more fee-based products such as insurance and credit cards. Yet, key to winning this game is service and customer-focused sales. Low customer loyalty and high propensity to switch banks remains a major challenge for banks.

In fact, segmenting the customer base is more pronounced in Vietnam compared to Indonesia or the Philippines. However, it is still too early to understand how these segments affect purchase and service behaviour.

Focusing on improving processes and infrastructure
Banks that invested in new loan origination and collection systems are beginning to take a greater focus on front line automation. Most banks have centralised credit decision processes, standardised sales, and reduced paperwork for loan applications, though many continue to rely heavily on manual customer data transfer. There is also a propensity for most progressive banks to link with credit bureaus in order to establish and integrate an automated decision making process. This capability will allow these banks to approve loans almost instantly for certain customer segments.

While banks are fixing their attention on strengthening their operational and credit risk management, they are also increasingly shifting their spotlight on building a developed management information system (MIS) and customer relationship management (CRM) infrastructure. Further investment in technology, risk management and front-line customer service will be critical to gain competitive advantage in this market.

Current state of play
Prior to 2012, foreign banks have dominated the mortgage market in Vietnam but today, local banks are the major players. Buying behaviour of consumers is moving slowly from all cash purchases to mortgage credit. Mortgage loans account for about 8% of total bank lending compared to Indonesia and the Philippines with 10.5% and 8.2% respectively. Yet, new properties that were launched in Hanoi and Ho Chi Minh City, have started to unbalance housing demand and supply that had a lower industry growth in 2016 compared to 2015. It remains to be seen whether mortgages or home ownership will tilt in the future.

We estimate that the credit card market will be growing by close to 40% annually in 2017. Banks are bearing a high risk but also expected to get high returns. The launch of platinum and co-branded cards was a key driver in 2016, but local banks rely too much on filling product gaps and imitating the credit cards of foreign banks. Everybody wants to knock off HSBC in the premier card segment, yet most lack a more comprehensive service proposition. With aggressive acquisition strategies, there are increasing incidences where local banks are lowering their application standards to as low as $90 for their monthly income. The risk appetite is even higher for mid-tier and smaller banks. Industry credit card delinquencies have risen and range between 3% and 14% among the banks we have met or spoken to.

Profitability measured by return on equity (ROE) in the credit card business remains low or negative for most banks. Partly to blame is the small portfolio. Most banks manage a portfolio which is only one-tenth of other banks in emerging markets within ASEAN. More forward-looking Vietnamese banks focus on individual products and account level instead of understanding customer lifetime’s value to improve profitability and manage losses.

Profitability also remains an issue in wealth management. While banks have set up their emerging and mass affluent segments, they desperately lack scale, the capability of needs-based analysis and a true wealth proposition. The contribution of investment and insurance fee income to total wealth income remains low. The car industry is currently enjoying early growth and is expected to mature by around 2025. The demand for auto loan is becoming stronger in the coming years but risk might be building up in the car segment too with a slew of new and cheaper cars emerging in 2017, in addition to rising delinquencies in banks’ portfolios.

The regulator is forcing banks to set up separate financial companies to handle the high risk areas and to protect the full entity from any potential fall outs. Under the Central Bank’s directive, lenders are also required to merge or go bankrupt as it plans to reduce the total number of banks to as few as 15 by 2017 from almost 40 (Dec 2016).

Striking the right balance
In Vietnam’s rapidly growing retail financial services environment, banks are bearing high risks but expecting high returns. Customer service and customer-centric selling usually fall short as demand outpaces supply. Distribution and sales in a fast growing pie are critical to banks. Banks are aware that economies of scale, profitability and developing a comprehensive service proposition remain major challenges. If they are able to execute the right risk-reward balance, a long-term sustainable future is waiting.