Vietnam's largest bank struggles towards an IPO
28-AUG-2008 Intellasia | Theasianbanker
Aug 28, 2008 - 7:00:00 AM
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Do Tat Ngoc, chair of Vietnam Bank for Agriculture and Rural Development (Agribank), is happy that his bank is the largest in Vietnam in terms of assets, but he is less pleased with its business prospects going forward. "Our duty is to continue lending to the agriculture sector and farm households, [but] in Vietnam this side of the economy is not good" he says of his mandate.
Ngoc's daily struggle is with profitability, and his ambitions to launch an IPO, in line with the government's plan to partially privatise the 100% state-owned lender, look set to be delayed as macroeconomic problems beset the country. The bank's model of providing universal banking, and not simply agricultural loans, also presents a challenge.
"We are planning an IPO, but slowly," Ngoc tells The Asian Banker. "Because our business is mainly in the agriculture sector and lending to farm households, the government now is moving slowly. Because we are lending to farm households, this means high costs and low profits." In 2007, Agribank declared US$281 million net profit.
With 1,100 branches and 1,000 representative offices, the state bank leverages a massive network for deposit gathering that is responsible for over half of its funding. But with the intense competition among banks pushing deposit rates higher and higher, individual deposits are a very expensive source of funds for the bank and are squeezing Ngoc's margins.
"The funds mobilised from people have a very high cost," says Ngoc, who considers fundraising one of his most important duties. "In our bank the cost of funds are sometimes higher than in other banks." According to Fitch ratings, sharply higher interest rates and tighter liquidity to combat inflation, which has risen beyond 25%, are likely to create higher credit costs. Ngoc complains that "the competition for mobilising funds is very heavy," but at least Agribank's broad branch presence gives it some advantage over his rivals.
Agribank has been changing from being a bank that disbursed 85% of its loans to state-owned companies and 15% to cooperatives, to one that extends 60% of its credit to farm households. The focus on individuals means that it has also begun to offer products such as credit cards and mobile phone banking. Although its clients may not be as sophisticated as those in cities, the bank does have many of them: Ngoc claims that out of 13 million farm households in Vietnam, Agribank lends to 12 million of them.
Expanding the bank's services will be a challenge for Ngoc, not just to market his products to his rural clients, but also to get his IT up to speed. Clients were only able to do deposits and withdrawals at their main branch until May of this year, when systems were upgraded to allow depositors to access their funds from other branches.
But with 90% of its income coming from its lending business, the bank's non-interest income streams are relatively weak. But at least it has scale. According to Asian Banker Research, Agribank has nearly US$20 billion in assets, significantly higher than the next three banks which have from US$10.6 billion to US$12.5 billion in assets. In 2007, it saw its assets grow 37%, compared to 20-29% at the others with the bank's ROA at 1.6%. According to Fitch Ratings, the bank held around 23% of system loans and 21% of system assets as of the end of 2007.
However, trouble may be brewing with those loans. The bank currently has a 3% NPL ratio, but Ngoc fears that tough economic times ahead will push this higher. "This year, as the economy in Vietnam is difficult, it may increase, I think maybe to five%," he grumbles. Gaining insight into the bank's true NPL situation may be a challenge, however, as the extensive branch network of Agribank may make it difficult to gather accurate data on loan quality, according to Fitch Ratings.
"We remain concerned about Agribank's loans quality, particularly given its strong loans growth over recent years and the now very challenging high inflation/high interest rate environment in Vietnam threatening to herald an increase in loan defaults and lowering collateral values," says Sabine Bauer, director in Fitch Ratings' financial institutions team.
Ngoc will also need to bring up his capital adequacy ratio, which he says is 6%. Hoping to raise funds on the bond market, Ngoc is seeking assistance from ratings agencies and the development banks-which have previously provided project funding-to provide the capital that isn't coming his way from the government as his IPO roadmap sits on the back burner.
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