BTA implementation and WTO accession will set a time frame for businesses to anticipate

competition, make rules more transparent, and create more level playing fields. Increased
transparency will result in better ratings for Vietnamese borrowers, and lower risk premiums charged
by lenders, including banks. A greater number of SMEs will grow bigger as will their demand for
credit. As incomes rise there will be opportunities for consumer lending, which is expected to double
over the next 5 years. The capital market is also expected to develop fast to provide a long term
funding channel for firms, and there will be less pressure on banks for funding. Banks will focus on
short term credit, consumption lending, individual borrowers, SME lending, and non-credit products,
instead of substituting the capital market for long term funding.

In brief, the macroeconomic picture in which banks operate will be bright and promising with trade
liberalization. If banks are well prepared and start actions early, they can capture these opportunities.

Foreign bank entry

When restrictions on foreign ownership in local banks are relaxed, as committed in the BTA and WTO
offers, foreign banks can buy shares in local banks and become strategic shareholders who can make
local banks stronger and more competitive. Mergers and acquisitions will also take place between
domestic banks and foreign banks making banks bigger in size and more competitive.

A number of foreign banks have already entered the Vietnamese markets through share purchases of
local banks, with others under negotiations. This is sure to increase in the future. This provides a
quick opportunity for both sides to learn and complement each others' strength. Foreign banks can
introduce new products through the existing network of local banks; apply their risk management
procedures in local banks, while local banks will have access to more finance for expansion. Allowing
a foreign bank to have a stake in a local bank also improves the credibility of the latter in the eyes of
other investors and the public at large. Banks with such mixed ownership are likely to target the retail
banking market, some may target the wholesale market, and all will expand into other services.

Foreign bank entry will bring more capital into the economy and increase the level of competition on
local banks. The BTA and coming WTO membership already sends a strong positive signal to local
bankers. From 2003 local banks, especially the stronger JSBs became aggressive in network
expansion, marketing and the launch of new products, which give customers more choice and better
quality services. This is really an encouraging outcome which will continue further under liberalization.

Increasing demand

Demand for credit remains large on the lending side, while there remains a substantial amount of
savings outside the banking system. This creates significant opportunity to mobilize further savings for
banks. More developed banking would reduce the cash economy; make the system more transparent,
easier for income disclosure, taxation, as well as fighting corruption and smuggling. A more
developed banking system could also gradually replace the informal credit market as more people
have access to bank services.

As banks develop into more non-credit services, their income share from credit will decline and from
non-credit services will increase, resulting in changes in banks profit structures36. Non-credit services
involve less risk for banks.

36
Currently 80-90% of bank’s income is still generated from credit services. this is expected to fall to 60-80% in the future.

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