Consequently, insufficient IAS implementation shelters Vietnamese banks from foreign competition as

non performing loans are systematically understated. At the same time, systematic risk in the banking
sector is accelerating. An example is the most recent use of derivatives, while no Vietnamese
accounting standards exist or are in the drafting stage.

Financial risk

Capital adequacy ratios (CAR) for Vietnamese banks are, according to international standards, very
low. A proper valuation of recent recapitalization by means of Treasury bonds (non-tradable) and
NPL, including directed lending would give an even worse picture. Vietnamese banks, especially
SOCBs, are extremely leveraged. In addition the maturity mismatch of liabilities and assets is
administrated and unhealthy large. A significant increase of sources of funds would cause a severe
margin crunch and might jeopardize survivability of banks.

5.4 Conclusions

The following table illustrates Vietnam’s banking sector competitiveness in comparison with other
countries in the region:

Table 11: Competitiveness of Viet nam’s banking and finance sector

# Countries General finance ranking General finance ranking for

for 2001 2003

1 Viet Nam 47 43
2 China 20 21
3 Singapore 3 3
4 Malaysia 21 22
5 Thailand 26 24
6 Indonesia 50 46
7 Philippines 36 34
Source: IMF 2003; WEF

Beside the banking system itself, the following issues will arise during the integration process:

„ Exogenous risks from international and regional banking systems: opening the domestic
financial market will increase risks within the market due to external impacts, and will erase the
probability of exploiting the gap between domestic and international interest rates;

„ Economy of scale and customer distribution channels will be lost. At present, advantages in
market share, customers and distribution channels lie in the hands of domestic banks. However,
limitation and discriminatory treatment are expected to be abandoned after 2010. The scale of
operation and approaches to the market, customer segments, and the types of services provided
by foreign banks will therefore increase. At that point, Vietnamese banks will have to relinquish a
chunk of their market share to foreign banks;

„ Investment in modern technology. With their limited financial and operational capacity, the
modernization challenge has turned into a large pressure. If new banking technology is not
planned for and adopted, banks will continue to take unnecessary risks and an inefficient use of
resources;

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