Investors focus on reform

Published: 21 July 2008

An inside view on Vietnam’s opening economy

Vietnam’s accession to the World Trade Organization (WTO) in January 2007 was a milestone event in the country’s transition towards a market economy. The WTO entry followed commitments to open up the country’s economy and various sectors, including banking, to foreign investors.

HSBC first set up in Vietnam in 1870, and is now the country’s biggest foreign bank in terms of investment capital, network, product range, staff and customer base.

Loic Faussier, Chief Risk Officer, Vietnam, and Hai Hong Pham, Head of Global Markets, Vietnam, shared their views on the pace of market reform and the Bank’s long-term commitment to Vietnam, noting the challenges and business opportunities during the current difficult market conditions.

Vietnam is moving towards a market economy, and the government has taken steps to strengthen the country’s nascent capital markets. How is the reform programme progressing?

Hai Hong Pham: The local bond market, so far, has seen some expansion since the latter part of 2006 in terms of the number of issuance and the value of outstanding bonds. Such growth came about as local institutions, mostly banks, showed keen interest in bonds, both as a means to raise needed capital and as an investment tool. What’s needed is to make the market more liquid, much more transparent. There should be primary dealers in the market, or what we call market makers. Most investors tend to buy and hold the bonds until the maturity date. That’s why, even when the yield has risen to a very attractive level and you want to invest, you cannot find any sellers. 

Moreover, around March this year, a two-year treasury bond was trading at a coupon of 7.7 per cent and now, after four months, it’s trading at about 20 per cent. That’s a substantial movement which doesn’t reflect the true fundamental value, because the main reason the yield is high is the lack of liquidity. Also, over the past three months a number of bond auctions have failed, as the yields were based on interest rate ceilings set by the Ministry of Finance. I think the government should allow market forces to dictate on yield rates.

Loic Faussier: As for the equities market, it has sharply developed over the last few years if we look at the number of listed companies on the two exchanges of Ho Chi Minh City and Hanoi, although several IPOs and the “equitisation” programme of SOEs have been suspended due to the drop in market valuation this year. We have been able to take advantage of the development in the equities market as we offer custody and clearing services for offshore investors, as well as local fund managers, through HSS [HSBC Securities Services] and are the leading provider of such services to these market segments, with more than 50 per cent market share.

Both Standard and Poor’s and Fitch have lowered the country's outlook from "stable" to "negative", amid worries over inflation and an overheating economy. How would you position our products and services in this kind of environment?

Mr Faussier: As you know, we are the largest foreign bank in Vietnam, and one of the very few banks here that offer a full range of corporate and institutional banking services. We have a long-term commitment to Vietnam and, even if the economy is not doing as well as it was a few months ago, HSBC remains very much committed to Vietnam, and continues to expand its business, including our Global Banking operations. Certainly, in a difficult market we have some advantages over other banks in terms of our size, experience in emerging markets and local track record. During this difficult period, customers feel they can count on HSBC to help them meet their banking needs. Some of the other foreign banks are not as committed as we are in Vietnam and have reduced their exposure and activity locally as a result of the adjustments in the Vietnamese economy or of their difficulties elsewhere. Thus we're in a good position to serve more customers and expand our market share.

Mr Pham: Also, in this period of volatility and uncertainty in financial markets, we can be of added value to our customers. Customers look to HSBC, the country’s largest foreign bank in terms of global markets services, for its ability to help provide liquidity for the markets and to offer advice and solutions for them to manage their business better. We have had new customers come to us to pursue projects that other banks couldn’t help them with, under current market conditions. We are able to benefit from this kind of environment.

Early this year, HSBC obtained preliminary approval from the Vietnamese government for the setup of a local subsidiary. Can you give us an update on this?

Mr Faussier: Under the agreement of Vietnam’s accession to the World Trade Organization, one of the government’s immediate commitments is to open up the country’s banking sector. At present, foreign banks are restricted to one branch per city. HSBC now has two branches, in Hanoi and Ho Chi Minh City, which are branches of our Hong Kong operations. Under WTO, foreign banks, however, should be allowed to open a local subsidiary in Vietnam, and the subsidiary bank can then set up branch offices nearly on par with domestic banks. We are in the process of opening our local subsidiary. In March this year we received approval in principle from the Prime Minister of Vietnam to open our local subsidiary and we're hoping to obtain final approval any time soon.

How will this arrangement influence the development of products and services? Do you foresee considerable competition among local players?

Mr Faussier: This will mainly benefit our Personal Banking and Commercial Banking customers. Their needs will be served better with a wider branch network. Our Global Banking customers are mainly in Ho Chi Minh City and Hanoi, where we already have branch offices. Having said that, we also have some large customers who are investing in real estate projects, factories, distribution networks, in the central regions of Vietnam. These customers too will benefit when we have branches outside the two largest cities of Vietnam.

HSBC acquired a 10 per cent stake in the Vietnam Technological and Commercial Joint Stock Bank, or Techcombank. How does this partnership benefit HSBC clients?

Mr Faussier: As part of our agreement with Techcombank, we have what we call a technical support agreement, which means we provide support in such areas as credit and risk management, product development and marketing and have HSBC staff seconded at Techcombank to implement this. In terms of partnership, we have recently linked up our HSBC credit cards with the ATM network of Techcombank, so that HSBC customers can now withdraw money using these ATMs. Also, our corporate banking customers can use Techcombank’s domestic network of more than 100 branches and transactional offices to deposit or withdraw money. And Techcombank itself is a Global Banking client of HSBC. We have some money market facilities with Techcombank. We do foreign exchange transactions and foreign currency clearing with them. We also provide documentary credits and other trade services for Techcombank. And actually, we’ve helped manage a bond issuance by Techcombank under Hai’s Global Markets team.

That’s a great joining-up strategy. Can you give us an idea how your teams, Global Banking and Global Markets, work together?

Mr Faussier: For example, the current volatility in the foreign exchange market creates opportunities for us because our Global Banking customers need advice on managing currency exchange risk. We are working closely with Hai’s Global Markets team through frequent team meetings to review customers’ needs and have regular product training sessions to upgrade the Relationship Managers’ selling skills of foreign exchange products. We’ve noted that so far this year we have sharply increased our foreign exchange and treasury income from our corporate customers.

Mr Pham: Techcombank’s corporate bond deal, in 2007, is a good example of us working closely together. The Global Banking team drew up a plan and we came up with a solution and recommendations for the customer. I think Techcombank’s bond offering was a very successful deal. The bonds were the first to be issued by a private bank in the country, and they also had a very attractive term. I think, at that time, they issued five-year bonds with a slightly tighter spread compared to that for BIDV-issued bonds [BIDV is the state-owned Bank for Investment and Development of Vietnam]. And compared to the current level of interest rates, I think they have gained a lot of benefits from that deal. Also, the deal proved to the market that a private bank could tap local investors through a bond issuance. HSBC also helped sell a portion of the bonds to offshore investors, highlighting our powerful global distribution network.

HSBC has had a long presence in Vietnam. Would it be correct to say that we are now the leading foreign bank in the country, given our accumulated wealth of knowledge of the local market?

Mr Pham: Yes, the bank first set up here in 1870. I think HSBC is seen in this market as the bank with stability, with strong commitment to the country. In the case of some international banks, people noticed how these banks were aggressive for a few years and then left quietly. One foreign bank began turning away customers after only one year of operation in Vietnam. I think people see us as a name with a strong commitment. We are there to work closely with our clients even during difficult times.

Mr Faussier: I think it's a combination of local knowledge and strength, plus the bank’s global network and resources. Take, for example, our term financing transaction with Dubai World, for the construction of the Saigon Port Container Terminal, which should become the first deep-sea water port in the Ho Chi Minh City area. We have helped to arrange a technical deal with their partners in Vietnam and, at the same time, were able to rely on the expertise of the HSBC team in Hong Kong in terms of project finance.

Aside from the Dubai World deal, we have in general increased contact with our teams in the Middle East, given the rising interest in the Vietnamese market among Middle East investors. We have received and introduced many investors from that region to potential local partners in Vietnam. In fact, last year we decided to set up a small Investment Banking unit in Vietnam partly to cater for investors from the Middle East.

We’ve discussed challenges in the market, and you've reiterated HSBC's commitment to Vietnam, even during difficult market conditions. How do you see the way forward?

Mr Pham: I see the current situation as very challenging, but I see it as a good opportunity for the bank to continue its growth. Since other banks are having trouble servicing their clients, this presents an opportunity for us to pick the best clients we want to deal with and grow our market share as fast as we can. Hopefully, we'll get the local incorporation licence soon, and this will mean more good news for HSBC. I look at it more as an opportunity than a difficulty. We have to work harder and smarter to benefit more in today’s market.

Mr Faussier: As Hai was saying, it is a difficult market for banks at the moment due to the government’s tightening of the monetary policy to fight inflation. However, HSBC usually does well in those types of market conditions and, in fact, Global Banking has had its best year so far in terms of income in Vietnam.

Again, we are very committed to Vietnam. Even under difficult market conditions, we continue to grow our business here. In the area of Personal Banking, we're looking to work with the right clients and to expand our network. As for our Investment Banking and Corporate Banking businesses, just to give you an example, we’ve set up our Japanese and Taiwanese desks to accommodate increasing numbers of investors from these countries. This is yet another opportunity to expand our business.