Q1 2014 www.businessmonitor.com VIETNAM COMMERCIAL BANKING REPORT INCLUDES 5-YEAR FORECASTS TO 2017 ISSN 1758-454X Published by:Business Monitor International Vietnam Commercial Banking Report Q1 2014 INCLUDES 5-YEAR FORECASTS TO 2017 Part of BMI’s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: November 2013 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2013 Business Monitor International All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Commercial Banking Report Q1 2014 CONTENTS BMI Industry View Table: Commercial Banking Sector Indicators Table: Commercial Banking Sector Key Ratios, February 2013 Table: Annual Growth Rate Projections 2012-2017 (%) Table: Ranking Out Of 70 Countries Reviewed In 2013 Table: Commercial Banking Sector Indicators, 2010-2017 SWOT Commercial Banking Political 10 Economic 11 Business Environment 12 Industry Forecast 13 Industry Risk Reward Ratings 18 Asia Commercial Banking Risk/Reward Ratings 18 Table: Asia Commercial Banking Risk/Reward Ratings 19 Market Overview 20 Asia Commercial Banking Outlook 20 Table: Banks' Bond Portfolios, 2012 20 Table: Comparison of Loan/Deposit & Loan/Asset & Loan/GDP ratios, 2013 20 Table: Comparison of Total Assets & Client Loans & Client Deposits (US$bn) 21 Table: Comparison of US$ Per Capita Deposits, 2013 22 Economic Analysis 22 Table: Vietnam - Economic Activity 26 Competitive Landscape 27 Market Structure 27 Protagonists 27 Table: Protagonists In Vietnam's Commercial Banking Sector 27 Definition Of The Commercial Banking Universe 27 List Of Banks 28 Table: Financial Institutions In Vietnam 28 Company Profile 31 Agribank 31 Table: Balance Sheet (VNDmn) 32 Table: Balance Sheet (US$mn) 33 Table: Key Ratios (%) 33 Asia Commercial Bank 34 Table: Stock Market Indicators 35 Table: Balance Sheet (VNDmn) 36 © Business Monitor International Page Vietnam Commercial Banking Report Q1 2014 Table: Balance Sheet (US$mn) 36 Table: Key Ratios (%) 36 Bank for Foreign Trade of Vietnam (Vietcombank) 37 Table: Stock Market Indicator 39 Table: Balance Sheet (VNDmn) 39 Table: Balance Sheet (US$mn) 39 Table: Key Ratios (%) 40 Eximbank 41 Table: Stock Market Indicators 42 Table: Balance Sheet (VNDmn) 43 Table: Balance Sheet (US$mn) 43 Table: Key Ratios (%) 43 Housing Development Commercial Joint Stock Bank (HDBank) 44 Sacombank 46 Table: Stock Market Indicators 48 Table: Balance Sheet (VNDmn) 48 Table: Balance Sheet (US$mn) 49 Table: Key Ratios (%) 49 VietinBank 50 Table: Stock Market Indicators 52 Table: Balance Sheet (VNDmn) 52 Table: Balance Sheet (US$mn) 52 Table: Key Ratios (%) 53 Regional Overview 54 Asia Overview China India Indonesia Philippines Vietnam Singapore South Korea 54 54 55 56 57 58 59 60 Global Industry Overview 62 Global Commercial Banking Outlook 62 Demographic Forecast 71 Demographic Outlook 71 Table: Vietnam's Population By Age Group, 1990-2020 ('000) 72 Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 73 Table: Vietnam's Key Population Ratios, 1990-2020 74 Table: Vietnam's Rural And Urban Population, 1990-2020 74 Methodology 75 Industry Forecast Methodology 75 Sector Specific Methodology 76 Risk/Reward Ratings Methodology 77 © Business Monitor International Page Vietnam Commercial Banking Report Q1 2014 Sector Specific Methodology 78 Table: Commercial Banking Risk/Reward Rating Indicators 78 Weighting 79 Table: Weighting Of Indicators 79 © Business Monitor International Page Vietnam Commercial Banking Report Q1 2014 BMI Industry View Table: Commercial Banking Sector Indicators Client loans Bond portfolio Liabilities and Other capital February 2012, VNDbn 3,388,150 2,772,420 278,421 February 2013, VNDbn 3,930,528 3,070,100 497,352 Total assets Date % change y-o-y Client deposits Other 337,309 3,388,150 560,003 2,483,817 344,330 363,076 3,930,528 588,974 3,169,132 172,422 Capital 16.0% 10.7% 78.6% 7.6% 16.0% 5.2% 27.6% -49.9% February 2012, US$bn 162.6 133.1 13.4 16.2 162.6 26.9 119.2 16.5 February 2013, US$bn 187.6 146.5 23.7 17.3 187.6 28.1 151.2 8.2 15.3% 10.1% 77.6% 7.0% 15.3% 4.6% 26.9% -50.2% % change y-o-y Source: BMI; Central banks; Regulators Table: Commercial Banking Sector Key Ratios, February 2013 Loan/deposit ratio Loan/asset ratio Deposits per capita, US$ Loan/GDP ratio GDP Per Capita, US$ 96.88% 78.11% 101.81% 1,762.5 1,682.5 Falling Falling Falling n.a n.a Source: BMI; Central banks; Regulators Table: Annual Growth Rate Projections 2012-2017 (%) Assets Loans Deposits Annual Growth Rate 11 CAGR 13 11 Ranking 22 27 41 Source: BMI; Central banks; Regulators © Business Monitor International Page Vietnam Commercial Banking Report Q1 2014 Table: Ranking Out Of 70 Countries Reviewed In 2013 Loan/deposit ratio Loan/asset ratio Loan/GDP ratio 16 Local currency loan growth Local currency deposit growth 23 27 Local currency asset growth 20 Source: BMI; Central banks; Regulators Table: Commercial Banking Sector Indicators, 2010-2017 2010 Total assets, VNDbn Total assets, US$bn Client loans, VNDbn Client loans, US$bn Client deposits, VNDbn Client deposits, US$bn 2011 2012e 2013f 2014f 2015f 2016f 2017f 2,953,153 3,437,893 3,816,061 4,350,310 4,959,353 5,604,069 6,276,557 6,966,979 151.5 163.4 183.1 208.1 241.2 275.7 312.3 348.3 2,475,540 2,829,890 3,084,580 3,454,730 3,869,297 4,294,920 4,724,412 5,149,609 127.0 134.5 148.0 165.3 188.1 211.3 235.0 257.5 2,209,896 2,483,357 2,706,859 2,977,545 3,245,524 3,505,166 3,750,528 3,975,560 113.3 118.1 129.9 142.5 157.8 172.4 186.6 198.8 e/f = estimate/forecast Source: BMI; Central banks; Regulators © Business Monitor International Page Vietnam Commercial Banking Report Q1 2014 SWOT Commercial Banking Vietnam Commercial Banking SWOT Strengths ■ Untapped market with potential for increased participation of foreign banks ■ Large population with a high savings rate and potential for income growth ■ The Vietnamese government aims to speed up the process of privatising state-owned banks, which will help modernise the industry ■ State-owned banks will play a lesser role going forward, and the risks associated with state-directed lending will decrease over time Weaknesses ■ Domestic banks continue to lag behind their foreign peers in terms of financial strength and the technological curve ■ Accounting standards lag far behind international standards and the lack of transparency entails significant risks for foreign investors ■ Small banks have an overwhelming exposure to real estate and individual loans, resulting in highly skewed and risky loan portfolios Opportunities ■ The population is still underbanked, with significant potential for adopting cash-free payment systems and new mobile banking technologies ■ Rising income levels and deepening capital markets could give rise to opportunities in more sophisticated financial products and growth for the local asset management industry Threats ■ Track record of macroeconomic instability threatens the credibility of the government and could potentially drive economic policy away from further liberalisation ■ The high level of government debt risks triggering a fiscal crisis, undermining confidence in the banking sector © Business Monitor International Page Vietnam Commercial Banking Report Q1 2014 Political SWOT Analysis Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and we not expect major shifts in policy direction over the next five years The oneparty system is generally conducive to short-term political stability ■ Relations with the US have witnessed a marked improvement, and Washington sees Hanoi as a potential geopolitical ally in South East Asia Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party ■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tight control over political dissent Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has acted to clamp down on graft among party officials ■ Vietnam has allowed legislators to become more vocal in criticising government policies This is opening up opportunities for more checks and balances within the one-party system Threats ■ Macroeconomic instabilities continue to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule ■ Although strong domestic control will ensure little change to Vietnam's political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable ■ Relations with China have deteriorated over recent years due to Beijing's more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause wide-scale environmental damage © Business Monitor International Page 10 Vietnam Commercial Banking Report Q1 2014 Flying Too Close To The Sun China - Credit-To-GDP Ratio Versus Underlying Trend *TSF Added After 2002 Source: BMI, PBoC Latin America: Rising household income levels will ensure robust growth in the higher-margin consumer retail banking segment in Latin America over the coming years However, given that much of the region faces a more challenging economic outlook, as well as the prospect of rising interest rates, consumer loan growth is set to be more moderate for the time being We believe that Colombia, Mexico and Peru hold most promise of retail banking growth over the coming years In the case of Mexico, we note that recent banking sector reform, which is expected to increase competition and reduce borrowing costs for consumers, is set to see domestic credit to the private sector as a share of GDP increase Moreover, we believe that strong economic growth will generate rising income levels in Colombia and Peru, which have relatively nascent banking sectors and where the share of the population (aged 15 and above) with an account at a financial institution remains low by regional standards © Business Monitor International Page 66 Vietnam Commercial Banking Report Q1 2014 Financial Inclusion To Follow Rising Incomes Latin America & Caribbean - Financial Inclusion Metrics For 2011 Note: Bubble size based on accounts held at a financial institution (% age 15+); Source: BMI, World Bank Emerging Europe: As signs point towards an ongoing recovery in eurozone demand, the outlook for Emerging Europe has improved considerably, and an export driven recovery across Central (CE) and SouthEastern Europe (SEE) is already underway While 2012-13 was a challenging period for the banking sector, which struggled against a sharp slowdown in domestic demand, financial market volatility, FX weakness and deteriorating asset quality, the outlook for 2014 is much more promising In CE and SEE markets, domestic demand should continue its recovery throughout the year, leading a recovery in both retail and corporate credit Meanwhile, Turkish credit growth will remain at risk of rate hikes, which we believe will have to be implemented in order to stem capital outflows, while Russian credit growth will remain robust, but is liable to decelerate slightly next year © Business Monitor International Page 67 Vietnam Commercial Banking Report Q1 2014 Exchange Rate Stability Is A Concern Bank External Debt Levels, % Source: BMI, IMF Middle East & North Africa: The outlook for the MENA region's banking sector is mixed Whilst we expect significant convergence across the region, the Gulf will remain the outperformer with Qatar a particularly standout The banking sector in the Gulf will be buoyed by heavy government spending throughout the region, particularly on large-scale infrastructure projects Elsewhere, the picture is less sanguine as the effect of low base effects are outweighed by political instability, particularly in Libya and Iran © Business Monitor International Page 68 Vietnam Commercial Banking Report Q1 2014 Still Room For Growth Middle East - Total Banking Sector Assets Source: Respective Central Banks, BMI Sub-Saharan Africa: Africa's banking sectors are generally poised for strong expansion owing to rapid economic growth which will generate growing demand for banking services among business and consumers Some banking sectors will see particularly rapid growth in assets owing to booms in various sectors In this regard, we highlight the following: Mauritius due to real estate and medical tourism; Botswana due to mining, construction, real estate and tourism; Uganda due to oil; Namibia due to trade logistics; Mozambique due to coal and gas; and Nigeria due to infrastructure, trade and residential construction © Business Monitor International Page 69 Vietnam Commercial Banking Report Q1 2014 Mozambique Outperforming Southern Africa - Banking Sector Asset Growth, % y-o-y Source: BMI, Central Banks © Business Monitor International Page 70 Vietnam Commercial Banking Report Q1 2014 Demographic Forecast Demographic Outlook Demographic analysis is a key pillar of BMI's macroeconomic and industry forecasting model Not only is the total population of a country a key variable in consumer demand, but an understanding of the demographic profile is key to understanding issues ranging from future population trends to productivity growth and government spending requirements The accompanying charts detail Vietnam's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy The tables show key datapoints from all of these charts, in addition to important metrics including the dependency ratio and the urban/rural split Population Pyramid 2013 (LHS) And 2013 Versus 2050 (RHS) Source: World Bank, UN, BMI © Business Monitor International Page 71 Vietnam Commercial Banking Report Q1 2014 Population Indicators Population (mn, LHS) And Life Expectancy (years, RHS), 1990-2050 Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 ('000) 1990 1995 2000 2005 2010 2013e 2015f 2020f 68,910 76,020 80,888 84,948 89,047 91,680 93,387 97,057 0-4 years 9,315 9,323 7,128 6,898 7,229 7,152 7,012 6,575 5-9 years 8,606 9,212 9,253 7,023 6,791 7,052 7,181 6,968 10-14 years 7,857 8,541 9,162 9,117 6,899 6,619 6,757 7,147 15-19 years 7,359 7,788 8,492 9,050 9,011 7,686 6,866 6,726 20-24 years 6,644 7,222 7,673 8,333 8,874 9,148 8,936 6,802 25-29 years 6,006 6,470 7,065 7,471 8,112 8,528 8,772 8,837 30-34 years 5,138 5,890 6,352 6,910 7,286 7,703 8,022 8,680 35-39 years 3,888 5,065 5,803 6,242 6,763 7,011 7,208 7,940 40-44 years 2,463 3,826 4,994 5,719 6,147 6,472 6,685 7,127 45-49 years 2,017 2,409 3,753 4,935 5,648 5,894 6,054 6,589 50-54 years 1,968 1,959 2,346 3,700 4,855 5,306 5,521 5,926 55-59 years 2,046 1,891 1,885 2,237 3,542 4,278 4,677 5,330 60-64 years 1,669 1,934 1,790 1,734 2,068 2,795 3,352 4,444 65-69 years 1,412 1,522 1,771 1,610 1,562 1,673 1,906 3,104 70-74 years 1,028 1,216 1,322 1,530 1,399 1,360 1,379 1,695 Total © Business Monitor International Page 72 Vietnam Commercial Banking Report Q1 2014 Vietnam's Population By Age Group, 1990-2020 ('000) - Continued 1990 1995 2000 2005 2010 2013e 2015f 2020f 75-79 years 752 819 984 1,080 1,263 1,219 1,167 1,160 80-84 years 430 536 597 732 815 919 964 900 85-89 years 224 261 336 385 483 517 546 654 90-94 years 71 108 132 177 210 245 268 306 95-99 years 16 25 41 53 74 83 89 115 100+ years 12 17 21 24 30 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Population By Age Group, 1990-2020 (% of total) 1990 1995 2000 2005 2010 2013e 2015f 2020f 0-4 years 13.52 12.26 8.81 8.12 8.12 7.80 7.51 6.77 5-9 years 12.49 12.12 11.44 8.27 7.63 7.69 7.69 7.18 10-14 years 11.40 11.23 11.33 10.73 7.75 7.22 7.24 7.36 15-19 years 10.68 10.25 10.50 10.65 10.12 8.38 7.35 6.93 20-24 years 9.64 9.50 9.49 9.81 9.97 9.98 9.57 7.01 25-29 years 8.72 8.51 8.73 8.79 9.11 9.30 9.39 9.11 30-34 years 7.46 7.75 7.85 8.13 8.18 8.40 8.59 8.94 35-39 years 5.64 6.66 7.17 7.35 7.60 7.65 7.72 8.18 40-44 years 3.57 5.03 6.17 6.73 6.90 7.06 7.16 7.34 45-49 years 2.93 3.17 4.64 5.81 6.34 6.43 6.48 6.79 50-54 years 2.86 2.58 2.90 4.36 5.45 5.79 5.91 6.11 55-59 years 2.97 2.49 2.33 2.63 3.98 4.67 5.01 5.49 60-64 years 2.42 2.54 2.21 2.04 2.32 3.05 3.59 4.58 65-69 years 2.05 2.00 2.19 1.89 1.75 1.83 2.04 3.20 70-74 years 1.49 1.60 1.63 1.80 1.57 1.48 1.48 1.75 75-79 years 1.09 1.08 1.22 1.27 1.42 1.33 1.25 1.19 80-84 years 0.62 0.70 0.74 0.86 0.91 1.00 1.03 0.93 85-89 years 0.32 0.34 0.42 0.45 0.54 0.56 0.58 0.67 90-94 years 0.10 0.14 0.16 0.21 0.24 0.27 0.29 0.32 95-99 years 0.02 0.03 0.05 0.06 0.08 0.09 0.10 0.12 © Business Monitor International Page 73 Vietnam Commercial Banking Report Q1 2014 Vietnam's Population By Age Group, 1990-2020 (% of total) - Continued 1990 100+ years 1995 2000 2005 2010 2013e 2015f 2020f 0.00 0.00 0.01 0.01 0.02 0.02 0.03 0.03 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Key Population Ratios, 1990-2020 1990 Dependent population, total, '000 2000 2005 2010 2013e 75.8 Dependent ratio, % of total working age 1995 71.0 61.3 50.8 42.9 41.4 2015f 2020f 41.3 41.9 29,712 31,567 30,734 28,617 26,741 26,860 27,293 28,655 Active population, % of total 56.9 Active population, total, '000 58.5 62.0 66.3 70.0 70.7 70.8 70.5 39,198 44,453 50,154 56,331 62,306 64,820 66,094 68,402 Youth population, % of total working age 65.8 Youth population, total, '000 60.9 50.9 40.9 33.6 32.1 31.7 30.2 25,778 27,076 25,544 23,038 20,918 20,822 20,950 20,690 Pensionable population, % of total working age 10.0 10.3 9.9 9.3 9.3 9.6 11.6 3,934 Pensionable population, total, '000 10.1 4,491 5,190 5,579 5,823 6,037 6,343 7,965 e/f = BMI estimate/forecast Source: World Bank, UN, BMI Table: Vietnam's Rural And Urban Population, 1990-2020 1990 1995 2000 2005 2010 2013e 2015f 2020f Urban population, % of total 20.3 22.2 24.4 27.3 30.4 32.3 33.6 36.9 Rural population, % of total 79.7 77.8 75.6 72.7 69.6 67.7 66.4 63.1 Urban population, total, '000 13,958 16,867 19,716 23,175 27,064 29,632 31,384 35,771 Rural population, total, '000 54,952 59,153 61,172 61,773 61,983 62,048 62,003 61,286 e/f = BMI estimate/forecast Source: World Bank, UN, BMI © Business Monitor International Page 74 Vietnam Commercial Banking Report Q1 2014 Methodology Industry Forecast Methodology BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined Common to our analysis of every industry, is the use of vector autoregressions Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis Such single-variable analysis is called univariate modelling We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA) In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, BMI uses a 'general-to-specific' method BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact Effective forecasting depends on appropriately selected regression models BMI selects the best model according to various different criteria and tests, including but not exclusive to: ■ R2 tests explanatory power; adjusted R2 takes degree of freedom into account; ■ Testing the directional movement and magnitude of coefficients; ■ Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); and ■ All results are assessed to alleviate issues related to auto-correlation and multi-collinearity © Business Monitor International Page 75 Vietnam Commercial Banking Report Q1 2014 BMI uses the selected best model to perform forecasting It must be remembered that human intervention plays a necessary and desirable role in all of BMI's industry forecasting Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Sector Specific Methodology BMI's Commercial Banking Report series is closely integrated with our analysis of country risk, macroeconomic trends and financial markets As such, the reports draw heavily on our extensive economic data set, which includes up to 550 indicators per country, as well as our in depth view of each local market We collate our commercial banking databank from official sources (including central banks and regulators) wherever possible, and only fall back on secondary sources where all attempts to secure primary data have failed Company data is sourced, in the first instance, from company reports, with central bank, regulator or trade association data only used as a backup ■ The reports focus on total assets, client loans and client deposits ■ Total assets are analogous to the combined balance sheet assets of all commercial banks in a particular country They not incorporate the balance sheet of the central bank of the country in question ■ Client loans are loans to non-bank clients They include loans to public sector and state-owned enterprises However, they generally not include loans to governments, government (or nongovernment) bonds held or loans to central banks ■ Client deposits are deposits from the non-bank public They generally include deposits from public sector and state-owned enterprises However, they only include government deposits if these are significant ■ We take into account capital items and bond portfolios The former include shareholders funds, and subordinated debt that may be counted as capital The latter includes government and non-government bonds In quantifying the collective balance sheets of a particular country, we assume that three equations hold true: ■ Total assets = total liabilities and capital ■ Total assets = client loans + bond portfolio + other assets ■ Total liabilities and capital = capital items + client deposits + other liabilities In terms of the equations, other assets and other liabilities are balancing items that ensure equations two and three can be reconciled with equation one In practice, other assets and other liabilities are analogous to inter-bank transactions In some cases, such transactions are generally with foreign banks © Business Monitor International Page 76 Vietnam Commercial Banking Report Q1 2014 In most countries for which we have compiled figures, building societies/thrifts are an insignificant part of the banking landscape, and we not include them in our figures The US is the main exception to this In some cases, total assets and client loans include significant amounts that are owned or that have been lent to customers in another country In some cases, client deposits include significant amounts that have been deposited by residents of another country Such cross-border business is particularly important in major financial centres such as Singapore and Hong Kong, the richer OECD countries and certain countries in Central and Eastern Europe Risk/Reward Ratings Methodology BMI's Risk/Reward Ratings (RRR) provide a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market The RRR system divides into two distinct areas: Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development This is further broken down into two sub categories: ■ Industry Rewards (this is an industry specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors) ■ Country Rewards (this is a country specific category, and the score factors in favourable political and economic conditions for the industry) Risks: Evaluation of industry-specific dangers and those emanating from the state's political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period This is further broken down into two sub categories: ■ Industry Risks (this is an industry specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry, and the relative maturity of a market) ■ Industry Risks (this is a country specific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score) We take a weighted average, combining market and country risks, or market and country rewards These two results in turn provide an overall Risk/Reward Rating, which is used to create our regional ranking system for the risks and rewards of involvement in a specific industry in a particular country © Business Monitor International Page 77 Vietnam Commercial Banking Report Q1 2014 For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall risk/reward rating a weighted average of the total score Importantly, as most of the countries and territories evaluated are considered by BMI to be 'emerging markets', our rating is revised on a quarterly basis This ensures that the rating draws on the latest information and data across our broad range of sources, and the expertise of our analysts BMI's approach in assessing the risk/reward balance for infrastructure industry investors globally is fourfold: ■ First, we identify factors (in terms of current industry/country trends and forecast industry/country growth) that represent opportunities to would-be investors ■ Second, we identify country and industry-specific traits that pose or could pose operational risks to would-be investors ■ Third, we attempt, where possible, to identify objective indicators that may serve as proxies for issues/ trends to avoid subjectivity ■ Finally, we use BMI's proprietary Country Risk Ratings (CRR) in a nuanced manner to ensure that only the aspects most relevant to the infrastructure industry are incorporated Overall, the system offers an industry-leading, comparative insight into the opportunities/risks for companies across the globe Sector Specific Methodology In constructing these ratings, the following indicators have been used Almost all indicators are objectively based Table: Commercial Banking Risk/Reward Rating Indicators Indicator Rationale Banking Market Rewards Estimated total assets, 2013 Indication of overall sector attractiveness Large markets are considered more attractive than small ones Estimated growth in total assets, 2013-2017 Indication of growth potential The greater the likely absolute growth in total assets, the higher the score Estimated growth in client loans, 2013-2017 Indication of the scope for expansion in profits through intermediation Country Rewards GDP per capita A proxy for wealth High-income states receive better scores than low-income states Active population Those aged 16-64 in each state, as a % of total population A high proportion suggests that the market is comparatively more attractive Corporate tax A measure of the general fiscal drag on profits © Business Monitor International Page 78 Vietnam Commercial Banking Report Q1 2014 Commercial Banking Risk/Reward Rating Indicators - Continued Indicator Rationale GDP volatility Standard deviation of growth over seven-year economic cycle A proxy for economic stability Risks Banking Market risks Regulatory framework and industry development Subjective evaluation of de facto/de jure regulations on overall development of the banking sector Regulatory framework and competitive environment Subjective evaluation of the impact of the regulatory environment on the competitive landscape Country Risks Short-term financial risk Rating from CRR, evaluating currency volatility Policy continuity Rating from CRR, evaluating the risk of a sharp change in the broad direction of government policy Legal framework Rating from CRR, to denote strength of legal institutions in each state Security of investment can be a key risk in some emerging markets Bureaucracy Rating from CRR to denote ease of conducting business in the state Source: BMI Weighting Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal weight Consequently, the following weights have been adopted: Table: Weighting Of Indicators Component Weighting, % Rewards 70, of which Industry Rewards 60 Country Rewards 40 Risks 30, of which Industry Risks 40 Country Risks 60 Source: BMI © Business Monitor International Page 79 Reproduced with permission of the copyright owner Further reproduction prohibited without permission ... banks; Regulators © Business Monitor International Page Vietnam Commercial Banking Report Q1 2014 SWOT Commercial Banking Vietnam Commercial Banking SWOT Strengths ■ Untapped market with potential... International Page 17 Vietnam Commercial Banking Report Q1 2014 Industry Risk Reward Ratings Asia Commercial Banking Risk/Reward Ratings Commercial Banking Risk/Reward Rating Methodology Since Q10 8, we have... Page 26 Vietnam Commercial Banking Report Q1 2014 Competitive Landscape Market Structure Protagonists Table: Protagonists In Vietnam'' s Commercial Banking Sector Central bank: State Bank of Vietnam