Vietnam Banking MA evaluation The Case study of The consolidation of SHB and HBB

Rationale Merger and Acquisition have long been the important strategies in banking sector toachieve reduction of expenses, increase of market power, decrease of earning volatilityand s

NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM

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BACHELOR’S THESIS IN FINANCE

Vietnam Banking M&A evaluation

The Case study of The consolidation of

I would like to express my gratitude to all those who gave me the possibility to completethis thesis, everyone from I.P Communication company, Hanoi office Especially, I wantsend my sincerely thank to Ms Nikki Nguyen– Head of Media Department at Hanoioffice for her great support as well as helpful advices that help me complete the research

I am deeply indebted to my supervisor Dr Dang Ngoc Duc from National EconomicsUniversity, whose help, stimulating suggestions and encouragement helped me in all thetime of internship and writing of this thesis

TABLE OF CONTENT

ABBREVIATION

M&A Merger and Acquisition

SBV State Bank of Vietnam

LIST OF FIGURE

LIST OF TABLE

CHAPTER 1 INTRODUCTION

1.1 Rationale

Merger and Acquisition have long been the important strategies in banking sector toachieve reduction of expenses, increase of market power, decrease of earning volatilityand scale and scope economies In 1990s, the world witnessed a huge wave of bankingconsolidation For three year, from 1994 to 1996 alone, more than 1500 M&A cases hadhappened in the US market In 2000s, before the financial crisis, the banking consolidationactivities increase significantly in term of both number of cases occurred and the totalvalue of the deals If 2007 represented the end of the bull market for banking M&A, 2008and 2009, were defined by nationalized and rescue transactions Affected by the financialcrisis, the M&A activity in banking sector have cooled, however, M&A remain to be thevital tool for adaptation, retrenchment and reform

In the last decade, Vietnam saw a dramatically development of banking system However,this development came mainly in the form of increasing number of banks but not in form

of the improvement in the system quality Therefore, when the economy started to slowdown and then went into the depression phrase, the system was under the pressure ofrestructuring and strengthening M&A has become critical solution for Vietnamese banks’difficulties at this stage From several cases in 2009, the M&A activities have become awave in 2011 and 2012 with the participation of domestics as well as foreign parties Tosome degree, these consolidations have impact on the whole banking system as well as theoperation of each bank However, the effects are unclear and the change in the banks’performance due to this phenomenon is also not satisfied addressed Answering thequestion about how M&A will affect the operation of the banks is important to evaluate itsinfluence on the restructuring process of Vietnamese baking system

Despite of being cited for strong synergy on the operation of the banks, many studies havefound that M&As are far from having proved their economic effectiveness Therefore,

there is a need for practical evidence to prove the positive effects on banking performance,including profitability and efficiency

Aware of these facts, I have selected the topic of “Vietnam banking M&A evaluation Case study: Consolidation of SHB and HBB” for my graduation thesis

-1.2 Research objectives

The extent to which the M&A transactions have a significant impact on the performance

of the banks, it’s necessary to undercover the underlying mechanisms and consequences ofM&A transactions Specially, throughout the investigation, the purpose of the researcheffort was to achieve the following objectives:

• To gain knowledge about M&A activities and related theories or concepts

• To provide general insight of the M&A activities in banking sector

• To draw conclusion about the current status of banking M&A in Vietnam

• To clarify the effects of M&A on the performance of the banks, through analyzingthe case of SHB and HBB consolidation

1.3 Methodology

1.3.1 Data used in the research

The data employed in the research are from the following two main sources

• Primary data: stock prices of SHB and HBB from March 2012 to March 2013;financial statements of SHB and HBB before and after the merger

• Secondary data: research and paper on M&A, banking M&A in the world andrecent trend of banking M&A in Vietnam

1.3.2 Analysis methods

In order to evaluate the significance of M&A related gains, the research follows two mainapproaches, namely:

• Stock price performance analysis

By running regression model based on CAPM model, the analysis is aimed to estimate thebeta risk coefficient of the stocks before and after the merger

• Balance sheet ratio analysis

This method compares the pre-merger and post-merger performance of banks usingaccounting data to determine whether consolidation leads to changes in reported costs,revenue and profit figures as well as other financial ratio

1.4.Research Scope

The research is concentrated to the theoretical background of M&A especially in bankingsector and the information related to recent M&A cases in Vietnam banking sector Inaddition, the analysis of M&A effects on banks’ operation is limited to the case of SHBand HBB

1.5.Research Structure

The research consists of 4 chapters:

• Chapter 1: Introduction

• Chapter 2: Theoretical background of banking merger and acquisition

• Chapter 3: Study of recent merger and acquisition wave in Vietnam banking sector

• Chapter 4: Case study of SHB and HBB: the effect of merger and acquisition on theperformance of the two banks

CHAPTER 2 THEORETICAL BACKGROUND OF BANKING

MERGER AND ACQUISITIONS

2.1.Merger and acquisition definitions and related concepts

2.1.1 The main idea of merger and acquisition

Merger and acquisition (M&A) is an aspect of corporate strategy, corporate finance and

management dealing with the buying, selling, dividing and combining of differentcompanies and similar entities that can help an enterprise grow rapidly in its sector orlocation of origin, or a new field or new location, without creating a subsidiary, other childentity or using a joint venture

The key principle behind buying a company is to create shareholder value over and abovethat of the sum of the two companies On the other words, the main idea behind MM&A isone plus one is more than two Two companies together are more valuable than twoseparate companies

This rationale is particularly promising to companies when the economics conditions arehard Strong companies will act to buy other companies to create a more competitive,cost-efficient company The companies will come together hoping to gain a greater marketshare or to achieve greater efficiency Because of these potential benefits, targetcompanies will often agree to be purchased when they know they cannot survive alone

2.1.2 Merger and Acquisition definition and distinction

The difference between a merger and an acquisition has become less obvious in variousperspectives, especially in terms of the final economic outcome; however, it has notdisappeared completely in every situation

nearly 100 percent of the assets or ownership equity of the acquired entity This processcould be viewed as the target company ceases to exist, the buyer "swallows" the businessand the buyer's stock continues to be traded The buyer is called acquiror while the targetcompany is the acquiree.

As its original meaning, a Merger or consolidation happens when two companies join

together and form a new enterprise altogether, and none of the previous companies existindependently after the deal occurs Both companies' stocks are surrendered and newlyestablished company then issues its stock in the market replace the two previous

MERGER AND ACQUISITION DISTINCTION

In practice, however, actual mergers of equals don't happen very often Usually, onecompany will buy another and, as part of the deal's terms, simply allow the acquired firm

to proclaim that the action is a merger of equals, even if it's technically an acquisition.Being bought out often carries negative connotations, therefore, by describing the deal as

a merger, deal makers and top managers try to make the takeover more palatable

A purchase deal will also be called a merger when both CEOs agree that joining together

is in the best interest of both of their companies But when the deal is unfriendly - that is,when the target company does not want to be purchased - it is always regarded as anacquisition

Whether a purchase is considered a merger or an acquisition really depends on whetherthe purchase is friendly or hostile and how it is announced In other words, the realdifference lies in how the purchase is communicated to and received by the targetcompany's board of directors, employees and shareholders

2.1.3 Synergy definition and forms

Synergy is a term that is most commonly used in the context of mergers and acquisitions

It is the concept that the value and performance of two companies combined will begreater than the sum of the separate individual parts Synergy, or the potential financialbenefit achieved through the combining of companies, is often a driving force behindM&A transaction Shareholders will benefit if a company's post-merger share priceincreases due to the synergistic effect of the deal

Synergy takes the form of revenue enhancement and cost savings By merging, thecompanies hope to benefit from the following:

• Staff reductions – Following a merger or an acquisition is generally a cut in

human resources This may make companies become more efficient and save a lot

of money from reducing the number of staff members from accounting, marketingand other departments

• Economies of scale - As become bigger after the M&A deal, the company would

gain more negotiation power over their customers as well as their supplier orcompetitors

• Acquiring new technology - To stay competitive, companies need to stay on top of

technological developments and their business applications By buying a smallercompany with unique technologies, a large company can maintain or develop acompetitive edge

• Improved market reach and industry visibility - Companies buy companies to

community: bigger firms often have an easier time raising capital than smallerones

2.1.4 Merger and Acquisition classification

2.1.4.1 Merger variations

From the business structures point of view, mergers could be classified in to severaldifferent types There following presents common type of merger and their distinctions

• Horizontal and vertical merger

Horizontal merger is when two companies are in direct competition and share the sameproduct lines and markets

Vertical merger happens when a company mergers with its customer or supplier

• Market-extension and product-extension merger

Market-extension merger is the case when two involving companies sell the sameproducts in different markets

Product-extension merger, on the other hand, is the merger happens between twocompanies selling different but related products in the same market

• Conglomeration

A merger is classified in to this category when two related companies have no commonbusiness areas

• Purchase merger and consolidation merger

These are two types of mergers that are distinguished by how the merger is financed

Consolidation merger is the type in which a brand new company is formed and bothcompanies are bought and combined under the new entity

2.1.4.2 Acquisition variations

• Private and public acquisition

Acquisitions are divided into private and public acquisitions, depending on whether thetarget company is or is not listed on a public stock market

• Friendly and hostile acquisition

An additional dimension or categorization consists of whether an acquisition is friendly orhostile Whether a purchase is perceived as being a friendly one or a hostile dependssignificantly on how the proposed acquisition is communicated to and perceived by thetarget company's board of directors, employees and shareholders

In the case of a friendly transaction, the companies cooperate in negotiations

In the case of a hostile deal, the board and/or management of the target are unwilling to bebought or the target's board has no prior knowledge of the offer

Hostile acquisitions can, and often do, ultimately become "friendly", as the acquirorsecures endorsement of the transaction from the board of the acquiree company Thisusually requires an improvement in the terms of the offer and/or through negotiation

• Reverse takeover and reverse merger

While acquisition usually refers to a purchase of a smaller firm by a larger one, reversetakeover is the case when a smaller firm will acquire management control of a largerand/or longer-established company and retain the name of the latter for the post-acquisition combined entity

Reverse merger occurs when a privately held company buys a publicly listed shellcompany, usually one with no business and limited assets This form of transactionenables a private company to be publicly listed in a relatively short time frame.

2.1.4.3 Other classification of Merger & Acquisition

In the content of cross-border transactions, M&A can be classified by the originalcountries of the two involved companies into three types, namely: domestic, inbound andoutbound transactions

Domestic M&A deals happen when both companies are from the same country.

Inbound transaction is the case in which a foreign company acquires a domestic company.

On the other hand, when a domestic company buys a foreign company, it is called

outbound transaction.

2.2 Reasons for merger and acquisition activities in banking sector

2.2.1 Banking sector Porter Five Forces analysis

To understand the reason behind the M&A activities in banking industry, first of all thenature of competition in this industry must be analyzed It is safe to say that, bankingsector is among the most competitive field This would be much clearer by applyingPorter's 5 Forces Model in this industry

Industry Rivalry - High

Potential Entrances - Low

Customers - High Subtitutes - Moderate

Suppliers - High

Force 1: Threats from new or potential competitors: LOW

This might be the only force that is low in banking industry Since, the bank establishmentrequires a lot of resources and follows a complicated procedure with the approval of thecentral bank It is not likely that a new comer will enter the market, especially when theeconomics conditions are hard In short, the barrier to entry of banking sectors is high.Therefore to certain degree eliminate the competition from potential entrances

Force 2: The intensity of competition among existing firms: HIGH

Except for control economy, in a free market commercial banks are competing veryintensively Banks are branching everywhere and offering various incentives to itscustomers In some cases, bankers are required to open certain account every month Thismakes the competition very fierce

Figure 2.1: Banking sector Porter Five Forces analysis

Force 3: The power of the suppliers: HIGH

In their basic nature, banks are dealing with money Only central bank can control themoney supply, as the result, it is safe to say that banking industry has a monopoly supplier.The central banks in every country have the ultimate control over the money circulated inthe system This means that the central banks, like Fed or SBV, have tremendous effect onthe whole industry

Force 4: The power of the customers: HIGH

The customers can easily choose a bank within a while range of banks And if thecustomers do not like anything of their banks, they can open accounts in another bank,which it won't take more than 30 minutes This is why customer service is becoming soimportant in this industry In short customers can create very strong force of competitiontoward the banks

Force 5: The easiness of changing to substitute products: MEDIUM

In term of investment vehicles, banking products have various substitutes such as bonds,mutual funds, stocks, etc However, in term of payment, the power of banks’ services isundeniable All the paychecks, payments go through some banks to clear The economywill be shut down if there is no bank to execute the payments

According to the analysis of Porter's Five Forces Model, banking industry’s competition isunfavorable and fierce since most of the forces scored high It’s hard for a bank to expandthe operation and increase the market share Therefore, M&A is an alluring strategy forbanks to achieve the development

2.2.2 Motive of banking merger and acquisition

Concerning bank’s incentives to take an active part in consolidation, two often cited asprimary factors are revenue enhancement and cost savings

2.2.2.1 Revenue enhancement

Revenue enhancement through M&A could come through the forms of economies of scaleand (geographic) scope and increase in market power

• Revenue economies of scale and (geographic) scope

Revenue economies of geographic scope therefore arise in the sense, that firms might bewilling to pay premier for a bank’s services if the same bank can provide services to thefirm in other regions of operation

Special to universal banks providing a large variety of financial services, scope economiescould be at hand through consumers’ willingness to pay a premium for one-stop shopping,maybe also driven by the consumer’s unwillingness to share his private information withmore than one financial institution , and through ”‘reputation economies”’ The latter mayarise if a universal bank is able to transfer its superior reputation in one banking service toanother by collective branding

However there might also be diseconomies of scope in the banking industry, arising fromless specialization leading to less tailor-made products and therefore lower priceschargeable, or due to customer worries that combining services might lead to conflicts ofinterest within the bank

• Increase in market power

In general, the market level price effect of M&A depends on the induced increase in localmarket concentration and the general demand structure Domestic M&As in smallmarkets, with the demand side having few outside options (e.g small businesses who

seem to strongly depend on local banks for financing) could most probably enable aconsolidating institution to charge higher prices from their customers through e.g lowerdeposit rates and higher small business loan rates Banks tend to have better and morepermanent margins in more concentrated markets.

Possible cost savings theoretically arise through three dimensions: economies of scale,economies of scope and increase in Cost X-E ciency.ffi

• Cost economies of scale

Scale is often mentioned as an important means of reducing average costs in the bankingindustry Due to both technological process such as Automated Teller machines - ATMs,Internet Banking, Risk Management IT as well as new dimensions of financialengineering (for example, international placement of bonds, etc) larger scale economiesmay have arisen

In retail banking, the emergence of internet banking is perfect example for conductingbanking services with high fixed costs (such as the development of the portal) and lowvariable costs due to less staffing required per transaction Other possible sources of costscale economies are call centers and payment processing

However, small banks could probably achieve the same degree of efficient by outsourcingparts of these processes or building networks If banks in general outsource the parts oftheir value chain, that feature cost economies of scale, such efficiency related to the size ofthe respective bank may vanish

• Cost economies of scope

Theoretically there are two main contradicting arguments concerning cost economies ofscope in the banking sector On the one hand re-usability of customer information formany products may lead to scope efficiency On the other hand a shift away from corecompetencies always may lead to additional administrative costs as well as foregone costreductions along the learning curve

In the first approach, accounting data of the periods before and after the merger are used todetermine whether there is any change in the cost, revenue or profit figures due to themerger of the two banks The advantages of this method are that the accounting data areeasily to obtain, the procedure are straightforward and the result are well understood Inthe analysis data from both pre-merger and post merger are used to evaluate the change inthe performance caused by the merger activity Advocate of this approach argue thataccounting data reflect the actual condition of the banks rather than the expectations of theinvestors, therefore they are more accurate than the stock price performance However,studies based on accounting data contain several deficiencies First of all, althoughaccounting data provide information about actual performance, they may be not very

useful in term of economic sense Accounting data consist of historical figures and oftenomit current market values Secondly, the changes in the performance of the banks duringthe investigated period between the pre-merger and post-merger time may due to morethan just merger related causes Other events may have happened during that period andbeen more appropriate reasons for the performance changes Failing to address theseimportant events may cause improper judgment about the effects of the consolidation tothe performance of the banks.

The second approach uses data in the stock market to evaluate the market reaction to themerger event and to estimate the merger gains for the stock of the related banks.Advocates of this method state that, stock prices are more accurate to measure the valuecreated due to the merger of two independent entities They argue that data used in thismethod reflect the current market condition, rather than accounting figures of history Theabnormal return of the two entities are often analyzed separately, however, the totalchange in shareholder wealth is also reported in several papers Nevertheless, thisapproach is not perfect Opponents of this method mostly criticize it for the timing of theanalysis Studies of abnormal returns, which used stock market data, have overcome thedisadvantage of potentially misleading accounting data, but most studies focus only on ashort period around the merger announcement The analysis, therefore, reflects sorely theinvestors’ expectation of unrealized events The analysis using data from post-mergerperiod contains its own disadvantages The conclusion based on the study of abnormalreturn with the data extend to after-merger period is unclear The abnormal return in thisperiod may due to other causes rather than merger-related factors What event period ismost accurate for the analysis is still unclear in all the studies The questions of how manydays before the announcement are appropriate to evaluate the information leakage andhow many days after the announcement are necessary to allow the market to fully reflect

Recently, studies about the effect of merger on the performance of the related banks havefollowed the third approach which uses both basic methods These papers not only analyzethe relationship between mergers activity and changes in accounting figures, but also stockmarket returns Furthermore, these studies take into account the correlation betweenchanges in accounting data and abnormal returns

CHAPTER 3 THE RECENTLY WAVE OF BANKING MERGER

AND ACQUISITION IN VIETNAM

3.1 Summary of banking merger and acquisition in Vietnam

After a booming period of the bank establishments in Vietnam with the number of joint stock commercial bank reached 43, it is now the time for the system to be restructured to

be more stable and safe for the long run development

The aggressive restructuring program monitored by the Government has immediateimpact on the system In the very first stage, the number of commercial banks in Vietnamhad been reduced from 43 to 41 following a consolidation of three troubled banks: SaigonCommercial Bank, Tin Nghia Bank and First Commercial bank By December 31, 2012,there are 37 joint stock commercial banks operating in Vietnam This is SBV’s strategy toreduce the number of commercial banks to just about 13-15 by 2015 The Governmenteven provides open opportunities for foreign investors to acquire controlling interest at the

10 weak banks classified in Group 4 “Weak Bank”

Other two noticeable M&A cases in banking sector are the merge of Saigon Hanoi Bank(SHB) and Hanoi Building Bank (HBB) and the acquisition of 65% stake in Sacombank(STB) by a group of local investors led by Eximbank For the first case, which is in form

of shares conversion, it will be discussed in much detail in the later part of the thesis Thesecond is a noticeable hostile takeover which the buyers spent as high as US$500 ml toobtain 65% stake in this US$700 ml net asset bank

3.2 Factors enhancing banking merger and acquisition activities in

Vietnam

3.2.1 Outside the banks

• Increasing involvement of foreign parties in banking sector

The increasing involvement of foreign parties in Vietnam is a critical factor causingcompetitive pressure toward the domestic banks More and more foreign banks andfinancial institutions have entered and expand their present in Vietnam This trend hascreated many difficulties for Vietnamese banks

According to the statistic of SBV, by December 31, 2012, there are 50 branches of foreignbanks, 4 venture banks, 5 – 100% foreign capital banks and 49 representatives of foreignbanks in Vietnam With strong resources like capital, experience and technology from theforeign finance entities, these parties have important competition advantages to increasetheir market share in Vietnam ANZ, HSBC and Standard and Charter are perfectexamples for the successful brands in the world have established strong present inVietnam financial market

Deregulation is another important factor contributing to the expanding operation offoreign banks in Vietnam In accordance with the schedule for WTO, Vietnamgovernment has gradually removed their protection for the domestic parties, creating morecompetitive market

It is undeniable that the operation of these foreign related entities will cause challenge forVietnam domestic commercial banks This intense competition has made small and weakbanks to be acquired by the larger and stronger banks or to merger together to have moreresources and power over the market

• Requirement to increase charted capital

This factor is considered as one of the strongest pressure for Vietnam commercial banks toincrease their M&A activities In order to strengthen and restructure the financial system,the government has passed documents requiring the financial entities to raise their legalcharter capital before continue their operation

2001 is a remarkable year for banks in Vietnam, since it is the year banks must meet theirrequirement about chartered capital According to the Decree 141/2006/NĐ-CP, byDecember 31, 2010, credit institutions must have their actual contributed charter capitalequals to their legal charter capital For commercial banks, the legal charter capital isVND 3,000 bn

This requirement has made the small commercial banks to expand and increase theircapital to meet the requirement, and also the bigger banks to increase their market share aswell as influence over other banks

• Regulation about M&A

Vietnam does not have any law concerning the M&A matter The regulations related toM&A could be found on other legal documents, namely: Law on Enterprise, Law onCompetition, Investment Law, etc More recently, in 2010, SBV has published the Circular04/2010-TT-NHNN on the M&A activities of credit institutions, creating a detail legalframework for the banks to execute their M&A strategy

3.2.2 Inside the banks

Beside outside factors as mentioned above, inside factors are also very important insupporting the M&A activities in Vietnam banking sector recently The two most

Competitive advantages are very important to Vietnam commercial banks, especiallywhen the competition now coming from domestic as well as foreign parties, fromtraditional inside the sector competitors as well as outsider like investment companies,insurance companies or securities companies, etc By implementing M&A strategy, bankscan, therefore, achieve synergy in term of economics of scale and economic of scopethrough the effects mentioned in chapter 2.

Under the pressure to increase the charter capital to meet the requirement of government

in order to continuing the operation, many financial institutions find themselves in trouble

to raise the capital Finding a strategic partner in this case is a reasonable solution.Entities, which currently have troubles in operation and are not likely to continue theiroperations in the future, become the target for other to enter the market or expand theirpower through the M&A activities

3.3 General characteristics of banking merger and acquisition in Vietnam

• Acceleration of M&A activities peaking in 2008

The annual breakdown in the number of transactions seems to confirm a significantupward trend since 2007 to reach a peak in 2008 before a slight decrease in 2009 and went

up again in 2011 (The figure for 2010 is not available)

The aggregate value of all transactions over the period amounted to US$ 2348.01 ml.Since 1996, the annual value has grown much more rapidly than the number, to reach itspeak in 2008 of US$ 556.56 ml and then reach other high in 2011 at US$ 1582 ml

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Figure 3.1: Number of banking deals from 2007 - 2011

The average transaction value, which takes into account both the number and the annualtransaction value, has followed the same pattern, peaking at US$158.2 ml

• Inbound transactions increase by number but not value.

In the Vietnam financial sector, with the exception of Securities companies M&A, foreignparties have not played the main role in banking M&A transactions Due to legalconstraints on foreign ownership in domestic banks, foreign entities could not acquiredcommercial banks through M&A activities

In 2011, within 10 M&A deals in banking sector, there are 5 with the acquirers are foreignpartners However, the percentage of ownership acquired is quite small around 20% foreach case

The banking M&A transactions in 2012 are mainly private issues For the past five year,more than 20 M&A deals involved foreign partners remain to be "strategic" and notinvolve the transfer of "control" in the banks

Figure 3.3: Average value of banking deals from 2007 - 2011

CHAPTER 4. CASE STUDY OF HBB AND SHB: THE EFFECT OF

MERGER AND ACQUISITION ON THE PERFORMANCE OF THE TWO BANKS

4.1 Background situation

4.1.1 Economic situation

Vietnam has been one of the fastest growing economies in Asia in recent years, with GDPgrowth averaging 7.2% annually between 2000 and 2010 The economic boom has liftedmany Vietnamese out of poverty, with the official poverty rate in the country falling from58% in 1993 to 20% in 2004 However, Vietnam still suffers from substantial trade,current account and fiscal deficits, leaving the economy vulnerable to global economicuncertainties in 2011 Moreover, the fiscal deficit is dominated by substantial spending onsocial subsidies that could be difficult to withdraw The heavily managed and weak dongcurrency reduces incentives to improve quality of exports, and also serves to keep importcosts high, thus contributing to inflationary pressures

By joining WTO, Vietnam has gained access to both foreign markets and capital, whileVietnamese enterprises become stronger through increased competition The governmentwill in spite of the current macroeconomic woes, continue to move forward with marketreforms, including privatization of state-owned enterprises, and liberalizing the bankingsector Urbanization will continue to be a long-term growth driver The UN forecasts theurban population to rise from 29% of the population to more than 50% by the early 2040s.Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeatview of Vietnam If the government focuses too much on stimulating growth and fails toroot out inflationary pressure, it risks prolonging macroeconomic instability, which couldlead to a potential crisis Prolonged macroeconomic instability could prompt theauthorities to put reforms on hold, as they struggle to stabilize the economy

4.1.2 Banking sector situation:

In 10 year from 2000 to 2012, Vietnamese banking sector saw a dramatic growth, in term

of total asset as well as number of banks As of 2010, there were about 100 banksoperating in the financial markets in four forms: state-owned commercial banks, joint-stock commercial bank, a bank with 100% foreign capital and foreign bank branches, andjoint-venture banks Despite of the large number, banks in Vietnam were mainly small andmedium scale There were only 11 banks having the chartered capital above VND 5,000billion

Over this period, the most important feature of the banking sector is the remarkable highcredit growth, which was significantly above the growth rate of mobilized fund as well asGDP In these ten years, the average credit growth was around 32% per year, while thegrowth rate of mobilized fund was 29% per year on average GDP during the same period

increased at a rate of 7.2% per year These unsustainable developments of the bankingsector contained much potential instability which would cause adverse consequences inlater years