The impact of entry

It used to be easy to make lending decisions at the state-owned Vietcombank. As one of four big state commercial banks in a command economy, Vietcombank – whose full name is the Bank for Foreign Trade of Vietnam – simply followed instructions from the Communist authorities in Hanoi to make credit available to other state enterprises, without regard to borrowers’ ability to repay.

But over the last few years, Vietnam’s centrally planned economy has been under-going a major transformation as market forces, and foreign investment, have swept in – a process that will be accelerated by the country’s accession to the World Trade Organisation (WTO).

Today, Vietcombank, along with other state banks, is supposed to operate on commercial principles, resisting any pressure to lend based on Communist Party exigencies, and instead identifying and wooing credit-worthy borrowers that have a demonstrable ability to repay loans.

It is a difficult transition, Vietnamese banking regulators concede. Some authorities still expect state banks will do their bidding, despite new laws that prohibit political interference in banking operations. It is also tough given the bank staff’s own lack of experience with modern credit analysis.

On top of that, the job of assessing potential borrowers’ creditworthiness is also hampered by the fact that bookkeeping in Vietnam is traditionally far from transparent. ‘Accounting here, in general, is very weak,’ says Il-houng Lee, the resident representative for the International Monetary Fund. ‘Accounting standards are decent, but because of the history, book-keeping is not a widely accepted practice.’

Vietnam’s accession to the WTO is expected to add to the woes of the state banks, which will face intensified competition, particularly from foreign rivals. From next year, foreign banks – which are now permitted to have just two branches and face restrictions on deposit mobilisation – will be allowed to set up wholly owned Vietnamese subsidiaries, allowing them to open branches and provide full service to Vietnamese customers.

‘The more banks open in Vietnam the fiercer competition will be – they will come and persuade some of our customers, and prices may be more competitive,’ says Nguyen Hoa Binh, chairman of Vietcombank. ‘They bring newer products, and better services, so the threat can be that way. We have to be ready.’

Yet in other ways, WTO accession could provide an unexpected boost for local banks by creating the impetus and drive for greater Vietnamese corporate transparency. As new export markets and opportunities open up to Vietnam, local companies may be required to present credible, audited accounts to their would-be buyers in order to secure the orders – a benefit that would also provide spin-off benefits to banks trying to make tricky lending decisions.

‘If it’s a company that wants to sell to Marks & Spencer in the UK, they are going to audit inside and out the operation of the manufacturer,’ says Ian Lydall, senior partner, PricewaterhouseCoopers, in Ho Chi Minh City. ‘As part of their assessment, they expect to see management financial information they can rely on.’

Vietnam’s weak accounting standards are very much a legacy of its Communist past. Previously assured of annual financial support from the Central Government, state-owned enterprises once focused only on meeting Hanoi’s mandated production targets without concern for whether or not the operation was making money. Record keeping reflected that focus.

‘There were not really sales, revenues and profits,’ says Lee. ‘State-owned enterprises existed to provide social welfare and, as long as you produced a lot of goods catering to society, that was enough.’

Like state-owned banks, Vietnam’s state-owned enterprises are now undergoing serious reforms. In a process that Vietnam’s Communist authorities have dubbed ‘equitisation’ – due to their reluctance to use the word ‘privatisation’ – state firms are being transformed from amorphously structured entities into partially privatised shareholding companies. With shares sold to management, employees, and members of the public, profit is now primary.

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As part of this overhaul, many firms are interested in upgrading their accounting procedures. But while three of the Big Four international accounting firms already operate in Vietnam – mainly catering to multinational companies there – few of the newly ‘equitised’ Vietnamese firms can actually afford to hire them either as advisers or as auditors.

‘There are several of them that would like to take outside advice, but they are only able to do so if they are particularly profitable, or donor funds or government funds are available,’ says Lydall. ‘More and more appreciate that they would benefit from changing some of their practices but, until they’ve got money to spend, it’s not going to happen.’

If state-owned enterprise books are considered weak, private firms accounts are even more problematic. Though no one wants to say so out loud, private Vietnamese companies, often run by the tight-knit founding families of the business, are widely though to keep several sets of books.

While such companies often seem to be running successfully, and are potentially attractive to borrowers, Vietcombank’s Binh says, ‘it’s not so easy [to give the loans]. The data is not quite correct.’

Besides creating headaches for commercial banks, Vietnam’s accounting weaknesses are a major obstacle hindering companies’ ability to raise capital through the stockmarket – and hampering foreign investors’ ability to gain equity exposure to the country’s fast growing economy.

Spencer White, a strategist for Merrill Lynch, this year set off a major stockmarket bull run, with a report in which he famously urged investors to put their money into Vietnam, calling a ‘10 year buy’. The report sparked a rally, which sent the market up 102% before it began to soften.

Yet six years after its launch, Vietnam’s formal equity market remains puny – with just 48 listed stocks, and a total market capitalisation of around $3.2bn. Part of the reason so few companies are listed on the formal exchange are strict requirements by stockmarket regulators for listed companies to expose their balance sheets to investor scrutiny – something many companies are reluctant, or even unable, to do.

Instead, many firms are content to let their shares trade among domestic investors on an unregulated over-the-counter market, which is said to have many actively traded companies, including several private banks that are gearing up formal listing and recently equitised pharmaceutical companies.

But with the WTO opening greater opportunities to tap global markets, private Vietnamese companies too may find it in their interest to move towards greater transparency – in order to raise capital to fund expansion and growth.

Jonathon Waugh, director of PXP Vietnam Asset Management, a fund management company, said he believes that local firms will, over time, come to realise that transparency is in their interest – and lack of transparency could hold them back. Already, he said, a handful of privately owned Vietnamese companies, notably Kinh Do, a major local confectionery and snack food company, had pioneered this, listing on the exchange.

‘If you are not prepared to reveal your true figures, you are unlikely to list, and you are potentially cutting off your sources of capital,’ he says. ‘Some companies are already paving the way, have raised more capital, and eventually more will say, “I can see the point of this thing called transparency because it actually benefits my growth”.’

Amy Kazmin covers Thailand, Vietnam, Cambodia, Burma and Laos for the Financial Times.