The Financial Times

FT Fund Management: Ventures in Vietnam's rural backwaters

Its economy is small, its infrastructure is fragile, its industries are still largely run by central planners, and per capita incomes are low.

글 Edmund Lin and Sunny Yi

First published on 7월 30, 2007
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Its economy is small, its infrastructure is fragile, its industries are still largely run by central planners, and per capita incomes are low. Yet, at this moment, Vietnam may be one of the world's most attractive new opportunities for financial services companies. Just how attractive will become clearer in the coming weeks, when Hanoi-based Vietcombank, one of Vietnam's big four state-owned banks, finalises plans to offer shares amounting to 10 per cent of the bank's capital in the first in a string of big bank IPOs this year and next. The trends so far are moving in the right direction. With GDP growth on track to top 8.5 per cent in 2007, Vietnam has entered Asia's economic fast lane. Since the government opened its financial services sector to global competition under World Trade Organisation rules late last year, international banks can acquire up to 30 per cent of the equity in the country's 32 joint-stock commercial banks. Succeeding in Vietnam's emerging banking sector will require more than capital, technical expertise, and management know-how. With Vietnam's per capita income still among the world's lowest at just $726 per year, it will take the right strategy to crack a market where only 6 per cent of the country's 85m people own a bank account and only 2 per cent have borrowed from a bank. Vietnam's cities are the obvious places to start, but only about half of Hanoi's residents and fewer than a third of those living in Ho Chi Minh City have bank accounts. That means newcomers cannot afford to ignore the rural countryside where three-quarters of the population reside. Building a profitable customer base in provincial towns and villages—markets western banks have found difficult to crack in other emerging economies—will prove to be an even bigger challenge. One way to reach these hard-to-serve populations with affordable financial services is to borrow from the playbooks of banks in other developing markets. In Central America, for example, Banco Agrícola (BA) has grown with entry-level products and easy access to distribution channels for low-income urban residents in El Salvador. Already a leader serving small businesses and the narrow stratum of affluent retail customers, BA managers recognised that the high fixed costs of the bank's full-service branches and wide array of deposit accounts and collateralised loans were money-losers in low-income markets. Rather than write off this vast customer segment, BA set out to redefine its branch network and radically streamline its product offerings. The bank opened customer-friendly personal-credit centres where borrowers could take out small personal loans and began issuing low-limit credit cards for use with local merchants. To keep costs low, BA also created two new entry-level transaction accounts serviced through debit cards and automated kiosks. The no-frills approach has doubled the bank's potential profit pool and could generate, by BA's reckoning, a return on equity better than 30 per cent. Another challenge for global banks entering Vietnam is to extend their reach to the countryside where informal networks of money-lenders, clan associations and family members meet more than half of Vietnamese financial needs. Though expensive and often unreliable, these traditional sources of capital have made provincial rural dwellers savvy borrowers. That is an advantage for retail banks: rural borrowers familiar with the use of credit can become loyal bank customers if they see advantages in terms of cost and reliability. The key for banks will be finding cost-effective ways to reach isolated and thinly populated communities. ICICI Bank, India's second-largest banking company, combines technology and local partners to reach customers in rural India. The bank teams up with village shopkeepers, leasing them low-cost kiosks that offer a range of deposit and credit products via the internet and training them to sell specially designed credit, insurance, and even investment products to their rural neighbours. Early results are encouraging. ICICI has made its rural banking operations a stand-alone division, with a loan portfolio that is forecast to grow at a 33 per cent compound annual rate through 2009. For investors, the rural banking strategy is helping to make ICICI Bank, in the words of one local securities research firm, the "best play in the 'emerging India' story". Now it is Vietnam's turn. The Vietcombank IPO will be one important test of the growth potential of Vietnam's banking sector. But the bigger tests will come afterwards, as the country's banks and their global partners combine the old and the new, and try to keep Vietnam in Asia's fast lane. Edmund Lin and Sunny Yi are partners with Bain & Company, based in Singapore and Seoul, respectively.

Its economy is small, its infrastructure is fragile, its industries are still largely run by central planners, and per capita incomes are low. Yet, at this moment, Vietnam may be one of the world's most attractive new opportunities for financial services companies.

Just how attractive will become clearer in the coming weeks, when Hanoi-based Vietcombank, one of Vietnam's big four state-owned banks, finalises plans to offer shares amounting to 10 per cent of the bank's capital in the first in a string of big bank IPOs this year and next.

The trends so far are moving in the right direction. With GDP growth on track to top 8.5 per cent in 2007, Vietnam has entered Asia's economic fast lane. Since the government opened its financial services sector to global competition under World Trade Organisation rules late last year, international banks can acquire up to 30 per cent of the equity in the country's 32 joint-stock commercial banks.

Succeeding in Vietnam's emerging banking sector will require more than capital, technical expertise, and management know-how. With Vietnam's per capita income still among the world's lowest at just $726 per year, it will take the right strategy to crack a market where only 6 per cent of the country's 85m people own a bank account and only 2 per cent have borrowed from a bank.

Vietnam's cities are the obvious places to start, but only about half of Hanoi's residents and fewer than a third of those living in Ho Chi Minh City have bank accounts. That means newcomers cannot afford to ignore the rural countryside where three-quarters of the population reside. Building a profitable customer base in provincial towns and villages—markets western banks have found difficult to crack in other emerging economies—will prove to be an even bigger challenge.

One way to reach these hard-to-serve populations with affordable financial services is to borrow from the playbooks of banks in other developing markets. In Central America, for example, Banco Agrícola (BA) has grown with entry-level products and easy access to distribution channels for low-income urban residents in El Salvador. Already a leader serving small businesses and the narrow stratum of affluent retail customers, BA managers recognised that the high fixed costs of the bank's full-service branches and wide array of deposit accounts and collateralised loans were money-losers in low-income markets.

Rather than write off this vast customer segment, BA set out to redefine its branch network and radically streamline its product offerings. The bank opened customer-friendly personal-credit centres where borrowers could take out small personal loans and began issuing low-limit credit cards for use with local merchants.

To keep costs low, BA also created two new entry-level transaction accounts serviced through debit cards and automated kiosks. The no-frills approach has doubled the bank's potential profit pool and could generate, by BA's reckoning, a return on equity better than 30 per cent.

Another challenge for global banks entering Vietnam is to extend their reach to the countryside where informal networks of money-lenders, clan associations and family members meet more than half of Vietnamese financial needs. Though expensive and often unreliable, these traditional sources of capital have made provincial rural dwellers savvy borrowers. That is an advantage for retail banks: rural borrowers familiar with the use of credit can become loyal bank customers if they see advantages in terms of cost and reliability. The key for banks will be finding cost-effective ways to reach isolated and thinly populated communities.

ICICI Bank, India's second-largest banking company, combines technology and local partners to reach customers in rural India. The bank teams up with village shopkeepers, leasing them low-cost kiosks that offer a range of deposit and credit products via the internet and training them to sell specially designed credit, insurance, and even investment products to their rural neighbours.

Early results are encouraging. ICICI has made its rural banking operations a stand-alone division, with a loan portfolio that is forecast to grow at a 33 per cent compound annual rate through 2009. For investors, the rural banking strategy is helping to make ICICI Bank, in the words of one local securities research firm, the "best play in the 'emerging India' story".

Now it is Vietnam's turn. The Vietcombank IPO will be one important test of the growth potential of Vietnam's banking sector. But the bigger tests will come afterwards, as the country's banks and their global partners combine the old and the new, and try to keep Vietnam in Asia's fast lane.

Edmund Lin and Sunny Yi are partners with Bain & Company, based in Singapore and Seoul, respectively.