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Cablegate: One Private Bank in Vietnam Is Modern and Innovative

This record is a partial extract of the original cable. The full text of the original cable is not available.



State pass to USTR Elena Bryan
Treasury pass IA/Asia Office Deborah Crane
USDOC for 6500 and 4430/MAC/AP/OPB/VLC/HPPHO

E. O. 12958: N/A

REF: HCMC 1002

1. Asia Commercial Bank, Vietnam's largest privately-held (joint-
stock) bank, has managed to build a successful business in a
sector fraught with potential pitfalls. The bank is small by
international standards, but since it was established in 1993 the
bank has grown to assets of about 737 million USD. Most
importantly, the bank is profitable and appears to make loans
based on genuine principles of credit risk analysis. In a meeting
with Ambassador Burghardt, bank management stressed the need for
Vietnam to continue financial sector reforms, and that foreign
voices should urge the GVN to continue the reform process.
Decisions on how to accelerate these reforms would be made at the
political level - a level where they and even the State Bank of
Vietnam had only limited influence. They openly asked for USG
help to encourage Vietnam to accelerate financial sector reforms.
ACB management believes that property prices in Ho Chi Minh City
have reached speculative levels and will drop substantially next
year. End Summary

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An Innovative Enterprise
2. On November 20, 2003, Ambassador Burghardt, accompanied by
HCMC Econoff, visited Ho Chi Minh City-based Asia Commercial Bank,
the country's largest and most successful joint-stock bank. He
met with Mr. Tran Mong Hung, Chairman, Mr. Pham Van Thiet,
President, and their management team. The bank is well-known for
its innovative and modern banking practices. Its reputation was
challenged last month when rumors that Mr. Thiet had fled the
country triggered a run on the bank (reftel), but the rumor was
quashed. About half of the hasty withdrawals have already been
redeposited with the bank.

3. The Ambassador's meeting began with a brief tour of the bank
lobby, where the Ambassador could see many of the bank's
innovations. The space was clean, well-lit, and orderly. The
bank had even installed a "Q-Matic" - probably the only one in
Vietnam outside our consular section - to minimize waiting. Life
insurance counters were set up for two competing firms, gold was
available for sale, and racks displayed promotional brochures on
the bank's credit cards, bank-by-phone and online banking
services. In addition to traditional bank branches, ACB is also
setting up kiosk branches and branches in grocery stores. Through
all of these initiatives, the bank is positioning itself to appeal
to a customer base of primarily urban middle class and wealthy

A Lot Can Happen in 10 Years
4. The Bank was established in 1993 and in ten years has expanded
to a network of 29 branches throughout Vietnam, with 16 of them in
Ho Chi Minh City. It has 11,500 billion VND (about 737 million
USD) in assets and total deposits of about 9,200 billion VND
(about 590 million USD). The bank offers all of the standard
deposit and loan services (in local and foreign currencies and, of
course, in gold), as well as credit and debit cards. It is also
an agent for Western Union and generates substantial fee income
from remittance services. The company has also set up a
securities company affiliate and a real estate arm. It has an
application with the U.S. Federal Reserve to open up a
representative office in the United States.

5. The bank is privately held. The members of the bank's board
of directors and management team control about 50% of the equity.
Another 25% is held in approximately equal shares by three foreign
investors: Jardine Matheson, Dragon Capital, and the World Bank's
International Finance Corporation (IFC). Bank management notes
that the IFC is an active investor and offers substantial training
and technical assistance to the bank. The Ambassador noted that
since the USG funds a major portion of the IFC, it is an indirect
shareholder of the bank. Mr. Hung said that a few SOEs also have
small equity stakes in the bank.

6. According to Chairman Hung, their business is split between
60% retail and 40% commercial banking. Nearly all of its
commercial business targets small and medium-sized businesses in
the private sector. Chairman Hung told the Ambassador that ACB
makes loans only to profitable, commercially viable companies, and
nearly all loans are secured by collateral. He also stated that
the bank does about 5% of its business with a few carefully-
chosen, profitable state-owned enterprises. Most of these are
monopolies that they gauge as good credit risks.

7. When the Ambassador asked how the bank assessed credit risk,
Chairman Hung acknowledged that it was difficult, but noted that
the IFC had provided substantial risk assessment training to its
staff, which was very helpful. He again stressed that the bank
only made loans to companies that they evaluated as profitable,
commercially viable concerns and that virtually all loans were
secured with collateral. Credit risk assessment was extremely
important, Chairman Hung stated, because going after collateral in
a default situation was extremely difficult. It usually took
about three years to successfully foreclose on property, for
example. He said that it was easier to dispose of property in
cities because land use rights, which were an unwelcome complexity
anywhere in Vietnam, were even more complex in rural areas. He
expected that the situation would likely improve in the future
because the National Assembly was considering a new land law.
Ambassador Burghardt noted that for the financial sector to
function properly, banks must be able to foreclose in the case of
loan default.

Political Actors Decide the Pace of Banking Reforms
--------------------------------------------- ------
8. Ambassador Burghardt asked for ACB's view of Vietnam's
financial sector reform. He noted that there was a virtually
universal view among international donors that reforms were
proceeding much too slowly. Chairman Hung replied that the
decision to accelerate reforms would have to be made at "the
political level," well above the State Bank of Vietnam. The SBV
understands the problem, he said, but their role is limited. He
claimed that virtually all of the key decision-makers were aware
of what needed to be done, but that it was still difficult to do

9. Reforms must continue, he said, because as Vietnam opens its
financial sector to foreign players, Vietnamese banks will have
great difficulty competing. Ambassador Burghardt asked if state-
owned banks were "throwing good money after bad" by continuing to
make new loans to loss-making state-owned enterprises. While
hardly endorsing the health and stability of the state banks, Mr.
Hung noted some positive developments. The SBV had pressured the
Ministry of Finance to inject capital into the state-owned banks
and use their pre-tax profits to increase their loan-loss
provisions. He also stated that over the last two or three years
state-owned banks had begun making 20-30% of their loans to
private sector businesses. This diversified their loan
portfolios, and hopefully these loans were made on a more
commercially viable basis.

But ACB Ready to Compete
10. ACB management acknowledged that competition will continue to
increase as more foreign banks are allowed to expand their
business in Vietnam, but Mr. Hung told Ambassador Burghardt that
ACB is ready. Working with the IFC the bank has committed to
training and strengthening its human resources. The Chairman
noted that it has worked hard to build its target customer base -
middle-class to wealthy urban households and small and medium
enterprises in the private sector - sectors that are likely to
grow. The bank has also successfully introduced a variety of
services. For example, as of last year it had issued more than
30,000 credit cards. With so many bank branches and a well-
developed customer base, Chairman Hung stated that ACB would be in
a good position to form alliances with foreign banks that also
have a focus on retail banking. It is already doing so with
Citibank in offering one type of loan product.

Don't Buy Land Until Next Year
11. The bank has a growing mortgage business, particularly in Ho
Chi Minh City, where it has set up real estate "supermarkets"
where buyers can review listings and get information about the
market. A typical ACB mortgage is extended for only 30-40% of
the purchase price of a home and carries a maximum term of ten
years. Econoff asked if ACB was worried about soaring property
prices and if we were seeing a property price bubble about to
burst. The bankers agreed, stating that property prices had risen
to speculative levels and were set to tumble. The market had
topped out, they said, and they believed that land prices would
fall by about 50% within the next year (as opposed to housing
prices, which would presumably fall by a lesser amount.)

12. Mr. Hung claimed that this would not be a major problem for
the bank, since most ACB mortgages were for only a small portion
of the overall purchase price. Payment terms were set based on
stable income flows of the borrower, which were unlikely to be
affected by a drop in property prices. Even though property
serves as collateral for non-mortgage loans, Mr. Hung stated that
ACB credit risk evaluation teams took this speculative pricing
into consideration when it assessed the viability of commercial
projects and the long term value of property as collateral. This,
he believes, will protect the bank from any dramatic price drops.

Nobody Listens to Me
13. At the end of the meeting, the Ambassador asked how bankers
like ACB participate in or influence discussions on financial
sector reform. Mr. Hung noted that it was very difficult to
influence the discussion which went on at very high levels in the
GVN. He said that the decision-makers understood the situation,
but that seemed to have difficulty taking action. He stated that
it was very important for the U.S. and other foreign countries to
push for these changes. This, he said, may be the most effective
way to influence their actions.

14. Chairman Hung and his management team are impressive, and
have built a bank to serve Vietnam's growing urban middle class.
In a few short years they have built a sizeable branch network, a
strong customer base, and attracted foreign investment and
expertise. Their innovations should help them compete as Vietnam
opens up its financial sector over time. Sadly, these individuals
downplay their influence with Vietnam's top leadership. One hopes
they have understated their influence, because their expertise and
advice are sorely needed if Vietnam's financial sector reforms are
eventually to succeed in giving Vietnam the banking system that it
needs to prosper and develop.


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