Cultural due diligence critical to nurturing foreign bank 'marriages'

Deutsche Bank bought a 10% stake in Habubank in 2007 to become a strategic investor. What are your memories of working with Habubank as a member of Deutsche Bank Vietnam's management board, happy or unhappy?

I am a natural optimist and think positively. That's why I look back on my time as a banker in Vietnam with gratitude and good memories. What was particularly fascinating for me was that I was able to bring the knowledge and experience I had acquired in Germany to an exciting emerging market like Vietnam. I can say that such a mission is always more exciting than being active in a saturated, developed market. Successes as well as failures were always quickly seen in Vietnam.

At that time, I talked a lot with German colleagues who worked in Singapore or Hong Kong. I would never have wanted to change places with them. Vietnam was too exciting for that. I took Vietnam and the Vietnamese to my heart from the very first day. I was particularly fascinated by the friendliness and openness of my Vietnamese colleagues and the many people from the press, politics and business sectors.

When I look back on that time, I am grateful for the many things I learned to be successful in Vietnam. This applies to the stumbling blocks, problems and difficulties I had to deal with on a daily basis, but also to the tools you need not to be fooled and to be successful in business.

Many foreign banks have seen their “marriages” in Vietnam break down, like Deutsche Bank-Habubank, ANZ-Sacombank, HSBC-Techcombank, Standard Chartered-ACB, OCBC-VPBank, and SMBC-Eximbank. Are there any common reasons behind these break-ups?

In the mid-2000s, there was a gold rush among foreign banks regarding the Vietnamese market. The reforms of Doi moi (1986) had taken full effect and everyone wanted to be involved in this development.

Vietnam launched Ho Chi Minh City and Hanoi bourses in 2000 and 2005, respectively. However, retail banking was still in its infancy. Shortly before, many foreign banks such as Societé Générale, Citibank, HSBC, ANZ and Deutsche Bank had arrived in Vietnam and, full of euphoria, ventured into retail banking, partly on their own, partly with strategic stakes of 10% or more in Vietnamese banks.

A few years later, the disappointment was widespread. The development did not seem to be going in the desired direction. And indeed, cooperations were not always satisfactory, which was due on the one hand to the lack of cultural due diligence, and on the other hand to conditions on the ground. The latter included caps on interest rates, rampant grey market banks, problematic risk management (ORM, CRM, MRM), and a tough struggle to introduce new products, especially in the investment and insurance sectors.

In addition, earnings from retail banking were generally growing more slowly and were less volatile than in corporate banking or even in investment banking. One or the other international banks may have lost patience with the retail banking business in Vietnam. Some exited early, others later.

Finally, it was Deutsche Bank's strategic decision to concentrate more strongly on the German market in retail banking, which was expressed, for example, in the acquisition of the German Postbank, which was a decisive factor in the gradual withdrawal of this line of business from Asia.

What is your advice for foreign banks that are eyeing to become strategic shareholders in Vietnamese banks today, with the intention to make changes to corporate governance?

First, take market intelligence very seriously and, in addition to classical due diligence (DD), conduct cultural due diligence (CDD) and work out a safe modus operandi for your business. Second, listen to Vietnam specialists and your people on the ground. Do not try to do everything through your head office in your home country.

Third, banking is a people business, so hire good people. Expats, locals or overseas Vietnamese (Viet kieu), everyone has their advantages and disadvantages. But someone without relevant local experience - whether an expat or a Viet kieu who has spent their whole life abroad - will not be able to understand the specific Vietnamese circumstances.

Fourth, pay special attention to risk management. This applies to operational risk management (ORM) and market risk management (MRM), and especially to credit risk management (CRM). In a broader sense, I also include treasury.

Fifth, even if you only have a minority stake in a Vietnamese bank, you should insist on decision-making and information rights. Just attending monthly board meetings is not enough. Be involved!

Sixth, find ways to establish an impeccable compliance structure, because according to Transparency International, Vietnam has a lot of catching up to do in this area. Seventh, in this context, be sure to respect Vietnamese law, especially in connection with the maximum stake.

And finally, Vietnam's banking market is currently going through a crisis. Act counter-cyclically. When everyone wants to enter the market, it is too late.

What advice do you have for Vietnamese banks looking to nurture relations with foreign strategic investors?

I can also only advise Vietnamese banks to be open to partnerships with foreign financial institutions. Vietnam's banking market has been shaken by scandals and crises, especially in the last year. The non-performing loan ratio (NPL) - even if you only take the official figures - is worrying. The stock and bond markets are not transparent. There is no independent rating agency. Vietnamese banks should not turn a blind eye to this and try to bring foreign expertise on board who, in addition to experience, also have an international network.

To this end, it is important to show the necessary openness for all the points that I have given above as recommendations for foreign investors. This applies to transparency and willingness to change as well as to the openness to provide information and share decision-making rights.

Finally, hire the right people. In addition to the pool of domestic experts, foreign experts can also be used for this purpose. Many Viet kieu have enjoyed excellent banking training in Europe or the U.S. and, from experience, are happy to return to the homeland of their ancestors if suitable offers are made. Other foreign banking experts should also be involved. Especially against the background of the considerations to establish a financial hub in HCMC as part of Vietnam's long-term strategy, further professionalisation is urgently needed.

Retail banking in Vietnam is a promising business given the huge market size and low personal banking penetration. ANZ sold its Vietnam retail business to South Korea's Shinhan Bank in 2017. Singapore's UOB said it expected to complete the acquisition of Citigroup's consumer banking business in Vietnam this year. Why has retail banking lost its shine in the eyes of foreign banks in Vietnam?

Generally speaking, retail banking is a business that requires patience. Infrastructure such as bricks and mortar has been an essential part of this business. With the growth of digital banking, the role of branches is diminishing, but still the cost and revenue structure in retail banking remains fundamentally different from other divisions of the bank.

In addition, there is the aforementioned lack of transparency in the bond and stock markets, and existing deficiencies in risk management (CRM, MRM, ORM) and the product and service structure, which is still in need of improvement. For foreign banks, there is also strong competition among local players.

What are your tips for foreign banks trying to make their retail banking businesses a success in Vietnam?

The most important advice I can give with my 18 years experience in retail banking is:

First, do proper market analysis (including DD and CDD). Second, pay special attention to risk management in all aspects: CRM, ORM, MRM and compliance

Third, involve Vietnamese experts alongside retail banking experts (preferably a combination of both) in every step of the process. Fourth, act counter-cyclically and do not enter the Vietnamese banking market when everyone wants to do it and conditions are unfavourable.

Fifth, take a long breath in retail banking, but also do not hesitate to accept the consequences if your involvement does not develop satisfactorily.

You once commented that the changes in the Vietnamese banking landscape have been “breathtaking” in recent years. What are the massive changes and the driving forces behind them?

Compared to about 12 years ago, there have been massive changes in the Vietnamese banking landscape. On the one hand, the country itself has developed economically. Vietnam's economy has boomed in recent years. According to the World Heritage Foundation, Vietnam - along with Poland - is the country that has improved the most in the Economic Freedom Index. Of course, it is still an "economically moderately free" country, but the direction to a higher ranking is set as Vietnam continues on its path of commitment to a market economy, free trade, and sound monetary and fiscal policies.

The banking sector has also developed, but in my view it lags somewhat behind the overall economic development. I mentioned the reasons above. Transparency, risk management and internal processes are better than a decade ago. But there are still a lot of things wrong.

Nevertheless, it must be acknowledged that professionalisation in banking has progressed. This can be seen in the players on the ground: Many senior bank manager managers in Vietnam are now real experts in their field. Among them, there are many bankers who learned the business abroad. And there are also several foreign consultants and managers in Vietnam.

The driving forces are manifold. On the one hand, politics has intervened through appropriate regulations. This is expressed in the higher professionalism of the state-owned commercial banks. On the other hand, it is also part of a developing country like Vietnam to have a functioning banking system. This is not only demanded by the business world, but also by many Vietnamese consumers, who request safe deposits, transparency and attractive banking products.

Recently, I have been involved in discussions to establish a Financial Hub HCMC and will delve further into this in 2023 (with University of Economics HCMC/UEH, among others). A country like Vietnam, which wants to become an industrialised country in the next decade, needs a functioning banking system. This is an essential component if Vietnam wants to enter the next decade stronger.

The structure of Vietnamese banks’ revenue and profit are shifting toward other services apart from lending. What kinds of services and products should Vietnamese banks focus their attention on?

Because of my own background, I would like to take the perspective of retail banking in all its facets, from retail “mass business” to the servicing of wealthy private clients (private banking/private wealth management). In addition to eliminating the still high risks in the lending business (real estate bubble, bad investments, NPL), other products and services should also be more strongly included. These include:

First, improving, or introducing interesting, transparent and risk-adequate investment products for all customer segments, from simple retail customers to rich private banking customers.

Second, closely related to this is an increase in transparency on the bond and stock markets. At present, confidence in these markets is very low, so clients are reluctant to invest.

Third, in terms of commissions, the insurance business offers further starting points. The life and non-life insurance areas are still expandable in the banking business.

Fourth, the simplification of processes in the service area is also very important. I myself have accounts at various Vietnamese banks. The quality of service varies greatly. It is important to learn from best practice at home and abroad.

Fifth, the cryptocurrency sector in Vietnam has a semi-legal character. On the one hand, the Vietnamese are among the countries with the most experience in percentage terms (after Nigeria, by the way). On the other hand, the legal regulations are not clear. There is certainly still a lot that can be done here.

How will AI, Big Data, blockchain and even metaverse change the Vietnamese banking landscape in the coming years?

The bricks and mortar business will certainly no longer have the status it had 10 years ago. More and more cashless payment systems will gain the upper hand and bring about a clear structural change. In the Vietnam of the future, there will simply be fewer branches and even more people will conduct their business outside the traditional banking system. The fintech sector will also grow. It will be important for Vietnamese banks to prepare for this structural change and adjust their business models.

Blockchain technology clearly has the character of a game-changer. This does not only apply to cryptocurrencies, but also to many areas in which banks have played an essential role in the past, for example in the area of trade and logistics. Certain things like the Letter of Credit will have to be adapted.

The emerging introduction of Central Bank Digital Currencies (CBDC) will also pose a challenge to commercial banks. I have already worked with UEH on this issue. Vietnam will not be able to wait here. China is about to introduce its own CBDC. Western nations are not idle here either. I know from the State Bank of Vietnam that they are also working on it intensively. Once a CBDC is introduced, many commercial banks will have to rethink their old business models.

You worked in Vietnam for a long time as a banker, then left the country before returning as the head of a non-government organization. What changes have impressed you since you first came here?

The changes Vietnam has experienced in recent years are groundbreaking and exciting. GDP growth rates of 6-8% (even double-digit in the big cities) are clearly visible. The skyline has changed and the infrastructure has improved significantly. A lot has also changed in terms of the professionalism of many partners, whether at the big universities or in the banking business.

Nevertheless, there is still a lot to be done. Anyone who knows Vietnam knows that. The exciting thing for me is that I can be involved in building the country. I see that as a real opportunity for me personally.

What further changes do you wish to see in Vietnam?

I would like to see Vietnam become an industrialized country in my lifetime. And I think my chances are not bad to see this happen and, above all, to actively contribute to this goal. As a banker, I would be particularly thrilled if the establishment of a financial hub in HCMC becomes a reality by 2035.