A new report predicts that the upcoming liberalization of the Vietnamese banking sector will result in intense competition between the country's three top banking groups. This will lead to heavy investments in technology, according to the study.
Released by Financial Insights, a subsidiary of research company IDC, the report focuses on the IT spending trends in the Vietnamese banking sector.
Abhishek Kumar, Financial Insights' Asia-Pacific market analyst of IT benchmarking practice, said in a statement: "We see three spending patterns in IT investments among Vietnam's banks. The smallest banks will be focusing on making basic upgrades to their infrastructure, and top-tier state owned banks will continue to rely on government-supported budgets to allow them to undertake large-scale technology projects.
"It is, however, among the middle-tier, more dynamic joint-stock banks that we observe a more effective approach to technology investments resulting in a harmonious match between investments needed and available resources."
Vietnam's economy has been growing at an average of 7.4 percent every year over the past decade, with no indication of slowing down in the near future, said Financial Insights. In the first half of 2005 alone, foreign investments totaling US$1.2 billion were registered, more than twice the corresponding figure in the first half of 2004.
According to Financial Insights, state-owned commercial banks and the smaller joint-stock banks, which together make up 91.7 percent of the Vietnamese banks, are investing heavily in IT modernization to prepare for the liberalization of the country's banking industry.
With the opening up of the banking sector, foreign banks have also taken an interest and are looking to expand their positions in Vietnam through expansion and investment, said the report.
Although retail banking is not performing as well as expected, the small and midsize enterprise (SME) banking segment has established itself as the fastest growing segment in banking, contributing nearly 20 percent of Vietnam's GDP (Gross Domestic Product).
Financial Insights is however, cautioning players in the country's banking sector against making hasty investments in IT.
Kumar explained: "The biggest concern is the conflicting claims of NPL (non-performing loans) ratios for the state-owned banks. The State Bank of Vietnam, World Bank and the International Monetary Fund (IMF) estimate NPLs at approximately 17 to 20 percent of outstanding loans.
"Yet state-owned banks claim that these estimates are exaggerated and that the true value is below the 10 percent norm," he said. "The issue stems from loose financial disclosure laws and the resultant lack of transparency and accuracy."
According to Financial Insights, the state banks are taking steps to deal with this concern which is but just one of many weaknesses of the Vietnamese banking sector.
The majority of these challenges can be addressed as the upcoming liberalization puts more pressure on the government and banks to modernize their current legal and banking infrastructure, said the research company.