As the global economy stutters and the Asian tigers, China and India, slow down to catch their breath, global investors are moving their focus to the emerging markets in ASEAN in search of the elusive yield. ASEAN, a region with combined GDP of over USD 2.4 trillion, abundant natural resources and a favourable demographic dividend, has waited on the sidelines for investors to give it a patient look as it attempts to rewrite its history of poor governance, corruption, and protectionist policies.
Vietnam is one such economy which has experienced the fickle nature of global investors like none of its other ASEAN counterparts. It was hailed as the next ‘Asian Dragon’ after it transformed its economy from a centrally planned model into a dynamic market-oriented one, and enjoyed an average growth rate of 7% per annum for 2 decades, a feat achieved by no other Asian economy except China. However, the combination of an inflated real estate market, unchecked credit growth and weak regulatory oversight led to unprecedented levels of double digit inflation and unproductive state owned enterprises resulting in a slowdown of economic growth to 5% and stagnation of the economy’s efficiency and productivity.
However, we strongly believe that this Asian cub economy is now poised for a revival - stable macroeconomic conditions have been in place now for over two years and inflation at <2% has dropped to its lowest levels in decades. Real GDP growth has been recovering gradually and was around 6% in 2014, supported by robust exports and foreign direct investment. Domestic demand has also recovered somewhat, with higher capital formation and a slight rebound in consumption. The State Bank of Vietnam has held exchange rate stable and is merging weak banks to support the banking system while working towards comprehensive reforms to reduce NPLs in the system – a clear result of these efforts is the rebound in the construction and real-estate sectors. Several international rating agencies have recognized these achievements and upgraded Vietnam’s sovereign rating. The government is targeting GDP growth of 6.2% in 2015 and according to PwC, the country’s annual real GDP expansion could average 5.3% in the 2014-50 period, a pace only bettered by Nigeria.
Digging deeper into the regions deal flow, Vietnam has accounted for only ~9% of the ASEAN deal volume (excluding real estate) during the last 5 years of which ~33% was focused on the Consumer products industry. Early investors in Vietnam have picked companies targeting the country’s demographic dividend and reaped benefits. However, the next generation of investors with Vietnam in their crosshairs will now have to look beyond the easy pickings of large domestic consumer products companies and target sectors which will benefit from the economic revival. We have identified three such sectoral themes - Bargain hunting (Financial Services), Tipping point (Modern Retail), Hidden gems (Niche F&B). In this edition of the newsletter we dig deeper into plays in the Financial Services sector.
Share of Deals in ASEAN over last 5 years
Bargain Hunting - Banking and Financial Services
The traditionally fragmented and disorganised Vietnamese banking sector is finally getting its act together as Moody’s rating agency has recently pointed out - the operating environment has begun to stabilize, inflation and domestic interest rates have moderated significantly and pressure on the exchange rate has subsided.
Inflation vs Lending Rate in Vietnam
The government has also targeted reducing gold and foreign currency deposits thereby boosting deposit growth for banks and reducing their dependency on the volatile interbank funding market. Profitability will remain a concern in the near term as the economy looks to consolidate but the emergence of a strong banking sector can only augur well for the investors brave enough to pick the winners now. Vietnamese listed banks are currently trading at an average trailing P/E of 10.5x and P/BV of 1.5x which is at a significant discount to their peers in the region.
A robust organic growth story
According to the State Bank of Vietnam, only 20% of the population in Vietnam holds a bank account thereby presenting a huge opportunity for banks to increase their retail banking operations. Vietnam has a young population with a median age of 29, who according to a research by McKinsey, are more open to new banking styles such as internet banking than older Vietnamese. As of Dec 2014, 43 banks in Vietnam provide internet banking and 32 banks provide mobile banking, of which the total number of mobile banking accounts created is half that of internet banking accounts. The future for retail banking in the country remains bright as a population of young adults will be more inclined to borrow and adopt new financial technology.
Vietnam has 36% smartphone penetration which is estimated to increase to 50% by next year and over 57% of this population indulges in online shopping (TNS, Kantar Study). Experts believe that we are at the cusp of a payments revolution in Vietnam as adoption of credit cards (card transaction grew by 200% from 2009 to 2013) and mobile wallets will redefine the payments landscape in the country. Alternatively, shadow banking in Vietnam, which accounts for an estimated of 30% of total lending in Vietnam, will also reduce significantly owing to new regulations thereby increasing business for traditional channels like banks as well as newer ones like Peer-to-peer lending.
The Vietnamese banking industry is undergoing a rapid phase of consolidation directed by the State Bank of Vietnam with an objective of reducing the number of banks from 40 at present to 15-17 by 2017. The Vietnam Asset Management Co. (VAMC) has been active in purchasing NPLs from banks as part of the restructuring efforts for the sector. While significant legal hurdles remain for the transfer of loan titles and collateral which impede NPL resolution, the time is ripe for the development of Asset Reconstruction Companies in the country. Overall, consolidation is likely to improve efficiency through better economies of scale, and reduce supervisory burden. Identifying and investing in one of the winners at this stage of consolidation will result in multi-bagger gains in future.
Have a chat with our M&A Advisory & Research team to discuss regional trends and identify investment opportunities for your business.
Taipan Partners is a boutique advisory firm specialising in integrated business solutions providing M&A advisory & research, talent management and business incubation services to high-growth, emerging and multi-national corporates, financial services firms and disruptive innovation startups with a focus on Asia.