EVFTA gains in telecoms and banking

08:00 | 02/11/2019
Even though a bigger lift in foreign ownership cap could become a driving force to lure further European investment in banking and telecommunications, the funding picture in these sectors remains a question on the back of enforcement of the landmark EU-Vietnam Free Trade Agreement.
evfta gains in telecoms and banking
The country’s orientations towards Industry 4.0 means that new avenues will open up for groups with international expertise in the telecoms market (Photo: Le Toan)

At last week’s conference on the challenges and opportunities for the telecommunications sector amid the enforcement of the agreement (EVFTA), Hoang Quang Phong, vice chairman of the Vietnam Chamber of Commerce and Industry (VCCI), said insurance, securities, and telecommunications are the group of services with noteworthy commitments in the agreement.

“The EVFTA is forecast to have strong impacts on the banking and financial, and telecommunications service market because it has higher commitments in the sectors than those in the World Trade Organization (WTO). Moreover, EU firms have strong expertise in these fields,” Phong said.

Significant FOL changes

According to Nguyen Thi Thu Trang, director of the VCCI’s WTO Centre, under the EVFTA’s commitment, Vietnam will permit the establishment of 100 per cent foreign-invested enterprises in the non-network infrastructure value-added telecommunications services after five years of the agreement’s entry into force, while in the WTO, just joint ventures are permitted with the foreign ownership limit (FOL) of 65 per cent.

In the value-added telecommunications services with network infrastructure, the FOL will be 65 per cent, being effective from five years after the EVFTA enforcement from the current 50 per cent. The threshold is 50 per cent under the WTO commitments.

In regard to basic telecommunications services, the FOL will be raised to 75 per cent for the services without network infrastructure after five years of performance of the EVFTA, in comparison with 70 per cent in the WTO. For the services with network infrastructure, the country allows the establishment of joint ventures with telecoms service providers licensed in Vietnam, with the FOL being 49 per cent at maximum by then which is similar to WTO commitments.

The EVFTA also represents an historic change and a new chapter in the banking sector. Vietnamese regulators are ramping up their efforts on moving forward with constructive reforms to the domestic financial landscape by lifting some limits on foreign ownership in two local banks in the next five years, except four joint-stock commercial banks in which the state still holds the controlling stake (BIDV, Vietinbank, Vietcombank, and Agribank).

However, after the five-year-period, this relaxed FOL decision would be no longer applicable. The current rate under the WTO is just 30 per cent.

Explaining why this decision lasts five years, Phan Dung Khanh, investment director at Maybank Kim Eng Securities stated time could be seen as a trial period for policymakers. After this time, they can have a more thorough view of whether to continue relaxing on the FOL or not.

He expressed his optimistic outlook on the relaxation of FOL in commercial banks, noting the decision would make it possible for European banks to penetrate Vietnam. “This is anticipated to improve the diversity of Vietnam’s banking industry in at least the next five years,” Khanh said. “European lenders may have relatively better experience with a wide range of products and services, thus the entrance of such foreign players to Vietnam will increase local competition. This represents a true win-win for business and consumers, in the form of greater services and increased competitiveness.”

While seeing big changes on the FOL, the EVFTA is expected to make no significant impacts soon in the picture of foreign direct investment (FDI) in these sectors.

Industry insiders say that investors often need longer time to penetrate the market. “Notwithstanding the regulatory relaxation, European banks might still face various obstacles including inter-provincial expansion, product approval, and distribution through banking channels,” Khanh told VIR.

“In fact, the number of European banks in our countries is shrinking, which is in stark contrast to greater participation from banks in other Asian countries,” he added.

While South Korean, Japanese, or Chinese lenders are gearing up to enter into Vietnam’s financial market thanks to the similarities among Asian nations, Western players still remain a modest part of the game. In worse scenarios, some have left or divested their shares in Vietnam. For example, French bank BNP Paribas divested its entire 18.68 per cent stake in the local Orient Commercial Bank, ending a decade-long partnership in 2017.

Instead of this, the opening of Vietnam’s banking system will help promote the internationalisation of Vietnam’s financial market, increase its international influence, and help the country become a promising investment destination.

“Finance and telecommunication are quite sensitive, so Vietnamese policymakers should take it really serious in this regard. The new approach, though a bit cautious, is appropriate,” Trang of the WTO Center added. “Under the new legal regime, both international and domestic lenders will be more focused on their business operational capability, quality, and efficiency.”

The similar situation is forecast for the telecommunications sector. “Vietnam commits to open no new telecommunication fields under the EVFTA, thus there will be no big change in the country’s FDI attraction in the first five years of the effectiveness. Five years later, the situation is not brighter,” Trang said.

International upside

The market opening and completion of Vietnam’s legal framework can create more chances for international telecommunications firms to venture further into the market with the EVFTA. However, the path for international investors to do whatever they like in the competitive market is not smooth. In fact, Vietnamese companies are dominating the telecommunications service market, such as Viettel, VNPT, EVNTelecom, FPT, and Vinaphone. Nguyen Quy Quyen, from the International Co-operation Department of the Ministry of Information and Communications explained, “At present there is VietnamMobile, the only foreign-Vietnamese telecom joint venture, but its market share remains modest.”

Meanwhile, Vu The Binh, general secretary of the Vietnam Internet Association, said that the possible opportunity for international groups to further venture in the telecommunications service market is the added-value services on the internet.

“International telecom companies may not target investment in network infrastructure. They instead focus on the fields of digital transformation which are less mentioned in Vietnamese rules,” Binh noted.

Regarding the banking sector, the improved business performance of Vietnamese banks and a government regulation to require local banks to meet stricter capital regulations as part of Basel II standards are spelling the start of a wave of foreign investment into the country’s finance and banking sector in 2019.

From the beginning of this year, the market has seen positive signals on rising foreign investment in the sector. According to global rating firm Moody’s, Vietnamese banks achieved a higher aggregate return on assets for a second year running, registering a rise of 1.1 per cent in 2018 from 0.9 per cent in 2017. Aggregate net income for the banks also rose 35 per cent to VND70 trillion ($3 billion) last year from the previous year, despite a moderation of credit growth.

Independent banking expert Nguyen Tri Hieu also foresees rising foreign capital inflow to the country’s finance and banking market this year.

By Thuy Huong

Based on MasterCMS Ultimate Edition Ver 2.8 2018