Q4 2011
www.businessmonitor.com
COMMERCIAL BANKING REPORT
ISSN 1758-454X
Published by Business Monitor International Ltd.
VIETNAM
INCLUDES BMI'S FORECASTS
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VIETNAM COMMERCIAL
BANKING REPORT Q4 2011
INCLUDING 5-YEAR INDUSTRY FORECASTS TO 2015


Part of BMI’s Industry Report & Forecasts Series
Published by: Business Monitor International
Copy deadline: September 2011



Vietnam Commercial Banking Report Q4 2011



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Vietnam Commercial Banking Report Q4 2011




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CONTENTS
Executive Summary 5
Table: Levels (VNDbn) 5
Table: Levels (US$bn) 5
Table: Levels At August 2010 5
Table: Annual Growth Rate Projections 2011-2015 (%) 6
Table: Ranking Out Of 59 Countries Reviewed In 2011 6
Table: Projected Levels (VNDbn) 6
Table: Projected Levels (US$bn) 7
SWOT Analysis 8
Vietnam Commercial Banking SWOT 8
Vietnam Political SWOT 8
Vietnam Economic SWOT 9
Vietnam Business Environment SWOT 10
Business Environment Outlook 11
Commercial Banking Business Environment Ratings 11
Table: Vietnam’s Commercial Banking Business Environment Rating 11
Commercial Banking Business Environment Rating Methodology 12
Table: Asia Commercial Banking Business Environment Ratings 13
Global Commercial Banking Outlook 14
Asia Banking Sector Outlook 18
Table: Banks’ Bond Portfolios 30
Table: Asia Commercial Banking Business Environment Ratings 31
Table: Comparison Of Loan/Deposit, Loan/Asset And Loan/GDP Ratios 32
Table: Anticipated Developments In 2011 33
Table: Comparison Of Total Assets, Client Loans And Client Deposits, 2009-2010 (US$bn) 34
Table: Comparison Of Per Capita Deposits, 2010 (US$) 35
Table: Interbank Rates And Bond Yields, 2010-2011 36

Vietnam Banking Sector Outlook 37
Economic Outlook 40
Table: Vietnam Economic Activity, 2008-2015 42
Company Profiles 43
Vietcombank 43
Table: Key Statistics For Vietcombank, 2004-2008 (VNDmn) 44
BIDV 45
Table: Key Statistics For BIDV, 2004-2006 (VNDmn) 46
VietinBank 47
Table: Key Statistics For VietinBank, 2005-2008 (VNDmn) 48
Agribank 49
Table: Balance Sheet, 2004-2008 (VNDmn) 50
Table: Balance Sheet, 2004-2008 (US$mn) 50
Table: Key Ratios, 2004-2008 (%) 50
MHB Bank 51
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Table: Key Statistics For MHB Bank, 2006-2008 (VNDmn) 52
Habubank 53
Table: Key Statistics For Habubank, 2004-2007 (VNDmn) 54
Eximbank Bank 55
Table: Balance Sheet (VNDmn, unless stated) 56
Table: Balance Sheet (US$mn, unless stated) 56
Table: Key Ratios (%) 56
Sacombank 57
Table: Stock Market Indicators 58
Table: Balance Sheet (VNDmn, unless stated) 58

Table: Balance Sheet (US$mn, unless stated) 59
Table: Key Ratios (%) 59
Saigonbank 60
Table: Stock Market Indicators 60
Table: Balance Sheet (VNDmn, unless stated) 61
Table: Balance Sheet (US$mn, unless stated) 61
Table: Key Ratios (%) 61
SeABank 62
Table: Balance Sheet (VNDmn, unless stated) 62
Table: Balance Sheet (US$mn, unless stated) 63
Table: Key Ratios (%) 63
BMI Banking Sector Methodology 64
Commercial Bank Business Environment Rating 65
Table: Commercial Banking Business Environment Indicators And Rationale 66
Table: Weighting Of Indicators 67




















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Executive Summary
Table: Levels (VNDbn)
Date
Total
assets

Client
loans

Bond
portfolio

Other

Liabilities &
capital

Capital

Client
deposits


Other

August
2009
2,065,761.6 1,706,340.0 173,358.3 186,063.3 2,065,761.6 286,547.0 1,594,992.6 184,222.0
August
2010
2,624,434.1 2,191,880.0 203,131.1 229,423.0 2,624,434.1 360,566.0 2,038,758.6 225,109.5
Change,
% 27%

28%

17%

23%

27%

26%

28%

22%

Source: BMI; Central banks; Regulators

Table: Levels (US$bn)
Date

Total
assets

Client
loans

Bond
portfolio

Other

Liabilities
& capital

Capital

Client
deposits

Other

August
2009
115.9

95.7

9.7

10.4


115.9

16.1

89.5

10.3

August
2010 134.7

112.5

10.4

11.8

134.7

18.5

104.6

11.5

Change, % 16%

17%


7%

13%

16%

15%

17%

12%

Source: BMI; Central banks; Regulators

Table: Levels At August 2010
Loan/deposit ratio Loan/asset ratio

Loan/GDP ratio

GDP per capita,
US$

Deposits per capita,
US$

107.51% 83.52%

118.16%

1,063


1,189

Falling Rising

Rising



Source: BMI; Central banks; Regulators





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Table: Annual Growth Rate Projections 2011-2015 (%)
Assets

Loans

Deposits

Annual Growth Rate 20

20


15

CAGR 20

20

14

Ranking 2

3

14

Source: BMI

Table: Ranking Out Of 59 Countries Reviewed In 2011
Loan/deposit ratio Loan/asset ratio

Loan/GDP ratio

5 2

10

Local currency asset growth Local currency loan growth

Local currency deposit growth


5 5

16

Source: BMI

Table: Projected Levels (VNDbn)
2007

2008

2009

2010

2011f

2012f

2013f

2014f

2015f

Total
assets
1410221.40 1747335.40 2411322.85 2893587.42 3472304.91 4166765.89 5000119.07 6000142.88 7200171.45
Client
loans

1067730.00 1339260.00 1848178.80 2217814.56 2661377.47 3193652.97 3832383.56 4598860.27 5518632.33
Client
deposits

1100392.90 1341142.80 1528902.79 1697082.10 1917702.77 2186181.16 2492246.52 2841161.04 3267335.19
f = BMI forecast. Source: BMI; Central banks; Regulators








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Table: Projected Levels (US$bn)
2007

2008

2009

2010

2011f


2012f

2013f

2014f

2015f

Total assets 88.05

99.94

130.56

148.40

168.15

201.78

248.76

307.70

378.96

Client loans 66.66

76.60


100.07

113.75

128.88

154.66

190.67

235.84

290.45

Client deposits 68.70

76.71

82.78

87.04

92.87

105.87

123.99

145.70


171.97

f = BMI forecast. Source: BMI; Central banks; Regulators

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SWOT Analysis
Vietnam Commercial Banking SWOT
Strengths

Rapid growth.
 Untapped potential.

Weaknesses

Domestic banks lack capital and technology to sustain high credit growth.
 The financial accounts of many banks are still opaque.

Opportunities

Population still under-banked.
 Income levels likely to rise strongly over the medium term.

Threats

Macroeconomic instabilities threaten the credibility of the government and could
potentially economic policy away from further liberalisation.



Vietnam Political SWOT
Strengths

The Communist Party of Vietnam remains committed to market-oriented reforms and
we do not expect major shifts in policy direction over the next five years. The one-
party system is generally conducive to short-term political stability.
 Relations with the US have witnessed a marked improvement, and Washington sees
Hanoi as a potential geopolitical ally in South East Asia.

Weaknesses

Corruption among government officials poses a major threat to the legitimacy of the
ruling Communist Party.
 There is increasing (albeit still limited) public dissatisfaction with the leadership’s tight
control over political dissent.

Opportunities

The government recognises the threat that corruption poses to its legitimacy, and has
acted to clamp down on graft among party officials.
 Vietnam has allowed legislators to become more vocal in criticising government
policies. This is opening up opportunities for more checks and balances within the
one-party system.

Threats

Macroeconomic instabilities in 2010 and 2011 are likely to weigh on public acceptance
of the one-party system, and street demonstrations to protest economic conditions

could develop into a full-on challenge of undemocratic rule.
 Although strong domestic control will ensure little change to Vietnam’s political scene
in the next few years, over the longer term, the one-party-state will probably be
unsustainable.
 Relations with China have deteriorated over recent years due to Beijing’s more
assertive stance over disputed islands in the South China Sea and domestic criticism
of a large Chinese investment into a bauxite mining project in the central highlands,
which could potentially cause wide-scale environmental damage.



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Vietnam Economic SWOT
Strengths

Vietnam has been one of the fastest-growing economies in Asia in recent years, with
GDP growth averaging 7.2% annually between 2000 and 2010.
 The economic boom has lifted many Vietnamese out of poverty, with the official
poverty rate in the country falling from 58% in 1993 to 20% in 2004.

Weaknesses

Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving
the economy vulnerable to global economic uncertainties in 2011. The fiscal deficit is
dominated by substantial spending on social subsidies that could be difficult to
withdraw.

 The heavily-managed and weak dong currency reduces incentives to improve quality
of exports, and also serves to keep import costs high, thus contributing to inflationary
pressures.

Opportunities

WTO membership has given Vietnam access to both foreign markets and capital,
while making Vietnamese enterprises stronger through increased competition.
 The government will in spite of the current macroeconomic woes, continue to move
forward with market reforms, including privatisation of state-owned enterprises, and
liberalising the banking sector.
 Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban
population to rise from 29% of the population to more than 50% by the early 2040s.

Threats

Inflation and deficit concerns have caused some investors to re-assess their hitherto
upbeat view of Vietnam. If the government focuses too much on stimulating growth
and fails to root out inflationary pressure, it risks prolonging macroeconomic instability,
which could lead to a potential crisis.
 Prolonged macroeconomic instability could prompt the authorities to put reforms on
hold, as they struggle to stabilise the economy.



























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Vietnam Business Environment SWOT
Strengths

Vietnam has a large, skilled and low-cost workforce, that has made the country
attractive to foreign investors.
 Vietnam’s location – its proximity to China and South East Asia, and its good sea
links – makes it a good base for foreign companies to export to the rest of Asia, and

beyond.

Weaknesses

Vietnam’s infrastructure is still weak. Roads, railways and ports are inadequate to
cope with the country’s economic growth and links with the outside world.
 Vietnam remains one of the world’s most corrupt countries. Its score in Transparency
International’s 2010 Corruption Perceptions Index was 2.7, placing it in 22
nd
place in
the Asia-Pacific region.

Opportunities

Vietnam is increasingly attracting investment from key Asian economies, such as
Japan, South Korea and Taiwan. This offers the possibility of the transfer of high-
tech skills and knowhow.
 Vietnam is pressing ahead with the privatisation of state-owned enterprises and the
liberalisation of the banking sector. This should offer foreign investors new entry
points.

Threats

Ongoing trade disputes with the US, and the general threat of American
protectionism, which will remain a concern.
 Labour unrest remains a lingering threat. A failure by the authorities to boost skills
levels could leave Vietnam a second-rate economy for an indefinite period.
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Business Environment Outlook
Commercial Banking Business Environment Ratings

Table: Vietnam’s Commercial Banking Business Environment Rating
Limits of potential
returns
Data

Score; out of 10

Ratings score; out of 100

Total assets; end 2010 US$148.4mn

6

Market Structure 67

Growth in total assets;
2011-2015

7


Growth in client loans;
2011-2015

7



Per-capita GDP; 2011 US$1,293.7

2

Country Structure 53

Tax 2.9

3


GDP volatility 0.4

10


Financial infrastructure 5.6

6


Risks to realisation of returns


Regulatory framework
and development 4.5

5


Market Risk 40

Regulatory framework
and competitive
landscape
5.0

5


Moody’s rating for local
currency deposits
2.0

2


Long-term financial risk 4.8

5

Country Risk 46

Long-term external risk 3.3

3


Long-term policy

continuity 7.0

7


Legal framework 3.7

4


Bureaucracy 3.9

4


Commercial banking business environment rating


56
Source: BMI

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Commercial Banking Business Environment Rating Methodology
Since Q108, we have described numerically the banking business environment for each of the countries
surveyed by BMI. We do this through our Commercial Banking Business Environment Rating (CBBER),
a measure that ensures we capture the latest quantitative information available. It also ensures consistency

across all countries and between the inputs to the CBBER and the Insurance Business Environment
Rating, which is likewise now a feature of our insurance reports. Like the Business Environment Ratings
calculated by BMI for all the other industries on which it reports, the CBBER takes into account the
limits of potential returns and the risks to the realisation of those returns. It is weighted 70% to the former
and 30% to the latter.
The evaluation of the ‘Limits of potential returns’ includes market elements that are specific to the
banking industry of the country in question and elements that relate to that country in general. Within the
70% of the CBBER that takes into account the ‘Limits of potential returns’, the market elements have a
60% weighting and the country elements have a 40% weighting. The evaluation of the ‘Risks to
realisation of returns’ also includes banking elements and country elements (specifically, BMI’s
assessment of long-term country risk). However, within the 30% of the CBBER that take into account the
risks, these elements are weighted 40% and 60% respectively.
Further details on how we calculate the CBBER are provided at the end of this report. In general, though,
three aspects need to be borne in mind in interpreting the CBBERs. The first is that the market elements
of the ‘Limits of potential returns’ are by far the most heavily weighted of the four elements. They
account for 60% of 70% (or 42%) of the overall CBBER. Second, if the market elements are significantly
higher than the country elements of the ‘Limits of potential returns’, it usually implies that the banking
sector is (very) large and/or developed relative to the general wealth, stability and financial infrastructure
in the country.
Conversely, if the market elements are significantly lower than the country elements, it usually means that
the banking sector is small and/or underdeveloped relative to the general wealth, stability and financial
infrastructure in the country. Third, within the ‘Risks to the realisation of returns’ category, the market
elements (ie: how regulations affect the development of the sector, how regulations affect competition
within it and Moody’s ratings for local currency deposits) can be markedly different from BMI’s long-
term risk rating.



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Table: Asia Commercial Banking Business Environment Ratings
Limits of Potential Returns Risks to Potential Returns Overall

Market
Structure

Country
Structure

Market Risks

Country Risks

Rating

Ranking

Bangladesh 43.3

45.0

30.0

44.0

42.3


56

China 93.3

55.0

56.7

76.0

75.1

11

Hong Kong 73.3

92.5

70.0

84.0

80.2

7

India 83.3

55.0


53.3

54.0

66.5

21

Indonesia 73.3

62.5

76.7

42.0

65.1

26

Japan 33.3

77.5

63.3

80.0

57.7


38

Malaysia 73.3

80.0

76.7

78.0

76.4

9

Pakistan 43.3

50.0

56.7

36.0

45.5

53

Philippines 50.0

62.5


56.7

52.0

54.7

43

Singapore 70.0

95.0

96.7

86.0

83.1

5

Sri Lanka 23.3

55.0

36.7

46.0

37.9


57

South Korea 80.0

85.0

76.7

70.0

79.2

8

Taiwan 76.7

72.5

83.3

74.0

75.8

10

Thailand 56.7

65.0


80.0

68.0

63.8

29

Vietnam 66.7

52.5

40.0

46.0

55.8

40

US 90.0

85.0

100.0

74.0

86.9


2

Scores out of 100, with 100 the highest. Source: BMI
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Global Commercial Banking Outlook
A Crucial Point For Global Banks
The global banking sector is at a potential turning point. Concerns over banking system solvency are
rising as sovereign debtors in developed states are put under increasing scrutiny. Private sector
deleveraging threatens not only asset and loan growth, but also the economic growth required to keep
loan performance sustainable. On the positive side, monetary policy is set to remain very accommodative
in developed states; this is increasingly likely to become the case in emerging markets as inflation fears
give way to growth concerns. This should keep short-term borrowing costs low. However, this is going
hand-in-hand with a weaker growth profile, which will ensure that deflation and higher default rates
remain a risk. Global growth momentum is slowing, and we have lowered our real GDP expansion
forecast for 2011 to 3.2% from 3.5%. We continue to believe that the world will avoid a double-dip
recession, and our 2012 global growth number represents a relative improvement upon 2011. However,
with several key economies stalling, including those of the US, eurozone and China, significant risks
remain.
In general our country banking sector forecasts incorporate faster growth in emerging markets than in
developed states, but the post-2008 crisis period is unlikely to be as dynamic as the preceding decade in
terms of banking sector growth. Furthermore, increasingly onerous regulations on capital adequacy ratios
and lending standards will constrain earnings growth for years to come, particularly in developed states.
Here, we explain our banking sector views on a regional basis:
 US and eurozone: The eurozone banking sector is under major duress as the integrity of the
monetary bloc itself is thrown into question. Macroeconomic headwinds have increased
markedly over recent months as the eurozone sovereign debt crisis intensifies. Core European

banks are now in the line of fire due to the significant exposure such firms have via their
peripheral bond holdings, subsidiary operations and faltering confidence within the interbank
market. In the US, a potential double-dip recession would curtail the fragile recovery in bank
lending and push up loan default rates. The loss of the government’s AAA sovereign credit
rating on August 5 also throws up major questions for financial institutions, including whether
money market funds and borrowing collateral will be affected by Treasury holdings being rated
below AAA.



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Set To Stall?

Eurozone – Total Loans To Non-MFIs Excluding General Government, EURbn


Source: BMI

 Emerging Europe: Overall, a continued recovery in growth remains our core scenario for
emerging European commercial banking sectors. The return of access to international capital
markets, positive economic growth, and greater confidence in the macroeconomic outlook has
seen deposit volumes surge, bolstering balance sheets. While banks in the hardest hit countries
had been hesitant to extend credit to their respective domestic economies initially, instead
placing large cash positions in government securities, this situation seems to be turning, with
credit growth across emerging Europe picking up steam. However, we caution that significant
risks to banking sector stability persist. We highlight Turkey, Ukraine and south eastern Europe

as particularly vulnerable to negative shocks.






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Three
-
Speed Emerging Europe

Emerging Europe – Banking Sector Client Loan Growth


Source: BMI, central banks

 Emerging Asia: We are concerned about several potential global risks to the Asian banking
sectors. In the case of Europe, the risk of a freeze on bank lending to Asia as seen in 2009 is
acute. There are several possible channels through which a eurozone crisis could impact Asia’s
banking sectors, including direct losses on exposure to eurozone assets; withdrawal of portfolio
assets in Asia by European banks; contagion leading to concerns over the region’s fiscal weak
links; and a reduction in European bank lending to Asia. In the case of the US, the largest risk
appears to be a double-dip recession, which we believe would lead to a hard landing for the
Chinese.
 Latin America: We believe the deterioration in investor perceptions of the Latin American

consumer will continue to weigh on banks’ performances over the next few months. Yet while
several economies are at risk from excessive consumer leveraging, we do not believe this
warrants a downgrade to our constructive outlook for the sector as a whole. Of all the major
regional economies, Brazil is most at risk from excess leveraging.




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Brazil, Chile
And

Panama Stand Out

Latin America – Consumer Credit, % GDP


Source: BMI, FELEBAN

 Middle East and North Africa: Despite the more difficult operating environment that has
arisen as a result of the regional political turmoil, the outlook for the majority of banks across the
Middle East and North Africa (MENA) region remains cautiously optimistic. Certainly, our core
views on the diverging outlook for financial institutions remains in play, with banks located in
politically stable hydrocarbon-rich states in the Gulf fundamentally better positioned than those
located or heavily exposed to North Africa and the Levant, as we head into the latter months of
2011.

 Sub-Saharan Africa: The region’s major banking sectors (South Africa, Nigeria and Kenya) are
all continuing their recoveries, albeit with varying degrees of strength. Forecast strong economic
growth will boost incomes, which will in turn enable an increase in deposits and greater take-up
of banking services. Rebounding economic activity and improved liquidity are bolstering
banking sector growth.
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Asia Banking Sector Outlook
Assessing the Contagion Risks of the European and US Crises
With European and US economies facing fiscal crises, banking sector instability and serious downside
growth risks, Asia is heavily exposed through a number of linkages. In the case of Europe, the risk of a
freeze on bank lending to Asia as seen in 2009 is acute, while strong trade links suggest a eurozone
recession would hurt the region’s export powerhouses. In the case of the US, the largest risk appears to be
a double-dip recession, which we believe would trigger a Chinese hard landing.
Part I: Eurozone Banking Crisis
Despite recent positive developments with regard to the debt problem in the eurozone, we continue to
believe that a Greek default is on the cards over the medium term and see banking sector instability as a
major risk. With this in mind, we look to assess the potential threats facing Asian economies from some
kind of eurozone financial crisis.
There are five possible channels through which a eurozone crisis could impact Asia: 1) direct losses on
exposure to eurozone assets; 2) withdrawal of portfolio assets in Asia by European banks; 3) contagion
leading to concerns over the region’s fiscal weak links; 4) a reduction in European bank lending into
Asia; and 5) a disruption in EU-Asia trade flows.
1. Direct Losses On Exposure To Eurozone Assets – Minimal Risk: In terms of direct exposure to
the eurozone and Portugal, Ireland, Italy, Greece and Spain (collectively known as the PIIGS), Asia
does not appear to face much of a risk. According to the IMF’s Coordinated Portfolio Investment
Survey, regional average portfolio investments in the eurozone were just 7.4% of GDP in 2009, with

direct exposure to the PIIGS at just 1.7% of GDP. Moreover, this was dominated by Hong Kong
(and, to a lesser extent, Singapore and Japan), for which portfolio assets held in the eurozone
represent a tiny fraction of their overall external assets. Even in the unlikely event that these assets
suffered complete losses, the actual damage caused to Asian financial systems would be
minimal. Hong Kong and Singapore appear to be most at risk from this channel.




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Direct Exposure To The PIIGS Is Minimal, Eurozone More Significant


Asia – Portfolio Investment In PIIGS & Eurozone, % of GDP



Source: BMI, IMF

2. Withdrawal of Portfolio Assets in Asia by European Banks - Moderate Risk: In terms of
eurozone investments in Asian asset markets, the exposure is even lower, reflecting Asia’s net
creditor status. The average eurozone portfolio investment in Asia stood at 5.1% of GDP in 2009,
with exposure to the PIIGS at just 1.1%. That said, Australia stands out as being potentially at risk
from a repatriation of external assets, with eurozone investments in Australia’s asset markets
equivalent to 11.3% of GDP and PIIGS investments equivalent to 3.0%. As a large net debtor, a
sharp outflow of these funds could hurt the Australian banking system.








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Australia Most At Risk Of Portfolio Outflow

Portfolio Investment By PIIGS And Eurozone In Asia, % of GDP



Source: BMI, IMF

Since the IMF data were released in 2009, however, we have seen a substantial pick-up in foreign inflows
into the region’s bond markets, which could be at risk in the event of a Lehman Brothers-style credit
event in the eurozone. This is particularly true in the case of Indonesia, in which improving debt ratios
and a strong economic growth outlook have seen overseas holdings of local currency government bonds
surge to IDR691trn (US$81.3bn), or 34.0% of the market. Malaysia has seen a similar sharp run-up in
foreign participation in its local bond market, more than doubling to 22% since the crisis. Given
Malaysia’s much higher government debt-to-GDP ratio (currently at 58% of GDP), foreign holdings of
local government debt at 12.5% of GDP is the highest in the region. While we do not know how much of
these holdings belongs to European investors, we would assume it to be substantial and therefore note the
threat of a sudden spike in risk aversion resulting in repatriation of capital currently sitting in Asian

government bonds.





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Rapid Growth In Inward Bond Investment


Malaysia And Indonesia – Foreign Holdings Of Local Currency Bonds, % of total
(% of GDP in bubble)


Source: BMI, Asia Bonds Online
That said, we believe Asian sovereign bonds are in a secular bull market driven by improving debt
dynamics, strengthening currencies and a stable growth outlook. The potential for even minor Chinese
reserve diversification offers an additional reason for optimism. Australia, Malaysia, and Indonesia are
most at risk from this channel.
3. Contagion Leading To Concern Over The Region’s Fiscal Weak Links – Moderate Risk: We
could also see a contagion effect in the sense that investors in Asian sovereigns with shaky fiscal
positions and high debt loads could begin to anticipate a sell-off in sovereign bonds as seen across
Europe. With a gross public debt pile of more than 200% of GDP, a deflationary backdrop and a poor
demographic profile, Japan certainly stands out on this front. In emerging Asia, we view Pakistan, Sri
Lanka, India, Vietnam and, to a lesser extent, the Philippines and Malaysia as the countries most at
risk from this form of contagion. A combination of high government debt-to-GDP ratios and external

funding requirements will put pressure on these governments to narrow their fiscal deficits.




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Japan Stands Out In Terms Of Debt Metrics


Asia – Public Debt, % of GDP



Source: BMI, central banks

That said, we remain confident that Asian governments will be able to manage their fiscal accounts. Even
in the case of Sri Lanka, which has the highest debt-to-GDP ratio in the region excluding Japan at 81.9%
and is perhaps most at risk, the country is in relatively good shape compared with the PIIGS owing to its
attractive growth prospects. Japan is most at risk from this channel.
4. A Reduction In European Bank Lending Into Asia – High Risk: While direct financial exposure to
a sovereign crisis in Europe would not have a material impact on Asian economies, we caution that the
indirect outcome of reduced lending activity could pose a more substantial threat. According to the Bank
of International Settlements, European banks are the source of one-quarter of all bank lending to
emerging Asia and the threat of financial market contagion is highest through this channel. With
European banks representing almost 30% of total lending and almost 50% of all foreign lending, Vietnam
looks particularly exposed. Singapore, the Philippines, India and Indonesia are closely behind in terms of

borrowing from European banks as a share of total lending. During the global financial crisis, European
banks reduced their lending to Asia by roughly one-fifth, resulting in a sharp drop in trade financing and
business lending within the region, exacerbating the economic downturn. Vietnam, Singapore and the
Philippines are most at risk from this channel.
5. A Disruption In Global Trade Flows – High Risk: In our eyes, the biggest risk emanating from a
full-blown European financial crisis would be the related fall in import demand as the trade bloc headed
into recession. This is where Asia’s links with the region are strongest. As the chart illustrates, Asia’s
exports to Europe account for a simple average of 17.7% of total exports. As a share of GDP, meanwhile,
exports to Europe account for an average of 6.7%. It is worth noting that these percentages most likely
Vietnam Commercial Banking Report Q4 2011



© Business Monitor International Ltd Page 23
underestimate actual trade links between Europe and Asia given the indirect trade routes via China and
other processing hubs through which assembled products are shipped from Asia to the EU.
Singapore, Hong Kong And Vietnam Most Exposed


Asia – Exports To Europe


Source: BMI, central banks

Pakistan, China, India, the Philippines and Vietnam all export over 15% of total exports to Europe,
making these countries heavily exposed to a slowdown in European demand. However, given the low
share of exports in GDP, this overstates the risks facing Pakistan, India and the Philippines. When
looking at exposure to exports to Europe as a share of GDP, Singapore, Hong Kong and Vietnam appear
to be the most exposed. Malaysia, Thailand and Taiwan are also highly exposed to a slowdown in
European import demand. We add that China is also at substantial risk despite exports to Europe making

up just 5.0% of GDP. The reason for this is that we believe the structure of the economy is such that the
profits generated by the relatively productive export industry are leveraged by the government into less
productive industries by providing foreign exchange earnings. Hong Kong, Singapore, Vietnam,
Malaysia, Thailand, Taiwan and China are most at risk from this channel.
Part II: US Double-Dip And Dollar Rout
The failure of US policymakers to come to some sort of an agreement on budget issues has dramatically
raised the possibility that the US economy could suffer a downgrade and could even default. While an
agreement appears to have been reached, the situation is highly uncertain, and with US Q211 growth
looking weak, it is the US dollar rather than the treasury market that is feeling the strain of these fiscal
and growth concerns.
With direct financial linkages between Asia and the US much weaker than those between Asia and
Europe (bank lending by US banks to Asia is roughly one-third of the amount lent by European banks),
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© Business Monitor International Ltd Page 24
we look at the risks facing Asia through trade linkages in the event of a potential double-dip recession.
We also look at the potential impact of a US dollar crisis on the region.
US Double-Dip Is Asian Enemy No. 1: We have written recently about our view that Asian economic
growth decoupling should not be taken for granted (see our online service, June 21 2011, ‘Global Cycle
Set To Turn Against Region’). Specifically, despite a weaker US economy, import demand from the US is
still strong and is in fact at an all-time high in the case of China despite the devaluing US dollar. This may
be offering a false sense of security for investors in Asian asset markets. Should US consumer import
demand weaken, we could begin to see the region’s growth boom falter. A US double-dip recession poses
the largest single threat to the Chinese economy and, by extension, the entire region.
China More Leveraged On US Than Ever, Asia Still Leveraged on China: Despite managing to
narrow its trade surplus, China has been unable to wean itself off its surplus with the US. Exports to the
US hit an all-time high in June, sending the trade surplus to within a whisker of its July 2010 record of
US$19.4bn. Although exports to the US (at 17%) account for a lower share of total exports today than

they did a decade ago, China’s trade surplus to the US has risen as a share of GDP and now routinely
exceeds the overall trade surplus. Essentially, China is more reliant than ever on the US to absorb its
spare capacity and we believe a US double-dip recession would trigger a Chinese hard landing.
China
’
s Surplus Is Only With The

US


China – Trade Surplus With US And Rest Of World, US$bn


Source: BMI, Customs General Administration
While we still expect a pick-up in the cyclical sectors of the US economy in the coming months, the risks
are increasingly weighted to the downside. Office machines and data processing equipment represent the
lion’s share of electrical machinery and equipment, which accounts for 24% of total imports from China.