This article first appeared in The Edge Malaysia Weekly, on April 4 - 10, 2016.

VID Public Bank (VPB) is now wholly owned by Public Bank Bhd —  which had acquired the remaining half of the Vietnamese subsidiary for US$76.6 million from its local partner — and was renamed Public Bank Vietnam Ltd on April 1.

The permission from Vietnam’s central bank for it to own 100% of a bank in the country came after over two decades of servicing the Vietnamese community through its joint venture with Joint Stock Commercial Bank for Investment and Development of Vietnam. VPB was established in 1992.

Is the conversion to a 100%-foreign owned bank licence an indication of Public Bank’s confidence in there being great untapped potential in Vietnam?

To be sure, Vietnam is like a gold mine to many banks that have ventured into the country. Its gross domestic product (GDP) grew 6.7% last year and it is expected to see a similar growth rate this year. Besides, recent reports have shown that only 30% of its population of 90 million have a banking account. This year, credit growth is expected to be between 18% and 20%.

As a comparison, over 90% of Malaysia’s population of 31 million have a deposit account.

Public Bank founder and chairman Tan Sri Dr Teh Hong Piow says in a statement that the bank is committed to support the efforts and initiatives of the Vietnamese government in ensuring the country’s economic growth and development.

He adds that the bank will continue to focus on the retail banking business, especially the small-medium enterprise segment, which is the country’s growth engine.

The huge potential, notwithstanding, many will also remember the time when the Vietnamese economy spiralled into a crisis in 2012 when the banking sector’s lending declined and non-performing loans shot up. Inflation was at 9% at that time.

Credit grew 7% year on year in 2012, down from 10.9% in 2011, while bad debts were estimated at 17% of total assets by international rating agencies. However, official numbers by Vietnam’s central bank showed that bad debts were around 4.2%. There had always been discrepancies between the central bank’s figures and the estimates of international rating agencies, experts say.

The situation was so dire that rating agency Moody’s downgraded the deposit ratings of all eight Moody’s-rated Vietnamese banks. The financial strength ratings of the banks were downgraded to “E” from “E+” previously. In September 2011, the rating agency said the outlook for the banking system in Vietnam remained negative over the next 12 to 18 months.

However, Vietnam embarked on structural reforms for its banking system in 2012, which included the consolidation of its fragmented banking sector and the restructuring of banks’ bad debts, which was done by selling the bad debts to the state’s asset management arm, Vietnam Asset Management Co.

From the looks of it, the efforts may have bore fruit, even though not all sceptics have been won over. By September last year, the central bank’s statistics show that non-performing loans have shrunk to just 2.9% as the economy recovered from its shock in 2012.

In December 2014, Moody’s revised its outlook for the banking system to “stable” from “negative” as there was more stability in the operating environment for the banks while the macroeconomic situation in Vietnam improved. The “stable” outlook for the banking system has been maintained since December 2014.

Despite the tumultuous times in Vietnam, it is worth noting that Public Bank’s 50%-owned VPB always made profits, even during the economic crisis. In 2012, the bank reported a 41.6% increase in pre-tax profit to US$6.6 million. Customer deposits rose 3.1% to US$225.1 million while gross loans expanded 6.3% to US$242.3 million.

Last year, VPB posted a profit before tax of US$5.4 million. Loans grew 10.2% while deposits increased 7.3%. Asset quality also improved as its gross impaired loan ratio declined to 2.6% from 2.8% previously.

That said, Public Bank’s Vietnam operations represent a small part of the banking group’s overseas profits. The bulk of its profit from overseas operations is derived from Cambodia (3.6%) and Hong Kong (3.9%). Public Bank’s Cambodia operations chalked up a profit before tax of US$58.5 million last year while its Hong Kong operations recorded a profit before tax of HK$506.3 million.

At the moment, most analysts seem neutral on Public Bank obtaining the 100% bank ownership in Vietnam. Many say they see it as a long-term positive for the banking group as Cambodia and Hong Kong will remain as the main contributors to its international earnings.

“Vietnam can be a catalyst for Public Bank in the future as it is a growing market with a high GDP and a lot of untapped potential. It could add some excitement to the steady and stable bank some time down the road, maybe, [but] not just yet,” says an analyst.

Last Thursday, Public Bank closed at RM18.78, up 1.4% since the beginning of the year, with Bloomberg data showing an indicative dividend yield of just below 3%. At the time of writing, 15 analysts are “neutral” on the stock while two say “sell”. Of the six having a “buy” recommendation, the most bullish value it at RM21.95 a share, implying a 16.9% upside potential.

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