Here's why consolidation is key for Vietnam's banking sector

None of its 31 banks have more than US450b in assets individually.

According to BMI Research, Vietnam's banking sector is at an early stage of development with banking assets per capita standing at an estimated USD3,150 in 2016.

This is higher than comparable counterparts with similar GDP per capita figures such as the Philippines, Indonesia, and India, but low compared with regional peers such as Thailand.

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The low banking penetration suggests that there are plenty of opportunities for organic growth for existing Vietnamese and foreign banks, as well as through merger and acquisitions (M&A) to expand their market share.

We forecast asset growth to come in at a rapid clip of 15.0% in 2017, only a slight slowdown from the estimated 16.2% in 2016. Over the coming quarters, we expect to see more consolidation in the sector as policymakers pursue reforms to boost the competitiveness of domestic banks (which remains relatively weak) to prepare these players for greater foreign competition under the ASEAN Banking Integration Framework (ABIF).

Although Vietnam is ahead of its comparable peers in terms of banking assets per capita, the banking industry is fragmented with none of its 31 joint-stock commercial banks having more than USD50.0bn in assets individually.

The biggest bank in Vietnam by assets - Bank for Investment and Development of Vietnam (BIDV) - ranks a middling 16th position in South East Asia, while the top 15 banks in the region are dominated by Singaporean, Malaysian, Thai, and Indonesian banks.

With the ASEAN Economic Community (AEC) underway and the ABIF allowing banks which meet certain criteria to gain greater access to other ASEAN markets, we expect greater consolidation in the Vietnamese banking industry as domestic banks face foreign competition, and as policymakers in the country are keen to hasten the overhaul of the banking system.