Run on Vietnam’s biggest bank highlights threat to economy

Posted on August 28, 2012

1


The deliveries of truck loads of money and queues outside branches of Vietnam’s biggest lender, Asia Commercial Bank, ready to withdraw their cash almost as quickly as stocks were replenished were an eloquent expression of the fears stalking the county’s banking system.

Nguyen Duc Kien, a flamboyant tycoon from one of the country’s richest families, was arrested last week. Photo: AFP

ACB suffered a huge run on its funds by customers this week following the arrest of its co-founder, Nguyen Duc Kien, a flamboyant tycoon from one of the country’s richest families, and then the chief executive, Ly Xuan Hai, who had stepped down.

But ACB’s difficulties – which officials said were under control – are merely a reflection of wider worries about Vietnam’s fragile banking system: that the level of bad debts, the highest in south-east Asia, could imperil Vietnam’s economy.

Vietnam’s central bank said in July that the level of non-performing loans across the banking system stood at 8.6pc, double that previously acknowledged. But earlier, in June, the central bank director Nguyen Van Binh had said it was 10pc, while analysts believe the true figure could be even greater. Among smaller banks some say it might be as high as 50pc.

How, in a country of 90m people once tipped as one of Asia’s star economic performers, did the banks get in such a mess?

In a nutshell, the banks greatly expanded credit on a tide cheap government capital as it tried to weather the global financial crisis by pump priming the economy. Banks offered easy loans were to private individuals and state-owned companies just as the economy began to slow.

Property prices, enjoying such a boom in 2007 that people were queuing in the streets to snap up new off-plan offerings, dropped dramatically. In the commercial capital Ho Chi Minh city prices for luxury flats dropped 17pc between late 2010 and mid-2011, leaving many investors with negative equity.

But it is the banking sector’s ties to Vietnam’s vast state-owned enterprises (SOE), which are themselves saddled with huge levels of bad debt, that pose an even greater headache. The state conglomerates went on a buying bonanza after 2009.

They seized the opportunity to expand, moving into sectors where they had no expertise. The state conglomerates, accounting for one third of the economy, are also seen as economic policy tools which officials in the Communist government wished to transform global companies.

“The state-owned enterprises borrowed money to speculate,” said David Koh, senior research fellow at the Institute of South-east Asian Studies in Singapore. “They had been given a mandate by the government to expand, growing conglomerates to become world beaters. But in their core business they were uncompetitive. In non-core businesses they were also uncompetitive and stuck.”

The Vietnam Electricity Group, known as EVN, is the country’s sole power supplier. But even though the country suffers power cuts because the government does not allow it charge enough to recoup generation costs, EVN expanded into building property, telecoms, banking and even a stock brokerage.

The group, with a bloated and poorly qualified workforce of 100,000, had run up debts of GBP7.6 billion by the end to 2010.

Vinashin, the state-run shipbuilder, nearly collapsed in 2010 after defaulting on GBP400 million of debts. Nine executives were jailed for the mismanagement of state resources.

Across a swath of state-owned conglomerates, where the biggest 100 have debts to the tune of GBP33.3 billion, ill-qualified managers and board members are given jobs because of political connections rather than skill.

The Communist government sees the biggest state-owned conglomerates as levers to wield social and economic power and is reluctant to give up that power.

Yet run-away inflation that hit 23pc in August last year forced the government to step in to dramatically tighten credit. It worked in that the annualized rate fell to a shade over 5 percent this month, but also exacerbated the slowdown heaping further trouble on the state-owned enterprises, private investors and ultimately the banks.

The Telegraph

Vietnam Stocks Enter Bear Market On Financial System Concerns

Vietnam’s stocks plunged, dragging the benchmark index into in a bear market, on concerns the arrest of two banking officials last week may signal further instability in the nation’s financial system.

The VN Index fell 3.4 percent to 386.19 at the close on the Ho Chi Minh City Stock Exchange, extending the drop since the recent peak on May 8 to more than 20 percent, which some investors regard as a bear market. Bank for Foreign Trade of Vietnam, the nation’s largest lender by value, slid 5 percent. Asia Commercial Bank (ACB), whose credit rating was cut by Moody’s Investors Service after the arrests, plunged about 7 percent.

Moody’s lowered Asia Commercial Bank’s credit rating to B2 from B1 on Aug. 24 and put the company on review for future downgrades following the “negative developments at the bank,” it said. Nguyen Duc Kien, one of the bank’s founders, was detained Aug. 20 for what the central bank called conducting “business illegally.” That was followed by the arrest of former Chief Executive Officer Ly Xuan Hai by the police for alleged economic mismanagement, according to a police statement.

“The question is if last week’s arrests are just the beginning of something bigger, and investors are worried about that,” said Marc Djandji, a Ho Chi Minh City-based senior vice president at Indochina Capital. “There’s little clarity as to what’s going on, or if there’s something going on behind the scenes.”

Djandji is buying stocks because the valuations are “very compelling,” he said. The VN Index trades at 9.4 times of estimated earnings this year, the lowest in Asia after Pakistan, according to data compiled by Bloomberg.

Injecting Funds

State Bank of Vietnam injected 13 trillion dong ($623 million) into the financial system through open-market operations on Aug. 22, the most over a seven-day period this year. Governor Nguyen Van Binh said Aug. 21 the monetary authority stands ready to ensure banks have adequate cash after Kien’s detention.

Prime Minister Nguyen Tan Dung’s government is seeking to shore up a banking system saddled with the highest bad debt in Southeast Asia that credit-rating companies cite as a threat to the economy.

Vietnam Joint-Stock Commercial Bank for Industry and Trade, the second-largest lender, lost 4.9 percent, while Saigon Thuong Tin Commercial Joint-Stock Bank, known as Sacombank, fell 0.5 percent. The central bank started inspecting Sacombank in July and will complete the probe this month, Binh told lawmakers at the National Assembly last week.

The VN Index (VNINDEX) slumped 12 percent since Aug. 20 with the arrests of the two bank officials.

Fitch Ratings also placed Asia Commercial Bank on review for a possible downgrade, it said on Aug. 24. The lender’s long- and short-term issuer default ratings may be cut if there’s sustained weakening in the bank’s liquidity and reputation.

“Moody’s is concerned that these developments have resulted in pressure on the bank’s liquidity and that there could be longer-term negative consequences for the bank’s franchise value,” the rating company said.

Bloomberg

Advertisements