Bank run shows risks from widening Vietnam corruption probes
It was a jarring image for one of the world’s fastest growing economies: Scores of Vietnamese flooded branches of the nation’s fifth-largest bank to pull out their savings amid rumors the lender was tied to a real estate conglomerate under investigation for fraud.
Vietnam’s central bank spent the last week calming markets and depositors while Saigon Commercial Bank raised interest rates and lured back customers. On Saturday, the regulator said it would place the privately-held lender under “special scrutiny” and directed four banks to help manage it.
The episode underscores the challenges facing an economy that the government expects to expand 8% this year — one of the highest rates worldwide — but where debt burdens are rising for the government, households and businesses. The developing country, whose communist leaders began embracing a “market economy with socialist orientation” about three decades ago and now hosts firms such as Apple Inc. and Samsung Electronics Co. is grappling with a prolonged campaign to weed out corruption and tighten guardrails in its markets.
The benchmark VN Index fell as much as 2% Monday, the first day of trading after SCB was put under “special scrutiny.” JSC Bank for Foreign Trade of Vietnam lost as much as 3.2% while Tien Phong Bank, Bank for Investment and Development of Vietnam fell by at least 2.4%.
While Vietnam’s financial system is on “solid ground,” vulnerabilities remain, said Miguel Chanco, chief emerging Asia economist at Pantheon Macroeconomics Ltd.
“Capital adequacy ratios were on a steady decline before Covid hit, and it remains particularly low for most state-owned banks, and household debt has risen sharply in the past decade or so,” Chanco said. “It’s no surprise that confidence in the sector still is somewhat fragile, as highlighted by the rush to withdraw deposits.”
Police on Oct. 8 announced the detention of Truong My Lan, chairwoman of real estate conglomerate Van Thinh Phat Holdings Group, and other company officials in connection with an investigation into the issuance and trading of bonds of some companies where trillions of dong were allegedly appropriated in 2018 and 2019, according to the Public Security ministry. Lan couldn’t be reached for comment after her arrest, and Van Thinh Phat didn’t respond to earlier requests for comment.
Ties between Saigon Commercial Bank, also known as SCB, and Van Thinh Phat haven’t been officially acknowledged and previous local media reports citing the link have been taken down. In a statement, the bank said Lan “does not participate in the management and administration of SCB.”
The lack of transparency fueled rumors. Police have investigated numerous individuals for posting what they say is fake news about SCB and urging customers to withdraw their money, local media reported.
The memory of past crises hangs heavy over Vietnam’s leaders. The country has done much to clean up its banking system since 2012, when a lending spree and weak controls led to a surge in bad debts, the arrest of bank executives and a plunge in stocks. Non-performing loans stood at 17% at the time.
Bad debt in banks was at about 1.9% in 2021 compared with 1.7% in 2020, according to the central bank’s Deputy Governor Dao Minh Tu. Bad debt in listed banks climbed slightly to about 2.1% as of June, the news website VnEconomy reported.
Loan growth this year was about 10.5% as of Sept. 20 and the State Bank will intensify scrutiny of bank lending, particularly in risky areas such as property projects, Tu said last month. The regulator has set the 2022 credit growth target at 14%.
Prime Minister Pham Minh Chinh directed commercial banks to comply with the law, strengthen governance and financial capacity while ensuring operational safety, according to a post on the government’s website, which cited Chinh at a Sunday meeting with banks leaders. Shortcomings in the the stock, corporate bonds, and real estate markets have affected credit institutions, requiring more supervision, he said.
The central bank on Monday widened the dong’s trading band to 5% on either side of its fixing rate from 3%, signaling authorities are willing to tolerate more weakness in the currency. The dong fell the most in 10 months after the central bank widening the band, trading at a record low of 24,279 per dollar as of 2:33 p.m. in local banks.
The investigation into the Van Thinh Phat Holdings Group follows a plethora of other probes this year, ranging from alleged stock manipulation to accusations of bribes involved in Covid-19 test kits and pandemic repatriation flights. Corruption cases uncovered from Oct. 2021 to Sept. 2022 increased by 41% year-over-year, according to a posting on the government’s website, citing data from the Ministry of Public Security.
Authorities began looking to root out corporate bond violations after the spring arrests of the former chairman and chief executive officer of Tan Hoang Minh Group during an investigation for alleged fraudulent appropriation of property. The government canceled the company’s nine bond offerings worth more than 10 trillion dong ($415 million).
The latest investigations underscore “lingering risks” of bond misconduct in the banking and real estate markets, SSI Securities Corp., the nation’s second largest brokerage, said in a note to investors last week. “Although recent market corrections have partially reflected this news, we believe that negative sentiment will remain, especially when a large amount of corporate bond is set to due within 2023-2024.”
The government recently looked to increase oversight of the corporate bond market with new regulations for issuers and investors.
Some companies have treated corporate bond issuances as “a way for them to be their own banks” and government regulations didn’t keep up, said Fred Burke, senior adviser at the law firm Baker McKenzie in Ho Chi Minh City. “Regulatory regimes have to evolve to keep up with reality. You could call it an evolutionary stage of development.”
By John Boudreau – Bloomberg – October 17, 2022