Answer: poor risk management, impending bank bankruptcies and rising political risks
Vietnam has seen a growing number of foreign banks withdraw from its under-banked economy, the latest indication that all is not as well as Communist Party officials often claim. The foreign flight started in 2015, gathered pace in 2016 and accelerated dramatically last year.
Last July, Commonwealth Bank of Australia (CBA) sold its branch in HCM City to Vietnam National Bank (VIB), a presence it had maintained since 2008. In September, HSBC Vietnam withdrew its investment from Techcombank, reportedly in a move away from “non-core” banking assets.
In mid-December, ANZ shut its doors in a transaction that transferred two retail branches, six transaction offices and 125,000 individual customers to Shinhan Bank. Last month, France’s BNP Paribas divested its entire 18.7 percent stake from HCM City Oriental Commercial Bank (OCB) after a near decade partnership.
Standard Chartered was close behind, selling its entire 8.75 percent stake in Vietnam’s publicly listed Asia Commercial Bank (ACB) in January after a 12-year partnership.
Standard Chartered subsidiaries Standard Chartered APR Ltd and Standard Chartered (Hong Kong) sold a combined 154 million shares to a group of investment companies. The bank had previously withdrawn its representatives from ACB’s board of directors for unclear reasons.
Foreign banks are rushing for the exits in Vietnam despite last year’s strong stock market performance, with the main index rising 47 percent. The benchmark index has continued to rise so far this year.
But there may be troubled financial times on the horizon.
Some financial analysts speculate foreign banks have withdrawn in anticipation of the implementation of an amended Law on Credit Institutions, which among other things allows insolvent banks to file for bankruptcy. The provision came into force on January 15 this year.
The capital flight could also signal a decisive shift in foreign investor confidence in the country’s financial system and long-term economic prospects. Expected rising interest rates in the US and European Union after nearly a decade of near zero rates could also be a factor.
Le Dang Doanh, one of Vietnam’s most senior economists, believes the foreign tide started to turn in 2016 and gathered momentum last year as foreign investment funds sold down shares to the tune of $400 million on the local bourse.
Nguyen Tri Hieu, a local banking expert, believes the foreign sell-off stems mainly from high bad debt ratios and inefficient risk management at local financial institutions. Many foreign banks have had an inside view of local banks’ inner workings through strategic partnerships and other joint arrangements.
Vietnamese small change paper money in plastic basin of a vegetable vendor in Hanoi Vietnamese small change paper money in plastic basin of a vegetable vendor in Hanoi
State media and Party officials, on the other hand, see the foreign capital flight as “individual” moves and not indicative of a gathering capital flight trend.
Recent reports indicate that bad debts at Vietnamese banks have hit 600 trillion dong (US$26.6 billion), most of which has not been rehabilitated through bankruptcy or market clearing distressed asset sales.
The state-run Vietnam Asset Management Company (VAMC) has taken over an estimated 300 trillion dong (US$13.3 billion) of the non-performing debts, but has only recently started to exercise its right to seize mortgaged assets, as allowed under Resolution 42 on settling bad debts.
Some analysts predict that as many as ten of the country’s 30 main commercial banks will ultimately file for bankruptcy, as the new amended Law on Credit Institutions permits. The same analysts speculate bankruptcies will half the number of credit institutions now in operation.
The consolidation will necessarily be state-led, but it’s unclear if authorities will be able to maintain system stability in the process. At the end of 2016, the government suggested a bank bankruptcy plan that was officially approved by the National Assembly in June 2017.
Prime minister Nguyen Xuan Phuc signed Decision No. 21/2017 on insurance premiums, which took effect on August 5, 2017. The decision stated that compensation for all insured individual deposits would be capped at 75 million dong (US$3,300) in the case of bankruptcy.
Moreover, bankrupt banks must submit their assets to the tax department before settling with individual depositors. Financial analysts warn there is little to no security for depositors at banks with small charter capital.
With high public debt and low foreign reserves, Vietnam has limited financial resources to bail out bankrupt banks and maintain system stability. That may explain why premier Phuc warned in January 2017 that the national fiscal system “may collapse” if rising public debt levels are not arrested.
He said the country’s 65 percent of GDP public debt ceiling, then officially at 64.73 percent, had actually already been breached if the measure is “fully calculated.” The warning, which was not elaborated, notably came before rising market concerns about the solvency of several local banks.
It’s unclear how many of the foreign banks that recently fled Vietnam were concerned about the potential political risk of sudden bank bankruptcies. Yet all of the foreign banks that have operated in Vietnam are known to carefully weigh political risks in the countries they invest.
United Kingdom-based Maplecroft, a risk consultancy, previously listed Vietnam (along with Turkey) as having the highest level of political risk among 15 surveyed high-risk global countries.
Those risks have arguably increased since Party secretary general Nguyen Phu Trong’s intra-party crackdown on corruption, a campaign that has netted several high-level cadres, including a former Politburo member, but also has the hallmarks of a politicised factional purge.
The combination of impending bank bankruptcies, intra-Party discord and indications of rising grass roots discontent was likely enough risk to convince many foreign banks to abandon their local positions and head for the exits.
And while Party officials insist the situation is well under control, the question now is which major foreign bank or investor will leave the country next?
http://www.atimes.com/article/foreign-banks-fleeing-vietnam/
