Emerging problems in the country’s property and bond markets are creating issues for Vietnam’s banking sector, which needs to boost its capitalisation. Peter Janssen reports.

After a decade of fast-paced growth and enviable profitability, Vietnamese banks hit a speed bump in late 2022 and will be struggling throughout this year to keep a property sector downturn from undermining the financial system’s overall stability.

So far, Vietnamese regulators, having first over-reacted to dubious practices in the property and bond markets in the fourth quarter of 2022, have taken a more lenient approach in early 2023. This bodes well for a gradual return to bank stability, and thus financial stability, and an avoidance of possible fiscal instability. But much remains to be done.

Vietnam’s ‘quasi crisis’ in the property and bond markets has been long in the making. With its booming economy, rising per-capita income and fast-emerging middle class, there is a huge demand for housing and condominiums. Construction of residential condominiums and apartments have proliferated in major urban centres and given rise to a host of property developers. There are at least 20 listed private property firms on the stock exchanges, some of them ranked among Vietnam’s top companies. Thus, the banks have been keen to lend to both developers and home buyers.

Things started to turn sour for the property sector in 2022, after several well-publicised anti-corruption crackdowns on developers with dubious track records. Most notably, in October 2022 property tycoon Truong My Lan, chairwoman of Van Thinh Phat Holdings Group (a Ho Chi Minh City-based property developer), was arrested on charges of bond market fraud.

A run on the Saigon Commercial Bank (SCB), which was rumoured to have close business ties with Ms Truong, quickly followed. To prevent the run from affecting other banks, the State Bank of Vietnam (SBV) announced it would guarantee all deposits at SCB, successfully ending the panic without injecting any money into the bank.

While a system-wide run on deposits was avoided, the case highlighted the close nexus between Vietnam’s banks and the property sector. Then when Novaland Investment Group, the country’s second-largest real estate group, announced that it would delay repayment (that is, default) on a VND1tn ($43m) bond due February 12, the nexus between the property sector and the nascent bond market was also revealed.

According to banking sources, there have been about 54 defaults on bonds since then, all in the property sector, which accounts for around one-third of all bonds issued. The Vietnam Bond Market Association estimates the value of outstanding bonds in mid-2022 at VND690tn, of which some VND375tn is property debt maturing by 2025, according to government estimates.

Government response

Vietnam’s bond market is immature. “In the case of Vietnam, what has happened over the past five years is that the bond market has increased devoid of regulations,” says Amit Pandey, analyst, financial institutions, S&P Ratings in Singapore.

When it became clear that some property players were exploiting loopholes in the system — such as using capital raised from bonds to make investments other than those declared in their prospectus — authorities finally got tough in October last year and issued Decree 65, imposing new requirements on bond issuers that demanded greater transparency and requiring official credit ratings for bonds sold to private investors.

This, unfortunately, was issued shortly after the central bank had started to push up interest rates — by 200 basis points (bps) in three months — further damaging the property sector as lending prices soared and consumers shied away from home buying to put their money in fixed deposits instead. Lacking a steady flow of new purchases, property firms saw their revenue flows disappear and started to default of their bond payments. In March, the authorities issued Decree 8 to undo some of the damage.

Here in Vietnam, it seems that no bank will fail. That’s the assumption, which is impossible

Ketut Ariadi Kusuma

“Decree 65 couldn’t have come at a worse time,” says Barry Weisblatt, investment strategist at SSI Asset Management. “So what they’ve done now is backtracked, and came out with Decree 8 that basically delayed implementation of some of the 65 rules until next year.”

The backtracking may have been necessary to save the system. “I think the most important thing right now is to prevent the financial market from collapsing and creating ripple effects on the economy,” said Ketut Ariadi Kusuma, financial sector programme coordinator for the World Bank in Vietnam. “I think some of these measures address that.”

With inflation waning — the World Bank projects 4.5% in 2023 — in early 2023, the SBV asked banks to lower their interest rates by 50bps, and lifted the credit growth ceiling for the system from 14% to 16%. After growing at 15% last year, banking credits scarcely grew 1% in the first two months of 2023.

The banks are likely to play a lead role in cleaning up the bond market mess, but no one knows to what extent. Many of the property bonds were arranged by the Vietnamese banks or their securities companies, which face single-customer lending limits, so they have encouraged the property firms to issue bonds to supplement their borrowing.

The banks have been benefiting two-fold: first by lending to developers; and then by lending to the buyers of properties that they have lent to, or arranged bonds for.

Repairing the damage

Vietnam’s banks, with some exceptions, are heavily exposed to the property sector. “Exposure of state banks to real estate is about 27% of their books, compared to 37% for private banks to developers, construction companies and residential mortgages,” says Tamma Febrian, an analyst at Fitch Ratings in Singapore.

The banks are also one of the main buyers of bonds, along with ‘affluent individuals’. Private individual investors account for about half of bond purchases and the banks for the rest. There are no institutional bond buyers in Vietnam, such as pension funds, insurance companies and hedge funds.

To address the bond defaults, the bond holders will need to agree to either restructure the repayment period for issuers or take properties in lieu of payments. Initially, authorities suggested that bond investors should shoulder the loss, but that option seems to have been dropped. Some observers think it will be up to the banks to bail out the bond market.

“The crux of the solution ultimately rests with the banks, because Vietnam’s financial system is primarily bank-driven,” said Willie Tanoto, analyst at Fitch Ratings in Singapore.

Vietnam’s total bond market is worth just over $30bn, or 8% of gross domestic product (GDP), while the banking system’s total credits amount to more than $500bn, or 125% of GDP, and rising 15% per annum. “If nothing else, the growth of the bank credit alone, just in terms of magnitude, is large enough to cover the bonds coming due this year,” said Mr Tanoto.

Different positions

While all Vietnamese banks have some exposure to the property sector, and by extension the bond market, not all are in trouble. Jens Lottner, CEO of Techcombank, one of Vietnam’s largest private banks, argues that much of the current property crisis has been caused by developers who failed to get proper legal status to the land on which they built and whose projects are now in limbo.

“For us, in order to get into financing, we will only do that if the legal status is clear,” he says. “We would not move forward if the legal status of the project is not clear, and that has been the bank’s policy forever. Therefore, up to now, we haven’t had any defaults from any of these developers.”

The reason why the Vingroup is where it is is because it only builds when the land status is clear

Jens Lottner

Techcombank is one of the leading lenders to Vingroup, whose Vinhomes is the largest property developer in Vietnam, and which has not yet defaulted on any bonds. “The reason why the Vingroup is where it is is because it only builds when the land status is clear,” Mr Lottner says. “A lot of the [companies] we are working with, for which we have issued bonds on their behalf, were appraised as our credit customers, including issuers [whose bonds we kept on our books].”

Despite the challenges the bank faced in the fourth quarter of 2022, Techcombank managed to notch up a pre-tax profit of VND25.6tn, up 10% year-on-year, with a credit growth of 14.5%, deposit growth above 12%, ending the year with total assets of VND669tn, and a capital adequacy ratio of 15.2% — one of the highest in the industry.

Vietcombank, Vietnam’s largest state-run bank, the largest bank in the commercial bank sector and the most profitable with a pre-tax profit of VND36.8bn in 2022, has not overexposed itself the property/bonds market, according to its executives. 

“Vietcombank is rather conservative in bond investments, because according to a circular from the SBV we are supposed to treat bonds like long-term loans,” says Vietcombank deputy CEO Nguyen Viet Cuong.

“Each time we decide to buy a bond from an issuer we analyse it like a loan, so our exposure to the bond market is very small, about 3% of our loans and most of the bonds are in the renewable energy projects.”

While other banks have struggled to keep and attract new depositors, Vietcombank saw deposits rise 13% last year, while keeping its deposit rates below those of the market. It has partly benefited from its state-owned status since customers tend to rush to state-owned banks in times of uncertainty.

On the credit side, the bank might face some liquidity constraints, with the challenge of extending loans at higher interest rates. However, it has no problem with its credit quota (under Vietnam’s banking system, the SBV gives different banks different credit ceilings). As reward for taking over a ‘zero dong’ (failed) bank, last year Vietcombank’s credit ceiling was increased to 19%, which it reached.

A bigger challenge for the bank will be in beefing up its capital. Like the other three big state-owned banks in Vietnam — VietinBank, the Bank for Investment and Development of Vietnam and Agribank — Vietcombank has a low capital adequacy ratio (CAR) of only 10%. In order to fully meet Basel II requirements, Vietcombank needs to increase capital, and the easiest way to do that is to sell some equity in the bank. It has already sold a 15% stake to Mizuho Corp Bank of Japan.

“Now we are looking for a suitable time and a suitable investor,” Mr Cuong says. “We want to increase our CAR up to 16%. That is our priority.”

On March 27, VPBank, another leading private sector bank, announced it had agreed to issue a 15% stake through a private placement worth $1.5bn to Japan’s Sumitomo Mitsui Banking Bangkok, which already holds a 49% equity stake in FE Credit, a wholly owned subsidiary of VPBank and the leading consumer finance company in Vietnam.

The $1.5bn will bolster VPBank’s position as one of the best capitalised banks in the country, with a CAR of more than 15%. This should help the bank ride out the property/bond storm better than most.

“Liquidity is our top priority to meet the unfavourable conditions in the market,” said Luu Thi Thao, deputy CEO of VPBank, during a recent webinar. “In 2022, VPBank became the number-one bank in terms of capitalisation among private banks, with a total capitalisation of VND120tn.”

System stability

Vietnam’s largest, most professionally run banks will undoubtedly weather the real estate/bond market turmoil, but there are many small players in the market. The country still has around 48 banks, with the big four state banks already controlling around 40-45% of the market, and half a dozen medium-sized private banks holding about 35–40%.

The small banks have survived in the past by offering higher deposit rates, but that seems a shaky strategy in today’s illiquid market when even the bigger banks are fighting for deposits. Yet SBV seems reluctant to let banks go under. 

“Here in Vietnam, it seems that no bank will fail,” says the World Bank’s Mr Kusuma. “That’s the assumption, which is impossible. There will be some failures. The question is: how do we protect the system from systematic risk?”

Analysts have warned that Vietnam’s banking system remains undercapitalised, and thus without sufficient buffers for a real crisis. The easiest way to increase capitalisation quickly is to seek foreign equity investors, but that is difficult as long as the SBV limits foreign equity to 30%.

“The state is very protective of the banks and views the sector as a national security issue,” says Mr Weisblatt at SSI Asset Management. “Most of the banks are capped at a 30% foreign ownership. It makes it difficult to raise capital.”


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