Rating agencies believe the high profile arrests of top Asia Commercial Bank (ACB) executives probably carry little contagion risk, but a lack of transparency over the reasons for the arrests prevents concrete conclusions about the likely future impact on Vietnam’s banking system.
“The newswires have not been very transparent with regards to the details. On that front it highlights the lack of transparency in the system,” said a credit analyst who wished to remain unnamed.
“Perhaps also in this case it could turn out to be a problem with weak corporate governance. We really don’t know what the arrests are related to so it brings [into light] these two problems which we’ve been highlighting for as far back as five years ago. We don’t know whether this will have a broader impact on the banking sector because we only know of these two officials being arrested,” she added.
Moody’s and Fitch have both placed ACB on negative watch. It is currently rated ‘B2 negative’ by Moody’s and ‘B negative’ by Fitch. Standard & Poor’s does not rate the bank.
“We would like to assess how things will pan out after the incidents, to see whether there is more to this than meets the eye or whether this is an isolated event,” said Alfred Chan, banks analyst at Fitch Ratings in Singapore.
The arrest of Asia Commercial Joint Stock Bank (ACB) millionaire shareholder Nguyen Duc Kien and the resignation and subsequent arrest of the bank’s CEO Ly Xuan Hai last week, caused a rush of deposit withdrawals and the bank’s stock price to plummet.
The share price closed at 20,200.000 on August 27, down from 21,800.00 on Friday (August 24) and 25,900.00 before the arrests. This is despite ACB’s public statement that the alleged violations only concern three smaller companies where Kien is the chairman, and that his arrest is unrelated to his status as a 5% shareholder at ACB.
While equity prices have no official impact on the creditworthiness of a bank, this disconnect between the official version of events as stated by ACB and the market reaction, means that rating agencies are yet to form any definite conclusions about the possible repercussions for the banking sector.
Contagion risk
However, credit analysts point out that the arrests have highlighted some new risks to the sector. The primary risk is a psychological one, as investors and depositors could lose confidence not just in ACB but in the Vietnamese banking sector as a whole.
“The event has also led to an apparent shock to confidence beyond the bank, with both the broader stock market falling by 14% and, more importantly from a credit quality perspective, interbank market [bid/offer] spreads widening by 350 basis points,” said the credit analyst.
“I wouldn’t say [last week’s events] totally reflected problems that we already knew were there, as some problems can have a very sudden impact, such as huge deposit outflows. If sentiment was to decidedly become more negative, it could hurt the banks’ liquidity and the financial sector as a whole,” said Chan.
“It could escalate into a system wide issue if ACB fails to pay its depositors, which could spark panic and cause the deposit run to spread to other banks. However, this is an unlikely scenario as long as SBV (State Bank of Vietnam) remains committed to support the bank, which we believe will also help restore depositor’s confidence,” said Ivan Tan, credit analyst at Standard & Poor’s.
The central bank has stated it will ensure there is sufficient liquidity in the financial sector, which mitigates some of the risks. However, while the central bank may be committed to helping as far as it can, the credit analyst expressed the concern that its powers only extend so far.
“The question is: if this was to happen to a few banks at the same time, would the central bank have enough financial resources to do what they have done with ACB? I don’t think they would have enough if all four of the state owned banks went down. That continues to be a risk,” she said.
“Looking at where the reported situation is now, the impact seems isolated to just a few banks, but because of concerns around transparency and corporate governance, we don’t think that the banks are out of the woods just yet,” said Chan.
However, on the whole, last week’s events have not brought to light any new problems in Vietnam’s banking system.
“The banks’ ratings [already] capture these events and the level of intensity, to some extent. From a ratings perspective, Vietnam’s banks are rated among the lowest already, so for that to go down further, there needs to be a very high degree of unexpected volatility,” said Chan.
“I believe the arrests are not too shocking. At the end of 2010 we had similar arrests with officials linked to Vinashin. There is nothing new, asset quality has been deteriorating, capital levels have remained very weak for the banks, there is a lack of transparency, and weak corporate governance,” added the credit analyst.
Chan notes that different problems surface year-on-year among banks in emerging markets, many of them relating to the broader operating environment, whether it is regulatory, economic or political in nature.
Problems with corporate governance at the country’s banks have also been well documented. The arrests of Kien and Hai are in some ways simply confirmation that the problem exists.
“I believe recent events highlight that transparency and corporate governance in Vietnam remains generally weak,” said Tan.