The failure of Saigon Commercial Bank (SCB, unrated) will shine a spotlight on corruption, fraud, and regulatory violations in the Vietnam banking sector. The event has revealed both significant lapses in corporate governance at the lender, and decisive action by the central bank to take extraordinary measures to maintain stability in the sector.
What's Happening
SCB's collapse exposed systemic corruption, and will continue to reverberate widely. In April 2024, Truong My Lan, a prominent real estate developer, was convicted of fraud that was perpetrated over almost a decade. In that time, she systematically siphoned funds from SCB by placing accomplices in key positions and giving loans to her related property and shell companies.
Media reports suggest that fraudulent loans account for over 90% of SCB's lending. This is corroborated by the central bank's systemwide data. The data showed a spike in nonperforming loans to almost 5% in the third quarter of 2023, from under 3% in the first quarter.
The central bank's fast actions contained the fallout from SCB. The lender is now under state control. The authorities swiftly stemmed a run on the institution, before it could escalate and undermine depositors' confidence in the banking sector. The central bank governor has affirmed that it will protect SCB depositors.
Why It Matters
The scale of the fraud at SCB has pushed the regulator to review and enhance its body of rules. Wide-ranging lapses in corporate governance and gaps in supervisory oversight at SCB underscore vulnerabilities in the financial sector. Our risk assessment of the Vietnam banking sector incorporates these regulatory weaknesses, in addition to weak transparency and disclosure standards. An amended law governing credit institutions represents a significant step toward improving the sector's corporate governance (see sidebar).
We believe the central bank's decisive actions demonstrate its high level of support for the banking sector. The central bank deployed special loans to SCB equal to about US$24 billion or 5.5% of Vietnam's 2023 GDP, according to Reuters. The central bank also placed SCB under its supervision, and assigned senior officials from state-owned banks to manage operations.
A flight-to-quality scenario played out in which deposits flowed from SCB to larger, state-owned banks. Importantly, however, these funds remained within the country's banking sector. We believe that quick intervention and significant--albeit costly--support restored financial stability.
What Comes Next
A wider crackdown on corruption will be a balancing act. The anticorruption drive to weed out illegal practices should improve economic efficiency, and enhance Vietnam's attractiveness as a foreign investment and manufacturing hub.
However, these efforts may also generate pain points. In our view, the initiative may slow administration and approval procedures, as the bureaucratic process adjusts to the new norms of enhanced scrutiny and accountability.
Background In Brief
The amended law governing credit institutions will be a significant step toward improving the Vietnamese banking sector's transparency and stability. The law, effective July 2024, requires banks to disclose all shareholders with a stake of 1% or more, along with their related parties.
The measure should allow for better scrutiny of beneficial ownership structures to prevent any single individual from wielding unchecked control. The law also features wide-ranging enhancements, including early regulatory intervention for weak banks and reduced maximum shareholding of individuals and institutional entities.
This report does not constitute a rating action.
| Primary Credit Analyst: | Ivan Tan, Singapore + 65 6239 6335; ivan.tan@spglobal.com |
| Secondary Contact: | Sue Ong, Singapore 62161082; sue.ong@spglobal.com |
| Media Contact: | Richard J Noonan, Melbourne + 61 3 9631 2152; richard.noonan@spglobal.com |
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