A State Bank report at end-July, 2008, indicated that the exposure of some banks to the real estate sector was uncomfortably high, with two banks having over 50 per cent of total loans in the real estate sector, another nine banks having an exposure of 30 per cent, and a further nine banks an exposure of over 20 per cent. Given that real estate prices have dropped by about half, the amount of non-performing loans would already be worrying. To make matters worse, the lack of hard data, particularly on the joint stock banks, is making assessment difficult, and tends to undermine investor confidence. Vietnam still has not enforced the internationally-accepted standard of measuring non-performing loans; that is, when a loan service is in default, the entire loan (rather than just the interest component) is counted as non-performing. The Vietnamese measurement therefore can grossly understate the amount of non-performing loans.

Documented information shows that foreign banks have minority interests in nine of the 37 joint stock banks. These foreign banks include HSBC, Standard and Chartered, and ANZ Banking Corporation all of whom have recently been granted 100 per cent foreign-owned subsidiary status. It is therefore not clear what will happen to the minority interests in their three joint stock banks. In any case, it is the other 28 joint stock banks without foreign interests that seem to have largely escaped public scrutiny. At least nine of these are so small that they will probably fail to meet the necessary capital requirements to continue operating beyond the end of this year. Consolidation through mergers and acquisitions will therefore be inevitable.

In addition to non-performing loans in the banking system, an equally worrying development is the trend towards large state-owned enterprises (in fact, conglomerates) obtaining banking licenses. Experience in a number of countries (including Japan, Chile, and Indonesia) has shown that conglomerates in these situations are inclined to make loans to companies within their business group without due regard to the risks posed by these loans, tending to undermine the potential stability of the banking system. According to an assessment by the Ministry of Finance dated May 31 this year, state owned conglomerates have invested in about 1.30 per cent of total equity, and 0.50 per cent of total assets of joint stock banks. On the face of these numbers, the involvement of state-owned conglomerates in the joint stock banks is not high, but as at the start of 2008, there were reportedly 15 new applications for banking licences by major enterprise groups, and the government has been under pressure to grant at least some of these. Indeed, three have already been granted this year. These comprise the FPT Bank (earlier known as the Tien Phong Bank) with large stakes held by the Corporation for Financing and Promoting Technologies, Mobiphone, and the State Capital Investment Corporation; the LienViet Bank owned mainly by the Him Lam Ltd, the Saigon Trading Group, and the Southern Airport Services Company (a state-owned entperprise); and the most recently established Bao Viet Bank which is controlled by the state-owned insurance company.

The dangers of related-party transactions, in addition to non-performing loans, could be really serious in an environment where published information on joint stock banks is already scarce, and the regulatory regime is not well-established.

In March this year, the National Financial Supervision Committee was set up to advise the Prime Minister and to function as an overall supervisor of the financial sector. However, the professional capacity of this Committee is lacking and its relationship with the prudential supervisory role of the State Bank of Vietnam is unclear. Unless and until more data are systematically published on Vietnamese banks and greater transparency obtained, investor confidence will continue to be undermined, and rating agencies will continue to look with increasing scepticism at Vietnam’s banking sector.