No contagion risk for Vietnam banks from billionaire corruption scandal

But it exposed structural weaknesses in Vietnam’s banking and financial industry.

A landmark corruption case involving a Vietnamese bank is not expected to present new contagion risks to the country’s banking system, but does expose financial supervisory shortcomings, reports Fitch Ratings.

In April, real estate tycoon and billionaire Truong My Lan was sentenced to death after being found guilty, along with her accomplices, of siphoning off approximately $12.5b (VDT304t) from the Saigon Joint Stock Commercial Bank (SCB). This is reportedly Vietnam’s biggest financial fraud case on record. SCB suffered from a bank run following Lan’s arrest.

Since October 2022, SCB has received $24b (VND600t, equivalent to 5.9% of the GDP, although incremental support has shrunk in recent months.

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Fitch said that the central bank’s actions demonstrate its high propensity to provide support to systemically significant institutions, even when a bank’s stress results from its own governance failures.

There is also potential for at least a part of these special loans to be repaid, especially if SCB recovers assets from Truong My Lan.

On the downside, moves by the government to strengthen SBV’s capital position would have an impact on public finances.

“We believe the release of further details regarding SCB in recent weeks has not created new contagion risks. We see no evidence of distress – such as sudden share price movements, deposit flight or regulatory response – in other systemically important Vietnamese banks,” Fitch Ratings said in a report.

Overall, the strengthening economy will provide Vietnamese banks with a stable business environment over the next few years, Fitch said.

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The case, however, highlighted weaknesses in Vietnam’s policies.

Notably, the ongoing lack of transparency in Vietnam’s macro policy framework could hamper effective management of emerging complexities in the economy and the financial sector, Fitch said.

Structural weaknesses in Vietnam's large financial sector are also present in its low capitalisation and high contingent liability risks from the state-owned enterprise sector.

Risks may also arise from intensified anti-corruption efforts.

“There is some risk that intensified anti-corruption efforts could hurt near-term GDP growth prospects if they damage consumer or investor sentiment, or increase bureaucratic inertia,” Fitch said.

Moves to reduce systemic risks in the property and finance sectors disrupted the local money market and bond market for months and affected economic growth in 2022-2023, although these effects have since receded, Fitch noted.