How did Vietnam’s real estate slump affect the Banking Sector?
Overview of the Vietnam’s real estate boom & bust
The past two decades saw Vietnam, a promising South East Asian nation, progress to be one of the fastest growing economies in the world. Its real estate market was at the heart of this growth. The performance of the real estate market led to an extremely high profitability, attracting a high level of investment. After reaching skyrocketing returns of 200-300% in 2007, investors in Vietnam used the free-flowing credit to construct buildings with the hopes of flipping them for a profit. During this period, speculation-based buying drove Vietnam’s real estate to artificially high prices that were out of the reach of many buyers.
Fuelled by this credit growth, inflation started creeping up over this period. This compelled the State Bank of Vietnam (SBV) to hike interest rates consistently since 2010 and to order banks to limit their level of debt (Graph 3). This effectively blocked the stream of cash into real estate. Demand fell and advance payments from customers dried up, leading Vietnam’s real estate market to slump. Global Property Guide in 2012 stated that prices of luxury apartments were down by 40%, mid-range apartments were down by 30%, and low-range apartments were down by 27%. While prices did experience some downward pressure in 2007-2008 on account of the fallout from the Global Financial crisis, prices only began to fall in earnest in 2010, with the sector hitting rock bottom in 2012 (Graph 1). The Vietnamese Ministry of Construction stated that around 17,000 property companies posted losses while more than 2,600 firms shut down by the end of the year.
How were banks performing prior to the slump?
According to Vietcombank Securities, the total assets of the Vietnam banking sector doubled from 2007 to 2010 while maintaining good profit growth. At the same time, the credit growth was much higher than deposits and GDP growth. Whereas the average credit growth during 2000 – 2010 was 32%, the average growth of deposits and GDP were 29% and 7.15% respectively (Graph 2).
What was the banks’ exposure to the real estate sector like?
When the market boomed, according to Reuters, developers sourced about 20% of their cash from bank financing and 80% from advanced payments. Most advanced payments were sourced from bank loans too leading to a high exposure of the banking sector to the real estate industry. Once the estate sector collapsed, with the continuous defaults in credit, banks started to feel the pressure as well. While, most banks’ annual reports did not suggest a significant impact, it was widely reported that Vietnamese banks have taken advantage of lax local accounting standards to creatively under report the non-performing loans (NPLs) and worsening credit quality. Duxton Asset Management also identified that cross ownership within the banking industry increased the difficulty in the measurement of bad debt.
Further banks were directed by the government to lend to the state-owned enterprises (SoEs). These SoEs used this credit to expand into unrelated sectors where they had no previous experience and ran those enterprises to billions of dollars in debt. Thus, real estate was only one part of the bad-debt picture. Banks in Vietnam were additionally burdened with the task of financing these inefficient, indebted SoEs.
What happened to banks during the slump?
NPL ratios of large and medium scale banks doubled as a result of the slump. Those of small banks increased by almost 160% (Graph 3)
However, it is important to note the lapses in Vietnam’s accounting standards that allowed Vietnamese banks to under report NPL ratios (as was pointed out by most credit rating agencies at that time). Hence, it’s quite possible that Vietnamese banks flattened their NPL figures by refinancing borrowers who were not paying them back. Therefore, the credit situation could have been worse than reported. Reuters stated that half of all NPLs may have had to be written off, with real-estate loans making up the bulk. Most at risk were a handful of small banks. The biggest banks had a relatively low exposure to real estate, averaging around 10% while many small banks had 30-40% of their loan books in property. For some, it was as high as 50%.
Upon our analysis of 5 key banks in Vietnam we noted the dip in the interest income and corresponding increase in credit losses led to a gradual decrease of operating profits and pre-tax profits.
In addition, some banks in Vietnam were hit with corruption scandals, as was the case with Asia Commercial Bank (ACB), where in 2012, the arrest of the Chief Executive Officer/Co-founder even led to a brief run on its deposits. Several other corruptions scandals were subsequently discovered, where key executive officers of several other banks were arrested.
How did regulators respond to this?
Due to the risk of a potential bank crisis, the State Bank of Vietnam initiated several safeguard policies such as banking industry consolidation, increased barriers of entry, compulsory reserve funds and uniform NPL treatment through legislative procedures. A government backed stimulus programme worth VND 30 Tn was carried out in order to stabilize the housing sector and the economy in general. Further, the Vietnam Asset Management Company (VAMC) was established to purchase bad loans off banks' balance sheets.
What happened next?
Towards the end of 2015, banks seemed to recover on a day-to-day operation front. However, the re-structuring and merging of smaller banks into large banks led to absorbing of higher credit losses, further dampening profits (Graph 4). Despite the reducing profits, credit growth and asset growth of the banks picked up in 2015, signalling that the banking sector had entered a recovery stage.
It is safe to say that the Vietnamese Real Estate Sector slump during 2011-2012 severely affected the banking industry as well. Although there were several other factors such as mismanagement, corruption scandals and cross ownership amongst the banks which heightened the systemic risk, the failure of the industry can primarily be attributed to the banks overexposure to a real estate sector on a slump.
Vietnam real estate slump, what happened? - Link
Impact of Estate Prices - Link
Shutdown of construction firms - Link
Vietnam Banking Sector Report 2011 – Vietcombank securities - Link
Vietnam Banking Industry Report 2015 – Duxton Asset Management - Link
Asia Commercial Bank incident - Link
Other corruption incidents - Link