Webinar on “Vietnam’s Banking Reforms: Treading Water from Global Financial Crisis to Covid-19 Pandemic”

In this webinar, Dr Tuan Ho discussed the achievements and shortcomings of Vietnam’s banking reforms since 2011, and assessed the prospects of these reforms, especially given the impact of the Covid-19 pandemic.


Friday, 3 September 2021 — In 2011, Vietnam embarked on an overhaul of its banking system to mitigate systemic risks and enhance the sector’s resilience, with a focus on implementing Basel II standards at selected banks, improving commercial banks’ capital adequacy and liquidity, and digitalising the banking system. Dr Tuan Ho, a Visiting Fellow at the ISEAS – Yusof Ishak Institute, presented a webinar on “Vietnam’s Banking Reforms: Treading Water from Global Financial Crisis to Covid-19 Pandemic” to assess the progress and prospects of these reforms, especially amidst the Covid-19 pandemic. Dr Tuan Ho is also a Senior Lecturer and Director of the Masters in Accounting and Finance Programme at the University of Bristol.

Dr Tuan Ho
Dr Tuan Ho discussed the prospects of forthcoming reforms and their implications for investors in the next five years. Dr Le Hong Hiep moderated the session. (Credit: ISEAS – Yusof Ishak Institute)

Dr Tuan Ho explained that the banking reforms were introduced in the wake of the Global Financial Crisis (GFC) in 2008. Prior to that, the banking sector was booming as new banks entered the market, and rural banks were transformed into full commercial banks. However, the sector was marked by significant inter-bank cross-holding. For instance, Vietcombank held 11 percent of the Military Bank, 8.2 percent of Eximbank and 5.3 percent of Saigon Bank. However, the rapid credit growth resulted in rising non-performing loans — a situation aggravated by the GFC. 

In a 2012 report of the International Monetary Fund (IMF) on Vietnam’s banking system, concerns were raised about the banks’ weak capital base, the rising percentage of non-performing loans, and the fragile public confidence in the financial system and currency, especially given the high interest rate and the significant devaluation of the dong between 2008 and 2011. This prompted the Vietnamese government to pursue a shake-up of the banking sector, which includes reducing the number of banks from 42 to 34 and pushing banks to adopt Basel II standards, which mandates capital adequacy requirements, a centralised supervision framework and governance according to market principles.

In Dr Tuan Ho’s assessment, the banking reforms yield good results, especially up to 2018. The non-performing loan ratio declined to 8.4 percent by December 2016. The government also implemented a legal framework that enables the Vietnam Asset Management Company (VAMC) to buy and sell non-performing assets. The enhancement of Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) measures also bolstered investors’ confidence. At the same time, the State Bank of Vietnam pursued more market-oriented monetary policies, especially regarding the foreign currency exchange.

Dr Tuan Ho cautioned that the Vietnamese banking system is still “treading water” despite these achievements. For instance, although the reported capital adequacy ratio (CAR) is 9.9 percent for state-owned commercial banks (SOCBs) and 11.8 percent for private banks, this mainly reflects the banks’ balance sheets, which show that the non-performing loan ratio was only 2.46 percent. However, according to the IMF, Vietnam’s impaired assets ratio (which includes the banks’ off-balance sheets) was as high as 8.4 percent, which means that many banks’ real CAR is far below the ideal regulatory minimum of 9 percent. Moreover, he mentioned that only 18 out of 43 banks (accounting for 60 percent of the total banking system’s assets) have met the Basel II capital standards.

Problems of the “zero dong” banks (GPBank, OceanBank, and CBBank), which would have defaulted if they had not been bailed out by the government, persist. While these banks are tasked with clearing their losses, their accumulated losses are actually increasing over the years. This is mainly because they have been restricted from engaging in new business activities, which prevents them from generating the necessary incomes to reduce their losses and make profits.

Additionally, the banking system remains opaque. For instance, bucking the global trend, the banks reported a decline in the non-performing loan ratio in 2020 in spite of the pandemic. According to Dr Tuan, this is due to government policies that allow banks to “restructure” the debts of pandemic-affected companies and avoid or delay the classification of these loans as bad debts. The Covid-19 pandemic has accentuated these issues, and real risks to the banking system may emerge in the near future. Dr Tuan also highlighted that there is also a risk associated with the real estate industry (as in the case of Evergrande in China), particularly since the extent of real estate developers’ ownership in the banking sector remains unknown.

Dr Tuan Ho concluded by emphasising the need for Vietnam to persist with its reforms, especially in expanding the fintech sector, ensuring the adoption of Basel II standards and resolving the problem of the “zero dong” banks.

During the Q&A session, Dr Tuan Ho shared his thoughts about Vietnam’s macroeconomic prospects, its booming stock market and the fintech sector, the extent of non-performing loans in the banking sector, the challenges in implementing Basel II in a pandemic-affected economy, and the possibility of foreign investors acquiring the “zero dong” banks, among others.

A total of 364 people from Singapore and abroad attended the webinar.

The webinar was very well-attended. (Credit: ISEAS – Yusof Ishak Institute)