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July 10, 2018

IMF published its staff report and selected issues report under the 2018 Article IV consultation with Vietnam. The IMF Executive Board Assessment reveals that the financial sector balance sheets, supervision, and risk management need to be further strengthened. A stronger financial sector can help improve the efficiency of financial intermediation to service the domestic economy and investment. The State Bank of Vietnam (SBV) should strengthen the macro-prudential framework by introducing leverage ratios, and countercyclical buffers (CCBs), complemented by policy tools to temper potential risks from consumer and mortgage loans (including loan-to-value (LTV) and debt service-to-income (DSTI) requirements. A strong and adequately funded deposit insurance scheme and an effective lender of last resort would be helpful in this regard.

The staff report explains that strong credit and asset price growth may be contributing to the build-up of risks in the financial system. Sustained high credit growth, high leverage, low bank capital buffers and the inflexible exchange rate could lead to balance sheet vulnerabilities. Vietnam must also prepare for cyber security risks and longer-term challenges of climate change and technological disruption. State-owned commercial banks (SOCBs) should be capitalized swiftly with government funds and by raising private-sector and foreign-ownership limits. It is critical to develop a macro-prudential framework and improve data quality on credit aggregates and balance sheet exposures to monitor and proactively manage risks. It is also important to ensure that sufficiently robust liquidity and crisis management frameworks are in place to provide legal and operational clarity regarding early intervention and communication to mitigate emerging financial-sector risks. To help SOCBs recapitalize with new equity issues, state ownership should be reduced below 65% and foreign ownership limits raised. The banks taken over by SBV should be restructured and sold to strategic investors or liquidated.

The staff report concludes that reforms so far have strengthened bank balance sheets. Bank profits and asset quality are improving in most large banks, helped by the strong economy and faster disposal of non-performing loans (NPLs). Legal changes in 2017 (Resolution 42) and higher real estate prices are facilitating the disposal of collateral and the restructuring of bad assets. Amendments to the Law on Credit Institutions are enhancing bank corporate governance by clarifying bankruptcy and other restructuring options. Several banks have used this opportunity to address legacy bad assets, raise profits, and boost capital. Large private banks are already close to the 8% capital adequacy ratio Basel II requirement. Overall, the banking system has become more competitive. However, important weaknesses remain in the form of low profits, thin capital , and high NPLs in some banks, and emerging financial risks. Capital buffers remain thin in some SOCBs and a few private banks. Reported NPL ratios are still high for some banks and could be higher still if ever-greening and connected lending were fully accounted for. Elevated equity prices are complicating the ability of banks to raise tier 1 capital (tier 2 capital limits have been reached by most banks). A market correction could affect household, corporate, and financial-sector balance sheets.

The selected issues report contains a feature on the recent developments in aggregate credit volumes, stock markets, and housing markets to examine whether financial market developments are in line with the economic fundamentals. Overall, asset prices and credit growth appear to be stronger than warranted by fundamentals, suggesting the need for tighter policies including a lower credit growth target by the central bank. The analysis is, however, substantially constrained by the data weaknesses. It is recommended that SBV should develop a macro-prudential policy framework, including LTV and DSTI requirements, to deal with future possibilities of excessive exuberance in the real estate market. However, in the staff report, the authorities indicated that macro-prudential policies such as loan-to-value (LTV) ratios and CCBs are under consideration but implementation would need to await the availability of better data and the transition to Basel II in 2020. Asset recovery should be accelerated by speeding up NPL resolution to less than the current 5–10-year timeframe, finalizing the implementing regulations for Resolution 42 to clarify enforcement, increasing the capital of Vietnam Asset Management Corporation (VAMC), and expanding fast-track court procedures to cover a broader category of NPLs. VAMC should stop warehousing bad assets; evolve into an asset management company by buying more NPLs at market prices in the near-term; and be gradually phased out over the medium-term. 

 

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Keywords: Asia Pacific, Vietnam, Banking, Article IV, Basel II, NPLs, Macro-prudential Framework, Capital Adequacy, IMF

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