Vietnam’s arrest of a high-profile banking tycoon triggered the largest stock market drop in almost four years amid investor concern that it signaled wider vulnerabilities in the country’s financial system.
Nguyen Duc Kien, who helped found Asia Commercial Bank, Vietnam’s fourth-biggest lender by market value, was arrested two days ago, according to a central bank statement. Police are investigating violations at three companies managed by Kien, 48, after he allegedly “conducted business illegally,” according to the statement.
“The sword of Damocles that’s been hanging over Vietnam is the banking sector, and everyone knows that someday they’re going to have to deal with it,” said Edwin Gutierrez, portfolio manager at Aberdeen Asset Management in London, which oversees about $9 billion in emerging-market debt including Vietnamese bonds. “With the lack of clarity, in the markets there’s a shoot first and ask questions later mentality.”
The benchmark VN Index on the Ho Chi Minh City Stock Exchange fell 2.1 percent as of 10:14 a.m. local time, extending yesterday’s 4.7 percent plunge, the biggest drop since October 2008. Shares in Asia Commercial Bank lost 6.6 percent in Hanoi trading after tumbling 7 percent yesterday, the maximum daily drop permitted by the Hanoi Stock Exchange.
Prime Minister Nguyen Tan Dung’s government is seeking to shore up a banking system saddled with the highest bad debt in Southeast Asia that credit-rating companies cite as a threat to the economy. The arrest of Kien, who has links to the prime minister, may also be related to Dung’s ongoing rivalry with President Truong Tan Sang for power within the Communist Party ranks, according to Steve Norris, a Singapore-based analyst at Control Risks Group.
“I don’t think removing this tycoon in itself is enough to decisively weaken the prime minister or threaten overall stability,” he said. “It’s just another example of these tensions going on beneath the surface that we very rarely see.”
Dung, who was reappointed to a five-year term last year, has faced criticism over his management of debt-ridden, state-owned Vietnam Shipbuilding Industry Group, known as Vinashin. Sang formerly headed the Central Committee’s central economic commission before he was appointed as president last year, one of the country’s top three leadership positions.
Kien held a senior position managing Vietnam’s professional soccer league and his family was among the 30 wealthiest in the country last year, according to VnExpress.
Kien lives in a three-story house ringed by an iron fence that overlooks West Lake in a wealthier section of Hanoi. Expensive cars were often parked outside his home on weekends for parties, said Tran Trung Thanh, 33, who lives nearby.
“When the police came, people around here felt very surprised,” he said. “We thought that he’s working in the banking system so he must be doing clean business.”
Two different mobile phones belonging to Kien were turned off. Nguyen Duc Nhanh, Hanoi’s police chief, yesterday said he couldn’t immediately comment when reached by Bloomberg News on his mobile phone.
Police summoned Asia Commercial Bank Chief Executive Officer Ly Xuan Hai for questioning in connection with Kien’s arrest, deputy CEO Nguyen Thanh Toai said by phone yesterday. Kien’s shareholding in the bank is currently less than 5 percent, according to Toai. He is no longer involved in management of the bank, the central bank said in its statement.
Other Asia Commercial Bank investors include Standard Chartered Plc, with a 15 percent consolidated stake, according to Louis Taylor, the CEO of the London-based lender’s Vietnam unit. Taylor yesterday declined to comment on the developments at Asia Commercial Bank when reached by mobile phone.
The State Bank of Vietnam will “closely watch market movements and take necessary measures to help ensure liquidity at ACB if needed,” Nghiem Xuan Thanh, chief administrator at the central bank, said by telephone yesterday.
Vietnam’s bad debt is the highest by percentage among the six Southeast Asian economies covered by Moody’s Investors Service, said Karolyn Seet, a Singapore-based assistant vice president. Vietnam’s central bank said non-performing loans within the banking system reached 8.6 percent at the end of March.
“There’s a lot of bad debt out there because a lot of loans were made for projects that haven’t worked out,” said Jonathan Pincus, a Ho Chi Minh City-based economist at the Harvard Kennedy School’s Vietnam program. “Lending decisions were made because of relationships and connections rather than because of the quality of the projects themselves.”
The concerns over the banking system surfaced in a parliamentary session yesterday involving the central bank governor that was broadcast live on television. Nguyen Thi Kim Ngan, vice chairman of Vietnam’s National Assembly, told State Bank Governor Nguyen Van Binh that the central bank needs to quickly help weak lenders to prevent the system from collapsing.
Speaking in parliament, Binh urged commercial banks to boost lending to help businesses while maintaining standards to avoid bad debts. The central bank will be “very cautious” in cutting interest rates further, he said.
The VN Index increased 19 percent this year through Aug. 21, third-highest in Southeast Asia after Thailand and the Philippines. The dong has gained 1 percent against the dollar in that time.
Kien’s arrest “could be a good political move” as Vietnam’s leaders seek to reassure the country’s 87.8 million people that wealth doesn’t buy power, according to Carlyle Thayer, professor of politics at the Australian Defense Force Academy in Canberra. The Communist Party, which took control of the entire country in 1975, restricts organized dissent.
“The atmosphere is to come down hard, to show the public that any questionable financial activities are being taken seriously by the party,” Thayer said. “The party wants to respond to the perception that questionable financial activities are hurting the party’s legitimacy.”
— With assistance by Nicholas Heath, K Oanh Ha, and Daniel Ten Kate