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Bank scandals shake investor confidence

Update: September, 10/2012 - 12:49

Analyst's Picks 

Both of the nation's stock exchanges saw negative performances last month, as the stock market was dragged down by scandals surrounding the arrests on fraud charges of two of the nation's leading banking tycoons.

On the HCM City Stock Exchange, the VN-Index lost 4.5 per cent of its value last month, falling to 396 points, with volume averaging 38 million shares per day. On the Ha Noi bourse, the HNX-Index plunged by a more dramatic 11.2 per cent over the course of the month to 61.43, with trades averaging 33 million shares per session.

While the scandal in the banking industry accelerated the market decline, August was the fourth consecutive month in which the two benchmark indices have posted negative returns. Gains posted in the first five months of the year have been almost entirely erased.

Movements on the market in August can be divided into two halves. In the first 20 days of the month, the VN-Index gradually extended its short-term recovery from a low in early July. However, news of the arrest of banking tycoon Nguyen Duc Kien the next day then sent the market into a nosedive.

Kien was a founding shareholder of Asia Commercial Bank (ACB), and the stock itself quickly lost almost 25 per cent of its value over the next five sessions, despite the fact that Kien has no longer played any major role in the management of the bank.

Sacombank (STB) and Eximbank (EIB) contributed to the massive breakdown of stock market. Panic reactions appeared among local investors over the first three days after the news hit, and shares across the board were sold aggressively, causing a dramatic drop in both of the benchmark indices. Market volume almost doubled during these sessions.

Investor sentiment improved slightly during the last trading week of the month after efforts from the State Bank of Viet Nam to ensure the liquidity of the system eased market concerns. Major market-driving blue chips such as Vinamilk (VNM), Phu My Fertilisers (DPM) and PV Gas (GAS) gradually recovered from their loss, helping the VN-Index regain some points.

Support from foreign investors also helped shore up the market, as they added around VND600 billion (US$28.6 million) in net buying value.

The arrests of ACB founder Nguyen Duc Kien and former chief Ly Xuan Hai led to a plunge in banking shares across-the-board and a run on deposits.

Nevertheless, there was a clear differentiation among banking shares themselves. Banks directly involved with the arrests were Asia Commercial Bank (ACB) and Eximbank (EIB), both large-cap stocks with major impacts on the movement of indexes.

Despite efforts by the central bank to prevent a run on these banks, investor confidence towards these stocks was quite low, and stock prices kept falling through the end of the month despite the market showing signs of recovery overall. By the end of month, these two stocks had each declined by over 20 per cent.

Among six other listed banks, the average losses in share values were contained at around 10 per cent, slightly smaller than market average. Demand for this group of shares has steadily recovered since the shock of the arrests. Moreover, concerns for a breakdown of the banking system have disappeared and investor outlook for banking shares has recovered some equilibrium.

The only ongoing concern is whether there would be fallout for the market from a perceived confict of interest between the Government and banking officials in the prosecution of the fraud cases.

From the point-of-view of fundamentals, meanwhile, banking stocks are considered less attractive in general due to the issues of rising bad debts and low credit growth. So the arrest of Ly Xuan Hai may have done some lasting harm by increasing the concern of investors about management fraud at commercial banks during the economic downturn. In terms of technical review, it may be a long time before these stocks can rally.

 

Economic factors otherwise support a possible rally in the remaining months of the year. Third and fourth quarter earnings of listed companies are expected to be more positive.

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