Early Warning Indicators of Bank Default Risk in Vietnam: A Credit Rating Perspective

A bank's default risk rarely emerges suddenly. In many cases, warning signs develop and accumulate over several years through changes in business models, asset quality, liquidity, capital adequacy, and governance before evolving into a serious problem.

With Vietnam's credit-to-GDP ratio remaining high at approximately 146% as of end-2025, and following the introduction of an early intervention framework under the Law on Credit Institutions 2024, identifying risk signals at an early stage has become particularly important for regulators, investors, and financial institutions.

In the report "Early Warning Indicators of Bank Default Risk in Vietnam: A Credit Rating Perspective," FiinRatings analyzes 15 cases of Vietnamese banks that defaulted or came close to default, develops an early warning framework comprising 11 indicators, and tests the framework on 12 operating banks using data covering the 2020–2025 period.

Key highlights include:

🔹 Warning signs typically emerge several years before a bank defaults and recur across both quantitative and qualitative dimensions, even though the immediate causes vary from case to case. Quantitative indicators capture abnormalities in business models, asset and funding structures, capital buffers, asset quality, and liquidity, while qualitative indicators focus on risk position, funding, and governance.

🔹 Regulatory capital adequacy ratios may not fully capture the build-up of risks in a timely manner. In one case examined, the Capital Adequacy Ratio (CAR) remained at 9%–10% for three consecutive years, while the Leverage Ratio and Interest and Fee Receivable Days had already signaled abnormalities 24–36 months before the bank defaulted. This finding suggests that risk assessment should incorporate complementary indicators rather than relying solely on regulatory capital metrics.

🔹 A notable paradox is that less common warning indicators may provide stronger predictive value. FiinRatings classified the 11 indicators according to their prevalence and found that some indicators, despite appearing in only a limited number of banks, possess strong signaling power in identifying institution-specific risks that might otherwise be overlooked.

🔹 The early warning framework demonstrates a relatively clear ability to differentiate across credit rating categories. Testing results on 12 banks (using data from 2020–2025) show that banks rated [AA] and above and [A] recorded relatively few warning indicators, while the frequency increased markedly among banks with lower ratings or Credit Estimates.

According to FiinRatings, the framework is intended to support supervisory monitoring, risk management, and credit assessment rather than serve as a standalone basis for concluding that a bank is at risk of default. Its application should be complemented by financial analysis, qualitative factors, and each institution's specific operating context.

As Vietnam continues to strengthen its legal and regulatory framework for early intervention and banking supervision, complementary early warning tools are expected to support more proactive supervision, improve the quality of credit assessment, and reinforce investor confidence in the country's financial market.

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