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Banking & Finance

Bad debts won't go away

Released at: 10:03, 31/10/2014

Bad debts won't go away

The recent surge in bad debt ratios, particularly among large local banks, confirms that little has been done in the fight against bad debts.

by Thong Dat

When the Vietnam Asset Management Company (VAMC), a wholly State-owned company with charter capital of $23.7 million, was established the country’s bad debt situation was making international headlines. The aim, sensible enough, was to reduce bad debts in the banking sector as local banks transferred problem loans to VAMC in return for a bond that could be used as collateral with the State Bank of Vietnam (SBV). More than a year on, however, the company is being questioned about its role, as a mountain of bad debts continues to haunt the country’s banking sector. 

Mounting bad debts

Many local banks were hesitant to publish their first-half financial reports. Under current regulations banks have 45 days at a maximum after the second quarter ends to publish reports but few complied. Only in August, when no more delays were allowed, did banks announce their six-month consolidated earnings, which showed a rise in bad debts. 

For example, Vietcombank’s bad debts spiraled to over $428 million and now account for 3.09 per cent of its total outstanding loans. The bank ran into trouble during the first half of the year as potentially irrecoverable debts (classified as Group 5 debts) were $226 million, an increase of 70.7 per cent year-on-year and 2.73 per cent against last year as a whole. With such a high bad debt ratio, Vietcombank may have to sell bad debts to VAMC in the near future as banks with a bad debt ratio of 3 per cent or more are compelled to do so.

The cause of the rising bad debts, according to Mr. Ivan Tan, Standard & Poor (S&P)’s Ratings Services analyst, is because local companies, which are the main recipients of bank credit, are affected by slow sales, high inventories, and weak cash flows. “Bad debts could erode Vietnamese banks’ capitalization and profitability over the next 12-18 months,” he warned in S&P’s July report.

Meanwhile, VietinBank, the country’s largest bank by assets, saw its name top the list of bad debt holders, with $452.13 million. Its bad debts increased dramatically, from 1 per cent to 2.53 per cent of outstanding loans, with $151 million unlikely to be recovered. However, as Mr. Le Duc Tho, General Director of VietinBank, explained, the rise in bad debts is understandable and acceptable. “The whole economy is going down and businesses are still struggling, and we can’t stand apart from this situation,” he said, adding that bad debts rose at the bank, in part, because they re-categorized their debts based on the stricter guidelines from authorities that came into effect in June.

Bad debts at the Asia Commercial Bank, meanwhile, have risen a further 23 per cent since late last year to more than $190 million, or 3.6 per cent of its total outstanding loans. Figures for Eximbank were also anything but rosy, as it had $112 million in bad debts, representing 2.94 per cent of its total outstanding loans, close to the level set by the central bank at which banks must sell to VAMC. Bad debts at Military Bank in June reached $139 million, up nearly $36.6 million and accounting for 3.1 per cent of total outstanding loans, against just 2.46 per cent late last year.

While analysts attribute the increase in bad debts to slow lending growth in the banking system and poor improvements in corporate financing in the context of slow-paced economic recovery, another main reason, according to Mr. Le Xuan Nghia, Director of the Business Development Institute, is that banks started to reclassify bad debts in June using more rigorous standards, as stipulated by Circular No. 09 from the SBV. “The end result will be a rise in bad debts, but a more accurate reflection of the situation,” he said. “Bad debts are obviously going to grow because of the new regulation.”

However, the short-term pain of increasing bad debts may herald long-term gains as this holds out the promise of greater transparency, as investors will obtain a more accurate view of the state of the books and the quality of bank debt. “It will be very clear when looking at the figures that these are the true numbers of bad debts, and therefore when foreign investors review a bank they can take a bolder position,” Mr. Nghia pointed out.

Running out of steam

VAMC has a mandate to clear up bad debts in Vietnamese banks but so far the company has been struggling. As at June this year it has purchased $538.4 million worth from local lenders, or just 16 per cent of its full-year target, yet Vietnam’s total bad debts are on the way up. Total bad debts rose to 3.74 per cent of outstanding loans in January, 3.86 per cent in February, 3.93 per cent in March, and 4.03 per cent in April. Bad debts did actually fall, from 4.55 per cent last November to 3.61 per cent in December, when VAMC made a number of major bad debt purchases. The question is why the company seems to have run out of steam. 

When senior leadership changes, a company often responds by hastily adopting a new approach to day-to-day management. In the case of VAMC, Mr. Dang Thanh Binh stepped down as Chairman in May, with his successor being Mr. Nguyen Quoc Hung. This change, to some extent, will cause major upheaval in the short term and will ultimately slow down the overall process. 

Furthermore, VAMC, by its nature, is just a place for banks to “park” their bad debts temporarily. It does not settle the debts directly and only acts as a broker. Besides, the bad debt trading market in Vietnam remains in its infancy and other factors, such as the legal framework and human resources, are still inadequate, affecting the bad debt settlement process. “The purchase of bad debts is not the end game in settling bad debts, as VMAC needs to deal with or sell the bad debts, especially to foreign partners,” said a representative from the BIDV Securities Company (BSC). “There have not been the legal corridors needed to sell bad debts in the first six months of this year.” 

VAMC, according to Chairman Hung, has developed a list of debts that may appeal to foreign investors, and ten or so have already expressed interest. In fact, two foreign consultancy companies have made preparatory studies to buy some of these debts, but not a single transaction has been made because of the absence of guiding documents and the tardiness of authorities in completing the necessary legal procedures, out of fear of the risks associated with the process. Foreign investors also seek lower prices for bad debt-backed assets and have reportedly valued the debts they want to buy at only about 30 per cent of the original value, which has made VAMC reluctant to sell. This is why, at this point, it has only succeeded in selling and rectifying around $47.4 million worth of bad debts.

Another point of reference came from Mr. Nghia, who believes that the successful experience in settling bad debts in almost all other countries relied primarily on foreign investors. “The majority of requests for buying bad debts in our country come from foreign investors,” he said. “But due to the many legal obstacles, especially debt purchasing procedures and ownership and transfer of real estate by foreigners, the process of selling debts to foreign investors has proceeded slowly.” 

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