Banks Face Challenges in Declining Profits, Increasing Bad Debt

9:22:26 AM | 12/8/2020

At this time, the influence of the Covid-19 pandemic has really made banks feel the “hit”. Many banks posted a drop in their second-quarter profit report partly due to slow credit growth, their increasing provisions for bad debts and potential debts from the loans of customers affected by the disease.

Profit plummeted

Ordinary businesses suffered the impact of the Covid-19 pandemic right from the beginning, while the impact came to banks a bit later. According to LienVietPostBank's financial report, the operating profit in the second quarter of 2020 decreased by more than 33.8% over the same period of 2019, to only VND400.6 billion, thus reducing the operating profit in the first two quarters to VND1,004.2 billion.

At KienLongBank, the operating and net profits in the first six months decreased by 31% over the same period last year, to only VND103 billion and VND82 billion, respectively. The main reason for the sharp decline in profits was that the bank's credit increased by only 1.99% in the first half, while the provision for credit losses was 3.2 times that of the same period last year.

The operating and net profits in the second quarter of 2020 of VietBank also decreased by 61% over the same period, reaching only nearly VND58 billion and more than VND46 billion, respectively, while provision for credit losses in six months nearly doubled.

For Nam A Bank, the net interest income increased by 3% in the first half of this year and net interest income from services increased by 22% to over VND1,053 billion and nearly VND49 billion respectively. Nam A Bank's foreign exchange business in the first half of the year also brought in profits of nearly VND37 billion; the profit from trading securities increased by 28% and profit from other activities up 42%. The operating expenses of Nam A Bank in the first six months of this year increased by 14%. However, Nam A Bank's credit risk provisioning expense increased by 6.2 times in the first six months of this year to over VND276 billion. Therefore, the operating and net profits in the first six months of 2020 of Nam A Bank decreased by 55% and 54% from the same period to VND201 billion and VND160 billion, respectively.

At the National Citizen Bank - NCB, although the profit increased over the same period last year, the provision for credit risk increased to 57%. Meanwhile, at Sacombank, the provision expense in the first six months increased by more than 86%. Bac A Bank's provision expense also increased sharply to 45.6% in the first half of this year, to VND166 billion. Thus, the bank recorded a sharp drop in pretax profit in the first six months (-19%) compared to the same period last year.

Bad debts likely to increase further

Not only has the credit provision expense increased sharply, but also the banking system is facing the risk of strong increase in bad debts due to customers' inability to pay debts due to the Covid-19 pandemic.

Reality shows that the sale of banks’ bad debts is increasingly difficult despite strong price cuts, as buyers are not truly interested. This fact leads to the situation that many assets still cannot be sold although they have been auctioned many times by the banks.

According to the financial statements of the second quarter of 2020 just released by some commercial banks, one worry is the growth rate of bad debt groups and the money sources that banks must use to make provisions for credit losses.

At LienVietPostBank, the first six months of the year recorded a total increase of nearly VND500 billion of bad debts, equivalent to 23.4% to over VND2,506 billion, with the increase in all three bad debt groups with most in potentially irrecoverable debt. Specifically, while subprime and doubtful debt groups had a total increase of only VND164 billion, the loan group likely to lose capital at LienVietPostBank increased by more than VND312 billion after only a few months and brought the total outstanding debt potentially losing capital at this bank to over VND1,738 billion.

At Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), as of the end of June, the bank's bad debt was VND6,433 billion, up VND630 billion compared to the beginning of the year. The ratio of bad debts to total outstanding loans increased from 0.79% to 0.83%. At VietinBank, by the end of June, the bad debt was VND15,968 billion, up 47% compared to the beginning of this year. In particular, the debt of the third group increased 2.5 times to VND7,155 billion.

The number of bad debts at the end of the second quarter at Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) was VND6,682 billion, an increase of nearly 17% compared to the beginning of this year, of which, the subprime debt increased by 1.8 times to VND850.8 billion.

At Tien Phong Commercial Joint Stock Bank (TPBank), the financial report shows that the total balance of bad debt groups as of June 30, 2020, increased to VND1,476.7 billion, an increase of nearly 19.6% compared to VND1,234.9 billion at the end of 2019. Among these, bad debts in the subprime loan group had the largest increase of over 47.2% after only the first six months.

Vietnam International Commercial Joint Stock Bank (VIB) also witnessed a very strong increase in a series of bad debt groups after the first six months of operation. The total balance of bad debt groups increased 27.6% compared to the end of 2019, to VND3,267.2 billion with all three bad debt groups having shock increases. Most notably, bad debts in the subprime group increased by 79.6% and doubtful debts increased by more than 49.2%, while despite having the lowest increase of 12.6%, the absolute bad debt balance in the group of potentially losing capital was VND1,979 billion, accounting for the majority of VIB's total bad debts.

However, there are some banks that have reversed the trend. At Vietnam Technology and Commercial Joint Stock Bank (Techcombank), the bad debts at the end of June was VND2,100 billion, down 32% compared to the beginning of the year; at Vietnam Prosperity Joint Stock Commercial Bank (VPBank), the bad debt rate as of the end of June dropped by 2.1% compared to the end of last year, to over VND8,613 trillion.

The volatility of bad debts and the signs of profit declines due to the consequences of bad debts in many banks have shown that the difficulties that the business community is suffering have begun to spread and badly influence the operation of the banking sector.

According to many experts, the bad debt movement is expected to increase and is forecast to become even more dramatic in the coming time, although in recent years, banks have been allowed to apply numerous measures such as debt restructuring, debt group retention, adjusting debt repayment period.

In the bad debt scenarios developed by the State Bank of Vietnam (SBV), the bad debt ratio may increase from 3% by the end of 2020 to 3.7% depending on the development of the disease and possibly even higher. This will significantly affect the progress of restructuring plans associated with dealing with bad debts of credit institutions and the resilience of weak credit institutions.

By Quynh Anh, Vietnam Business Forum