Bank Debts and Profits

At present, commercial banks have kicked off earnings report season. It is quite easy for industry insiders and specialists to see a drop in profit margin and a rising possibility of capital loss.

 

To date, Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) suffered the biggest drop in profit. Its earnings stood at VND1,959 billion in the first half of2012, down nearly 30 percent from the same period of last year (with nearly VND2,735 billion). Credit flow congestions are clearly displayed on its financial statements. Although the Hochiminh Stock Exchange (HOSE)-listed lender was assigned a credit growth limit of 17 percent, its actual performance was minus 3.1 percent.

 

Asia Commercial Bank (ACB), a fast-growing lender with well-established reputation on credit market, also saw a slight slide in the first-half earnings. The HCM City-based banked fetched VND1,392 of profits from January to June, down 4 percent year on year.

 

In spite of the fact that its bad debt ratio quickened to 4 percent, Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank)’s earnings were slightly affected, with a slim decrease of 6 percent from a year ago to VND2,155 billion.

 

Credit growth was quite low at commercial banks. In addition to a minus growth of 3.1 percent at Vietinbank, other lenders also revealed very modest growth, e.g. 2.96 percent at Vietcombank, 0.8 percent at ACB and nearly 1 percent at Eximbank.

 

Against the wind, Military Commercial Joint Stock Bank (MB) boasted a 30 percent growth in net profit in the first six months to VND1,391 billion. Its outstanding loans stood at a high level on the market, reaching VND65,256 billion as of June 30, up 11.5 percent over the end of 2011.

 

Eximbank also achieved admirable results in a relatively gloomy context. Although its credit growth was very low, less than 1 percent in six months, its earnings climbed nearly 10 percent year on year to VND1,392 billion in the reporting period.

 

Apart from a significant drop in profits, a sharp rise in nonperforming debts was also an existing concern. Vietcombank saw a bad debt soar to 3.47 percent as of June 30 and it is facing the potential loss of additional VND1,600 billion since the start of the year, totalling nearly VND3,900 billion.

 

Another biggie, Vietinbank, also had worrying debts. Its threat of capital loss was listed in the Group 5, the lowest in bank classification. Its bad debts surged nearly VND1,400 billion in just six months, bringing its total bad debts to VND3,000 billion.

 

Nam Viet Commercial Joint Stock Bank (Navibank) reported ugly-looking data, with bad debts climbing from 2.4 percent at the beginning of the year to 3.87 percent. Its bad debts valued VND511 billion and it faced a potential loss of VND231 billion, or 45 percent of the total.

 

There is a contradiction that while bad debts is on the rise, most commercial banks still make a profit. So, where does the profit come from?

 

Dr Le Xuan Nghia, a member of Advisory Council for National Monetary Policies, pointed out that when we analysed the structure and nature of profit, we should not look at the figure only. As far as I am concerned, many banks were fraught with huge bad debts which even bit into their equity capital. This was the way they cooked the books. An unrecoverable loan was accounted into the books and jotted down “to be collected.” However, this loan was taken from the owner’s equity and shareholders were still paid dividends as usual. However, according to international standards, debts categorised in Group 4 and Group 5 are deemed a loss.

 

Besides, we should not look at the absolute value of profit. As banks possess huge assets and owner’s equity, the profit margin is not so high.

 

Dr Nghia said he had report to the Prime Minister that bad debts were already at an alarming rate which is verging on 10 percent of GDP. If we let banks to clear the debts on their own, they may be able to reduce 1.5 - 2 percent a year and they will need 5-7 years to finish the job. And, during this time, they will impose strict conditions on new loans and focus on recovering old ones. They will apply high interest rates to offset damage caused by bad debts even when the State Bank of Vietnam (SBV) wants to impose pro-business lending rates.

 

In the context of unfavourable economic conditions, although bad debts are on the rise, banks’ operations are still profitable despite missing estimations. Only credit flow freezing persists although the Government and the central bank are striving to warm up.