Profits but No Money

Bad loans increased, second-quarter financial statements of banks did not show any positive signs. After-tax profits of 8 listed banks have reduced 24 percent over the same period of the previous year.

 

Banks are divided into 2 groups with different profit growth rate. In the first group, banks like Vietcombank, Vietinbank and ACB have second-quarter profits and accumulated profits of the first two quarters reduced over the same period of the previous year. Among them, profits of Vietinbank reduced most sharply: 69 percent over the first quarter and 28.3 percent over the first 6 months of last year.

 

Vice versa, top banks such as SHB, Military Bank, Sacombank or Eximbank have accumulated increased profits of the first 6 months.

 

Whether profits are high or low, the fact that banks keep earning profits while enterprises suffer losses continuously has made the public angry, people accuse bank owners of “doing nothing, earning everything”. However, it is still in a question whether banks really make profits.

 

Mr Nguyen Xuan Thanh, Director of Public Policy, Fulbright Economics Program analysed that banks can earn revenues and increase their total assets continuously; however, whether those revenues and assets are money or not is still in a question. Meanwhile, bad loans can be solved by putting them into other categories of assets in the balance sheet and in fact, no money flows in. According to data that he gathered from 37 commercial banks, value of accounts receivable related to financially lending and investing is VND 148,000 billion at the end of 2011.

 

Consolidated financial statements of the first quarter and individual financial statements of the second quarter show that most of listed banks have negative net cash flows, that means money flowing out is much more than money flowing in.

 

Negative net cash flows comprises of 3 types: cash flows from operational activities, from investment activities and from financial activities. It is normal if the two latter ones bring negative flows, however it should be aware of if cash flow from operational activities is below zero.

 

In the first quarter, most banks had money flowing out more than flowing in. In the second quarter, while several banks have improved the situation, others have not. Accumulated cash flow of the first half of 2012 is still negative. So why does cash flowing out and into banks reduce?

 

Let’s start with the sharpest profit reduce of Vietinbank. In the first quarter, loans from Government and State Bank of Vietnam reduced, at the same time deposits of both financial institutions and customers went down. Turning to the second quarter, profits kept decreasing; however, the downtrend is less sharp.

 

This is one of main reasons of inflow reduction in many listed banks. However, attraction of the stock exchange also causes several banks to invest money into those types of assets. The amount of money that Vietcombank has invested into the stock exchange has increased 3 times. Similarly, the amount of money for stock investment accounts for 50 percent of money for operational activities.

 

So whether negative cash flows will endanger banks? Banks are only enterprises and cash flows are a very important indicator. Most recent illustration is Habubank. This bank has continuously had negative cash flow from operational activities in the period of 2008-2011. As a result, this bank was merged to SHB.

 

The story of having profits but having no money is common in many enterprises and happens more and more frequently in the banking sector. However, banks are specific enterprises. And what will happen if financial institutions are in shortage of money themselves?