Bad Debts Hinder Profit

At the end of quarter II, 2015, a series of commercial banks in Vietnam announced trillions of Vietnam dong in profits. Most impressively, VND5,535 billion of interests of Bank for Investment and Development of Vietnam (BIDV) in the first 9 months had grown nearly 25 percent over the same period last year. Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) has announced VND4,528 billion in profits before tax after 9 months. Asia Commercial Bank (ACB) has reached more than VND1,029 billion in profits before tax after risk provisioning. The Military Bank also has impressive profit figures. In the first 9 months of this year, the MB reached VND2,400 billion in profits before tax, accounting for 76 percent of the yearly target.

 

Due to optimism and expectations on profit growth in 2015, the banks have revised the profit growth compared to the middle of this year. According to a survey of business trends of the credit institutions and branches of foreign banks in Vietnam by Department of Forecasting and Statistics of the State Bank of Vietnam announced on November 8, 77.7 percent of credit institutions participating in the survey said business conditions have "improved" while 45.9 percent expect the business condition to be "much improved". The average expectations for earnings growth in 2015 have been adjusted by credit institutions from 8.89 percent in the survey in June, 2015 up to 9.73 percent in the survey of September, 2015. In particular, the expectations for growth of the joint-stock commercial banks and large financial and leasing companies have taken the lead. In 2015, the banks expect that the credit balance of the system have grown by 7.6 percent.

 

Credit growth has been high since the beginning of the year, along with declining NPL ratio, which has accelerated the profits of the banks. The real estate market rebound helped the banks to solve part of the bad debt. Debts sold to the Vietnam Asset Management Company (VAMC) contributed to reducing the NPL ratio in the report. According to the SBV, currently, 98 percent of the bad debts was handled; it is an extremely impressive figure. By the end of September, the NPL ratio of the whole industry fell from 17 percent (2012) to 2.93 percent. This information has been noted by Chief inspector Nguyen Huu Nghia at the end of a seminar on "Positioning the banking system after the restructuring".

 

The banks used to be "hens laying golden eggs" when the flow of cash came from booming credits. Before 2011, the profits of some banks were high, an average of over 30 percent, while the year amounted to 50, because the credit growth was booming at that time. Profits from credits accounted for about 80-85 percent and the banks made huge profits, which neither included sub-prime loans, bad debts nor new debts that were reported in 2010; the large banks, after provisioning, earned roundly VND5 trillion and medium-sized banks made also about VND2-3 trillion in profits and the newly born banks made about VND1 trillion in profits.

 

Bad debts then tossed the banks and the restructuring since 2012 has wiped out many branded banks. The process of restructuring of the bad debts has forced banks to set aside the huge risk management reserves. Meanwhile, slow credit growth has strangled profits. Shocks of changing management policies on the gold market in 2012 have led some trouble for banks.

 

Since the beginning of 2015, credit has grown steadily. Credit growth is forecast at 17 percent and the fact that many banks have announced high growth rates has improved expectations of bank profitability. However, according to in-depth analysis on performance indicators of the banks by economic experts, there are still huge challenges in the process of making a healthy, efficient and highly profitable system.

 

The NPLs of the banks have fallen sharply, but they are still required to establish strong risk provisions to avoid bad debts and accomplish the goals of reducing the NPL ratio to below 3 percent. The bad debts have not been thoroughly treated; basically, the banks dogged responsibility to set their debts aside for a while.

 

The regulations under Circular 2 also require the SBV to classify the bad debts until further notice of the SBV. Circular 2 requires the banks to more closely manage bad debt problems and also help banks to be more aligned with international practice. This might initially affect profits.

 

While the banks have to implement these new standards according to Circular 36/2014/TT-NHNN that regulates the limits, the prudential ratios of the credit institutions and branches of foreign banks, some expenses will rise.

 

With rising interest rates and sharp competition among commercial banks, the net interest margin (NIM) of the banks is quite low. Statistics show that the average NIM of the system is low in recent years. According to Le Xuan Nghia, the peak profit of the banks was in 2011 and the NIM reached to highest rate in the period of 2011-2015; 2011 was 3.5 percent, 2012 was 3.2 percent, in 2013 was 2.8 percent, and 2014 was 2.7 percent.

 

According to the National Financial Supervisory Commission, by July, 2015, the NIM had inched up just 2.78 percent. This also shows that the profitability margin of the banking system is very low, only about 5 percent.