Bad Debt Control in 2021

Although the profit of Vietnamese banks still grew quite well in 2020, controlling bad debt risk is their top concern for the time being as the inflation of bad debt, especially potential bad debts, is being concealed under the cover of debt restructuring.

Profit growth

According to business reports in 2020 released by banks, despite negative impacts caused by the Covid-19 pandemic, many banks recorded a strong profit growth over 2019 or even exceeded their plans. The best performer was Vietcombank, which made a profit of more than VND23,068 billion (US$1 billion), almost unchanged from 2019. Vietinbank had a total pre-tax profit of VND16,450 billion (US$715 million), up 43.5% over 2019. Agribank also posted a profit of nearly VND13 trillion, nearly 3% higher than the plan.

Like State-owned commercial banks, joint stock commercial banks also made remarkable profit growth. Sacombank reported pre-tax profit of VND3,339 billion, 3.8% higher than that in 2019 and 30% higher than the plan. OCB had pre-tax profit of VND4,414 billion, up 37% year on year. MB raked in VND10,688 billion of profit, 6.3% higher than 2019 and 19% higher than the full-year plan. TP Bank announced a pre-tax profit of more than VND4,300 billion, up 11% year on year and 8% higher than the plan.

According to their unaudited business reports, this outcome mainly came from the clever application of profit formula, including expanding net interest margin (NIM), diversifying service incomes such as online payment services, cross-selling insurance products, or making money from other businesses, and flexibly managing costs.

In addition, credit growth started to accelerate from the third quarter of 2020, when the pandemic was well controlled and businesses began to resume business activity. Although banks slashed interest rates three times in the second quarter of 2020, the capital absorption capacity of the economy was low. In July 2020, credit growth was only 4% but started to accelerate from August and rapidly rose 11% at the end of the year.

In particular, the profit growth of commercial lenders also came from slower decrease in lending interest rates than the deposit rates, thereby improving net interest margin. While Circular 01/2020/TT-NHNN of the State Bank of Vietnam (SBV) allowed credit institutions to restructure debts and not to change categories for debts affected by the Covid-19 pandemic, enabling banks not to hedge for risks as usual. As a result, the "buffer" for risk provisions did not bite into profit pie.

Potential bad debt

Directive 01/CT-NHNN on implementation of key tasks of the banking industry in 2020 set the target of bringing the nonperforming loan (NPL) ratio on the internal balance sheet to below 2% and the ratio of on-balance sheet bad debt of credit institutions and bad debts sold to Vietnam Asset Management Company (VAMC) and classified debt to below 3%.

However, negative impacts of the Covid-19 pandemic and serious damage caused by unprecedented natural disasters, storms and floods resulted in business disruptions. This sent up bad debt strongly, especially as a result of bad debt restructuring.

According to the State Bank of Vietnam, by the end of 2020, credit institutions restructured repayment terms of VND335 trillion (US$14.5 billion) for about 270,000 borrowers affected by Covid-19; exempted and lowered interest rates on more than VND1,000 trillion (US$43.5 billion) for over 600,000 borrowers.

Banking expert Can Van Luc said, by the end of 2020, NPL ratio of the banking system was about 3% (compared to 1.98% at the end of 2019) and gross bad debt at about 5% (compared to 4.65% in late 2019). In 2021, this bad debt category may increase, with the NPL ratio on the balance sheet reaching 3.5-4% and gross bad debt climbing to 5.5-6% by the end of 2021.

The amount of debts restructured under Circular 01 is about VND335 trillion. Given the current loan balance of VND8,500 trillion, the potential bad debt from structured debt is 4%. This is really a huge challenge for banks in 2021.

To control and limit new bad debt, banks were recommended to seek profits from services and other business activities rather than credit; actively set up risk provisions for bad debts and potential bad debts, including banks with low bad debt ratios. According to experts, banks should accept sacrificing short-term profits to increase provisioning for a thicker buffer of provisions for handling bad debts.

According to experts, to speed up the settlement of bad debts, Vietnam should soon set up and operate a trading floor for bad debts. In the decision on VAMC development strategy to 2025, with a vision to 2030, the State Bank of Vietnam required VAMC to complete the establishment and operation of the Debt Exchange in 2021-2025.

Quynh Chi, Vietnam Business Forum