In mid-April 2020, at the meeting of the prime minister, the ministries and business community, deputy Governor of the State Bank of Vietnam (SBV) Dao Minh Tu said that “state-owned banks this year must reduce at least 40 percent of profits.”
This message is associated with the requirements and efforts of the banking system in sharing and supporting businesses to overcome difficulties caused by the Covid-19 pandemic.
This is not a certain target or ordinance, and there is no specific legal document stipulating such reduction.
However, so far, even after holding the annual general meeting (AGM) in 2020, state-owned banks have not determined their profit targets this year. Specific targets are still waiting for the SBV’s orientation, and the reduction of 40 percent profit as mentioned by the SBV’s deputy Governor becomes a reference.
There is a still a long way to go in 2020. It is expected that from next week, commercial banks will publish detailed financial statements in the second quarter (Q2) of the year. For banks with state capital, the “must” to reduce at least 40 percent of profit is a comparison.
However, according to BizLIVE’s findings, with the results in the first six months of the year, this requirement is likely to become an impossible task.
At a large state-owned banks, despite continuously lowering savings interest rates and lending rates, cutting service costs, increasing provisions for risks, etc. the profit is estimated to be just about three percent lower than the same period of 2019. The “must” to reduce at least 40 percent of profit is thus becoming too difficult.
At another commercial bank, despite not subject to the implementation of the above “target”, its profit has become gloomier. The bank’s leader explained that his bank is focusing on other target. That is the Loan Loss Reserve ratio (LLR). It has become more noticeable in banks’ 2020 profits.
The higher the LLR, the greater the temporary transfer of profits. The Vietnam’s banking system in recent years has recorded some banks with high LLR and their LLR have continued to increase in the first half of the year.
For example, at Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), the LLR has soared from 160 percent to 170 percent in 2018 and 2019, and then currently reached about 180%.
At Military Commercial Joint Stock Bank (MB), the LLR, after exceeding 100 percent in 2019, continued to rise to about 135 percent by the end of June 2020.
On one hand, the high LLR reflects the proactive capacity against bad debts. On the other hand, it shows the high potential profit in these banks, which is associated with the prospect of reversal.
LLR of 180 percent in Vietcombank or 135 percent in MB means that for one dong of bad debt, they respectively have up to 1.8 dong and 1.35 dong of reciprocal capital, which means that their capital ratios overstate its ability to cope with bad debts.
The questions are that why banks can attain such high LLR, much higher than the level of bad debts, and whether they overly provisioned for risks to “cover up” profit.
The answers lie in the current interwoven mechanisms. Accordingly, LLR also contributes to reflect the differences among commercial banks, in terms of profit quality, risk appetite, focus level in the segment, etc.
According to regulation, the bad debts of groups must be provisioned accordingly at different levels. The highest level is 100 percent (for the group 5 debts). In addition, banks must make an additional 0.75 percent of provisions for the total debts from group 1 to group 4, including the outstanding loans which are not bad debts.
The difference in the level of provisions for risks as well as the reflection of risk appetite of commercial banks also depends on the determination of the value of secured assets to deduct first then make provisions. There are situations when the secured assets are highly valuated, the provisioning rate is reduced; while for some cases, the secured asset value is lowered to nearly zero in order to increase the provisioning source.
For the year 2020, the new and significant differences are taking shape. This factor makes LLR this year stand out. It is associated with Circular 01of the SBV on supporting customers’ debt restructuring due to the impact of the Covid-19 pandemic.
Circular 01 allows banks restructure debts without having to switch groups. The mechanism here is open. When restructuring debts without having to change group, the provisioning ratio is kept unchanged instead of having to be raised when the debts are transferred into the group of bad debts or listed in a higher level of bad debt group.
LLR will become higher if commercial banks still choose to make more provisions for the restructured debts accordingly to the group that should correctly reflect the bad debt level. This partly contributes to a much higher rate of LLR compared to the scale of bad debts in the statements. Profits are also temporarily located here or going along with the potential of reversal in the near future.
This element is not new. Restructuring debts without changing the debt group has been used in the system of Vietnamese banks for many years. The scale even peaked at 300 trillion dong, associated with Decision 780 from 2012. Moreover, each number has a different level of risk provisioning and association with profits is different
Thus, this year, along with the addition of Circular 01, banks’ announced profits will be very relative. Meanwhile, the LLR becomes more noticeable. There is a big difference expected between members.
