Interest income normally accounts for 60-80 percent of the total income of Vietnamese banks, while outstanding loans account for a large proportion of total assets. Controlling credit quality, therefore, is an important factor that helps banks protect profits and develop sustainably in the long-term. From many different criteria such as the ratio of bad debts, the ratio of risk provisioning, the level of uncollected accrued interests, lending terms, the level of focus on one large customer or a group of large customers, the level of focus on risky sectors, etc., the 2018 credit quality ranking recorded many outstanding names, in which the highlight was Asia Commercial Joint Stock Bank (ACB).
Ratio of bad debts
ACB ranked the first in bad debt settlement. After many years of strongly provisioning for risks and handling bad debts from the past, ACB has so far achieved positive results with bad debt ratio and proportion of Group 2 debts reaching respectively 0.73 percent and 0.17 percent in 2018, the lowest among listed banks. In addition, in the past five years from 2014 to 2018, ACB steadily controlled bad debt ratio below that of Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank). Compared to all banks (including unlisted ones), the bad debt ratio of ACB was also the lowest in the system.
Vietcombank was the second listed bank to maintain bad debt ratio at less than one percent and the proportion of Group 2 debts at a low level of 0.5 percent. The group of banks which controlled bad debt ratio below two percent included Tien Phong Commercial Joint Stock Bank (TPBank), Military Commercial Joint Stock Bank (MBBank), HCM City Development Commercial Joint Stock Bank (HDBank), Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank), Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), Vietnam Technological and Commercial Joint Stock Bank (Techcombank) and Export Import Commercial Joint Stock Bank (Eximbank).
Meanwhile, banks recorded fairly high ratio of bad debts in the system included Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) with 2.11 percent, National Citizen Commercial Joint Stock Bank (NCB) with 2.12 percent, and Saigon Hanoi Commercial Joint Stock Bank (SHB) with 2.4 percent. Although the bad debt ratio of Sacombank remains high, it has improved significantly after the bank’s merger. Sacombank’s bad debt ratio in 2016 and 2017 were respectively 6.91 percent and 4.67 percent.
For Vietnam Prosperity Commercial Joint Stock Bank (VPBank), both the bad debt ratio and proportion of Group 2 debts were high. The bank kept its bad debt ratio below three percent throughout 2011-2016 period, at 3.39 percent in 2017 and 3.51 percent in 2018. However, for the parent bank, the bad debt ratio was 2.41 percent. The two subsidiaries of VPBank FECredit and AMC contributed 40 percent to this volume of bad debts. FE Credit is currently leading the market share in consumer lending.
Level of risk provisioning
VCB and ACB continued to be the system leaders in terms of bad debt handling capacity, with high provision for risks of up to 150160 percent of the total bad debts. At this level, in the worst case when 100 percent of bad debts are not recovered, these two banks still have 50 60 percent remaining for provision reversal. In other words, VCB and ACB have built up a fairly large “stockpile” in order to cope with the worst situation without affecting future profits. Accounting increase in provisions and decrease in book profits is a method to help banks reduce responsibilities in tax payment this year and reduce pressure of the next year’s plan, at the same time maintaining the “stockpile” to gradually use for difficult years in the future.
MBB, TPBank and VietinBank were highly ranked in terms of the ability to settle bad debts with the provisions for risks equivalent to the loss occurred when all bad debts are unrecovered.
Techcombank, BIDV and HDBank showed remarkable bad debt settlement capacity with the provisions for risks reaching around 70 90 percent of total bad debts.
NCB, SHB, Eximbank and VPBank had the lowest risk provisioning on total bad debts, reaching 45 65 percent. The weak resistance can make banks vulnerable when there are large bad debts exceeding the handling capacity of the risk provisioning fund.
For VPBank, the ratio of provisions for risks on total bad debts of the unified bank reached 46 percent but that of the parent bank was nearly 53 percent. As having many unsecured loans, VPBank classified bad debts carefully. In 2018, the ratio of provisions for risks on total bad debts of FE Credit declined from 47.5 percent to 36.1 percent. According to Saigon Securities Incorporation (SSI) Research, FE Credit may lower this ratio because the net credit loss to average outstanding loans of FE Credit fell from 11.5 percent in 2017 to 10.8 percent in 2018.
Interest receivables
In the process of doing business, banks always have loans that do not yet mature by the date of the financial statement. Thus, the existence of a small amount of unrecoverable interest receivable is normal in banks’ operation. However, when the interest receivable is too large, it will raise question of credit quality and transparency in debt classification, because it is possible that the bank has intentionally classified the bad debts (difficult to collect interests) as the Group 1 debt (interest recorded), thereby recording an increase in interest income and decreasing bad debts, decreasing provisions for risks, and maintaining a better book profit than reality. A bank which hides bad debts in this way will cause double damages when the debt officially becomes bad debt, as at that time, the bank has to both withdraw the interest and increase provision for risk, leading to a sharp decline in profit.
The interest receivables include the receivables from financial institutions, customer loans, investment securities and derivative activities are the criteria which should be used when considering credit quality, but most banks do not report these criteria separately. Considering the ratio of Interest and fee receivable to Total assets, eight out of 13 banks experienced less delay in interest collection, with a ratio of about one percent.
Lending terms
Normally, a bank which focuses much on short term usually has higher credit quality, because the longer the term, the higher the risk.
For some cases, when facing difficulties in recovering the debt principal and interests, banks restructure the debts from short terms to long terms to hide the bad debts, instead of provisioning for the risks in order to have a reserve for handling risks. This restructuring will lead to a very high rate of interest receivables. In this way, when the bad debts are revealed, the bank will not have the source to handle and face the risk of losing liquidity.
As having the proportion of short-term loans on total outstanding loans of above 50 percent, BIDV, ACB, VietinBank, HDBank, and VCB see low credit risk. In contrast, as other banks have a very low proportion of short-term loans and focus on medium and long-term lending, they face very high credit risk. For some banks of which the proportion of short-term loans is less than 40 percent, the capital turnover rate will be lower, increasing the liquidity risk for banks.
Level of concentration on large customers
The credit quality of a bank is also seen through the level of concentration on large customers. In the past, the focus on a large customer Vinashin was the main reason for the loss of capital and liquidity difficulties of Hanoi Building Commercial Joint Stock Bank (Habubank). However, at present, the Law on Securities and Vietnamese Accounting Standards do not require banks to disclose information about the level of concentration on large customers.
Level of concentration on risky sectors
The bad debts to risky areas, particularly from lending to real estate and construction were the main reason why some banks fell into the state of having negative equity. Lending to securities and unsecured financial credit are also risky. Many banks do not reveal specific data on these two sectors. Normally, this type of data is disclosed in banks’ annual audited financial statements.
In 2017, ACB was the leading bank in the level of safety in lending to sectors with the lowest outstanding loans to real estate and construction areas (6.3 percent), followed by Sacombank and TPBank (7.6 percent). The proportion of lending to real estate and construction areas of MBBank, VPBank, BIDV, Techcombank and HDBank was ranging from 13 18 percent of the total outstanding loans. Notably, this number of SHB was 22 percent.
Overall, the criteria showed that ACB and VCB are having the highest credit quality in the banking sector with the lowest bad debt ratio and a high risk tolerance, thanks to their preparation of accumulated risk provisioning in the previous years. The criteria of TPBank, MBBank, HDBank, VietinBank and BIDV were almost at the sector’s average.
