Pham Manh Thang, deputy general director of the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) said on a side-line talk that banking operation in Vietnam has an ideal aspect.
Thang said bank is a financial intermediary, so it only focuses on meeting short-term and working capital demand for businesses. However, over the past many years, banks have had to focus large amounts for medium and long-term capital demand of the economy.
And with a credit-based economy, the total outstanding loans have maintained at around 120 percent GDP for many years. With this huge demand, banks only have to mobilise and lend. The more they lend, the more profitable they are. That seems to be ideal as market demand is large.
In fact, not long ago, credit growth maintained at an average of more than 30 percent per year, even 47-53 percent.
However, large risks revealed. Bad debt emerges, being hot and complex with long-lasting consequences. Moreover, many legal risks have occurred and are still occurring.
Deputy general director of Vietcombank said that is one of the realities that motivated commercial banks to shift, restructure assets to safer segments, developing more sustainable profit-making spears.
At the beginning of 2018, upon discussing with Vneconomy, Nguyen Le Quoc Anh, CEO of the Vietnam Technological and Commercial Joint Stock Bank (Techcombank) also expressed a viewpoint that they do not choose to lend to make profits but to do services to meet demand.
The trend on doing services is also larger in the season for reporting business results of banks in this Q1.
With traditional outlook, some recent analyses are cautious with impressive profit reports of many banks because growth and revenue from “The core” is not as strong as other segments.
For example, the net interest income of some members only grows 10-15 percent year-on-year or the credit growth is just 2-3 percent after the first quarter. For a long time now, 90-95 percent profits have been dependent on credit.
However, although the quantity does not increase a lot, the quality has great change. Right in credit, core structure in many members has shifted from wholesale to retail, consumer credit, creating higher profit margin, better income, instead of strengthening growth in quantity.
And, credit is no longer the core of many banks’ profits. For many members such as Vietcombank, Techcombank, MB or even Vietinbank, BIDV, service core is increasingly influential with gradually increasing proportion to 20 percent, 25 percent, even to about 40 percent.
On the other hand, if credit core is subject to tight limits, such as the balance of safety indexes and especially, there must follow the target assigned by the State, service has a wide room for growth. The trend has shown, banks are competing and pushing harder for this almost unlimited door, so its contribution is growing.
For example, at Military Bank (MB), in Q1/2018, revenue from interest income rose 30 percent year-on-year, which had been high already, and then non-interest income (including fees and services) even grew more highly with 68 percent year-on-year.
As aforementioned, contribution of service core is increasingly large, and more importantly, in terms of sustainability, it has no risk and can be “traced” in the future because of bad debt as for credit core.
In the first quarter of this year, many commercial banks have reported unexpectedly high profit growth, even several times higher than the same period last year. But, is that certain?
Profits are extracted after banks make provisions for risks. In recent years, to realise credit targets, banks that make less and unreasonable provisions leading to virtual profits will be subject to the State Bank’s punishment.
Of course, in the system, some cases still have loosened mechanism for provisioning, following restructuring scheme. However, in general, this provisioning is moving towards more sufficient, tighter and cleaner.
Vietcombank bought back the bad debt sold to the Vietnam Asset Management Company (VAMC) since the end of 2016. In Q1/2018, this bank still continues to put for provision an additional of nearly 1,500 trillion dong. Six trillion dong is expected to be put for provision this year (depending on actual activities).
Along with Vietcombank, Techcombank and Military Bank (MB) completed the final settlement of bad debt at VAMC in 2017. The provision still depends on the actual business of quarters in 2018 but profit quality was better than before.
At the beginning of this year, Vietinbank announced that it will soon finish paying off bad debts already sold to VAMC. In the first quarter of 2018, VietinBank continued to increase its provisioning of more than 2.4 trillion dong but profit still has the highest growth rate compared to the same period over the past many years.
Most noticeably, in the reporting season in Q1/2018, BIDV surprisingly put for provision more than six trillion dong, an increase of 2.5 times from Q1/2017. However, BIDV’s profit still grew nine percent year-on-year and the net interest income increased very strongly with nearly 35 percent.
Making provisions does not mean that money is lost, it implies potential reimbursement. The increase in making provisions in the past and at the present will reduce pressures in the future, even for future profits.
With 2015 as the peak year for commercial banks to sell bad debt to VAMC, the deadline to complete the provision for this amount has come close i.e. 2019, following a 5-year roadmap.
With the results shown, profit of many commercial banks has improved, along with the increase in the risk provisioning, which is a positive emphasis of the reporting season in Q1/2018.
And when this burden is positively shared right from the beginning, the profit of the following quarters can be slightly lower.