Many banks set a debt-free target at Vietnam Assets Management Company (VAMC) this year, despite sacrificing profits to make provisions. However, this is not easy.
The bad debt of the whole economy is still about half a quadrillion dong
According to data published by the State Bank of Vietnam (SBV), as of the end of 2018, the total bad debt, potential debt to be bad debt and debt sold to VAMC accounted for about 6.5 percent of the total outstanding loans of the economy. Thus, with total outstanding at over 7.21 quadrillion dong at the end of 2018, the estimated bad debt scale of the economy is about 470 billion dong.
Specifically, internal Non-performing loans (NPL) ratio was at 1.89%, equivalent to nearly 140 trillion dong. Accordingly, the remaining amount of 330 trillion of debt was sold to VAMC, potentially becoming bad debt.
The actual number of VAMC bonds that the credit system is holding is not clear. However, our statistics from 24 banks that announced the audited financial statements show that it is not a small number, up to 126 trillion dong, only slightly decreasing by 0.5 percent compared to the end of 2017. Block of bad debts pushed to VAMC has helped banks’ balance sheets be better; supporting business activities over the years, but it does not mean that banks have escaped the burden of these debts.
Because a large amount of bad debt at VAMC is counting down the time to return to the banks when the five-year term is approaching. Furthermore, every year, banks still have to continue to set up provisions with relatively high costs at 20 percent (except for a few special cases of restructuring, provisioning at 10 percent over time for 10-year bond).
In addition, the fact that the bad debt handling process at VAMC also encountered many difficulties and the progress was not as expected by the credit institutions, despite the active coordination between the parties. The reason is not only because the market of buying and selling debts and assets is not well formed, but also because of too many complicated debts while the resources of VAMC are limited, so it is impossible to handle debts quickly.
Accordingly, in the last three years, banks tend to buy back bad debt and clean up debt at VAMC. The purchase of bad debt sold will help banks proactively handle these bad debt faster, especially when a series of regulations on solutions to dealing with bad debt have been officially issued through Decree Resolution 42 of the National Assembly from July 7/2017, in which the credit institutions have the right to seize security property in case there is no debt cooperation.
Therefore, by the end of 2018, there have been five banks clearing debts at VAMC including Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Vietnam International Joint Stock Commercial Bank (VIB), Orient Joint Stock Commercial Bank (OCB), Military Joint Stock Commercial Bank (MB). This trend is also continuing to spread, especially in the context of bad debt ratio of low levels, banks have achieved high profits in recent years.
Following highlights of this year’s business plan, many banks expressed their determination to wipe out debt at VAMC as quickly as possible, even sacrificing profit growth to accomplish this goal.
Vietnam Prosperity Joint Stock Commercial Bank (VPBank) Annual general Meeting documents showed that in 2019, the bank only set a profit target of 9.5 trillion dong, only three percent higher than 2018. Moreover, this was the first time after a period of vertical growth from 2014-2018, VPBank cautiously gave an one-digit growth figure.
And according to VPBank’s explanation, the reason for this modest goal is because the bank wants to focus on resolving bad debt sold to VAMC this year, currently at 3.16 trillion. To buy back bad debt sold, VPBank has no other way to sacrifice profits to make provisions. After the deduction has been made, in the coming years, when bad debt is dealt with completely, this provision will be refunded to profit.
Similarly, Tien Phong Joint Stock Commercial Bank (TPBank) also wants to buy all or part of VAMC bonds this year, depending on the actual pre-tax profit. The bank also expects to set up Assets Management Company (AMC) in order to quickly handle bad debt, ensuring bad debt ratio below two percent.
The general Meeting of Shareholders on April 12, Kien Long Joint Stock Commercial Bank (Kien Long Bank) also approved the business plan for 2019, notably, the bank aimed to control NPL ratio below two percent, focusing on boosting bad debt and strive to settle all 100 percent of special bonds sold to VAMC before December 31, 2019. Reportedly, at the end of 2018, the balance of Kienlongbank bonds at VAMC was 152 billion dong.
As mentioned above, the solution to buy bad debt sold to VAMC for self-treatment brings many benefits for banks in the current context. However, this goal is not easy to carry out.
For example, at Vietnam Joint Stock Commercial Bank of Industry and Trade (Vietinbank), at the end of quarter 2/2018, VAMC’s special bond balance reached zero but then the bank had to continue to sell a large amount of bad debt to VAMC in the second half of the year, raising the balance to over 13.4 trillion dong. This figure is even bigger than the high record of VietinBank’s 10.3 trillion dong of VAMC bond balance at the end of 2015.
In fact, in order to buy back all bad debts at VAMC, the bank’s internal bad debt itself must also be low and the bank has abundant financial resources for setting up the debt handling reserve after the repurchase. That is also the reason that many banks said they might have to sacrifice profits to increase provisioning. Being less profitable obviously makes many shareholders feel resentful.
After receiving bad debt, the self-processing of banks has not been easy.
Despite being granted more rights to seize security assets, many banks still reflect that local authorities and regional police do not assist in the seizure. Some Ward People’s Committees refuse to cooperate because they think there is no guidance from the higher level. The Ministry of Public Security has not yet issued a document guiding the mechanism and ways of enforcing in cases where the guarantor opposes and does not cooperate.
Moreover, the debt sold to VAMC is mainly secured by real estate. Therefore, the self-processing of banks will also depend on whether the real estate market is better or worse. In recent years, many real estate blocks with value from several hundred to trillions of dong have been offered by banks with lower prices or attractive discount, the investors still have no interest. For example, that Saigon Thuong Tin Joint Stock Commercial Bank (Sacombank) offered for sale three “big” land plots in the southern region in the past one year but they had to reduce prices by nearly three trillion dong.
