Enterprises are entering the final stage of the 2017 financial statement announcement, in which the bank emerged as an industry with outstanding growth in business results and a reduction in non-performing loan (NPL) ratio to an ideal level.
However, in order to assess the nature of a bank’s operation, it is not only looking at the profit figures as well as the bad debt rate published in the report.
Normally, when investors read financial statements, they usually only pay attention to the balance sheet and business results, but there are still two very important reports that few investors will look carefully or do not understand clearly namely the cash flow tables and financial statement explanation.
Be aware that the cash flow table recognises the actual in and out cash flow of a business, thus reflecting the actual performance of the organisation. Specifically, if the interest income and similar income items in the cash flow table are much lower than the income in the business result report, it shows that the bank is recording virtual income because in fact, the interest has not yet been collected from customers.
Suppose that in the year, the bank expects to collect interest from credit to 10 trillion dong, but the real cash flow of interest on the cash flow table is only nine trillion dong, so the actual one trillion dong has not been collected but still recorded receive income to calculate profit, while this is a risk that may not be obtained, or at least shows that the bank’s capital is being appropriated and the real interest rate is low, so its business performance is not high.
There are also cases that interest income in the cash flow table is higher than that in business results, which is explained that during the year, the bank may have obtained overdue interest or previous withdrawn interest, therefore the actual interest is much higher than the expected interest earned from credit.
Similarly, we also can look at the items of interest and receivable on the balance sheet to assess the profitability of credit institutions. If this figure is too large compared to the current debt balance, the bank’s profit-taking efficiency is not good. It is possible that many accrued interests have been recognised and accounted into the income and profit of the previous years, however, it has not been collected until now and if these can be withdrawn, it would strong affect the business results in the year.
This is why in the past there was a point of view that the bank was eroding into their future profits. In a normally operating bank, the rate of interest and receivable on the average balance is only 2-3 percent, if more than 5 percent is required to be noticed and if more than 10 percent is a high risk.
Regarding bad debt and bad debt ratio, it is necessary to read the financial statement explanation to know the details of each debt group, in which, if the debt in category 5 is high, special attention should be paid, because under the current regulation, debt in category 5 required 100 percent risk provision. However, bad debt in the quality of debt may not fully reflect the actual credit quality of the business, because the business may not transfer the group according to regulations. Restructured loans may not represent the right group, while these are also high risk.
Investors also need to look at the special bond volume of the Asset Management Co (VAMC) to calculate the credit quality of the business. If the special bond of VAMC is high, it means that the company has sold a large amount of debt to VAMC. Normally, the value of bonds can be equal to 90-95 percent of the value of the sold principal debt.
