The latest non-performing loan figures reported by Vietnam’s largest banks suggest that bad debts have risen by around 100% since the end of last year. This is not a cause for concern, but a sign that the problem is being acknowledged, and a positive step towards the reform of the country’s banking sector, say analysts.
At the end of the first half of this year, VietinBank reported VND2.254 trillion (US$108 million) worth of bad debts. This is up 147% on the VND912.5 billion figure reported at the start of the year. Vietcombank’s figure at the end of the first half was VND3.9 trillion, up 71% from the VND2.3 trillion at the start of the year.
Asia Commercial Bank (ACB’s) latest NPL figure was VND607 billion, 104% more than the VND297 billion at the end of last year, according to local newspaper the Vietnam Business News.
According to experts, since the government imposed rules limiting the growth of banks’ loan books, the NPL situation has improved. As such, the dramatic increases in the figures are likely a sign that the banks are beginning to face up to their bad debt problem.
“The first good news in the treatment of an addict is getting them to admit that they have a problem. So by being comfortable with acknowledging higher NPL numbers the authorities are admitting to the scale of the problem,” said Dominic Scriven, CEO of Dragon Capital.
At the end of March this year, the State Bank of Vietnam (SBV) quoted the bad debt ratio of the Vietnamese banking system at 8.9%, which is much higher than the official government figure of 4.4%. According to Marc Djandji, vice president of investment analysis at Indochina Capital, this is good news.
“This is a big step for them in the sense that for years they’ve been saying it’s below 3%. So they are addressing these issues, but it takes political will and it takes time for these things to get implemented,” he said.
Whether the SBV figure is a true reflection of the NPLs in the system is a matter of debate. But according to Scriven, determining the exact number of NPLs should no longer be the issue.
“For the moment it’s probably fair to leave the question as to what the absolute NPL number is because frankly nobody knows and the number changes on a daily basis…We now know it has to be tackled so all the creative energy can go towards designing and executing a solution or a range of solutions,” he said.
A range of solutions
The array of resolutions suggested by the government and commentators is diverse. This month, the government suggested that banks should lower interest rates on old loans to less than 15%. According to Ivan Tan, the primary analyst covering Vietnam at Standard & Poor’s, banks have willingly taken up the suggestion, as they have little to gain from additional NPLs on their books.
“This is in many ways a restructuring, but a lot of banks are willingly doing it, they are trying to rehabilitate the loans rather than foreclose them. Even if [they seized] the collateral right now the market valuation of the collateral is reduced,” he said.
In addition, rates have come down and according to Djandji, SBV governor Nguyen Van Binh hopes to see interest rates on loans reduced to around 8% by the end of the year if inflation can be reduced to lower than 7%. In addition, the government has pledged to reform its state-owned enterprises (SOEs) which have high levels of debt.
“The other part of it is tackling the SOEs which are, not exclusively but generally, a large chunk of dodgy credit. A week or so ago the prime minister signed a new bumper decree on SOE reform with a range of models for reform by 2015. They’re cracking off immediately with things like divesting non-core assets and making SOEs report like public companies, which in my view is likely to be the most successfully applied technique,” said Scriven.
In terms of dealing with the existing NPLs, an asset management company (AMC) is being established by the SBV to buy bad loans from the banks and resell them to a counterparty. This is likely to be successful, according to Scriven.
“The clever money is on the central bank establishing a debt agency. The budget of Vietnam is not allowed to be used for bank recapitalisation, so a conventional budget bailout can’t happen. The most logical thing would be for the debt management company to borrow some money and acquire the assets, i.e. recapitalise the banks,” he said.
Another ongoing discussion is the need to consolidate the banking sector. Some of the country’s smaller banks have struggled to repay capital lent to them through the interbank market, thus weighing on the NPL ratios of their larger competitors.
“If the smaller banks are taken out then eventually the larger banks take up that market share. I think that that is the best solution. There are just too many banks,” said Djandji.
But according to Tan, many of the small banks have one dominant controlling shareholder, which could pose a problem if several of them are forced to merge.
“A control issue might arise because some of these might even be family owned or controlled so the issue of corporate governance and having a clear unified outlook could come out,” he said.
Commentators agree that the situation is far from resolved. While positive measures have been announced, the real challenge is whether or not they can be successfully implemented.
“There will be challenges in seeing these reforms through, given the numerous stakeholders involved and the local authorities' untested track record,” said Alfred Chan, director of financial institutions at Fitch Ratings.
“There’s lack of experience, not enough accountability and a lack of transparency but fundamentally they’ve got to do it,” concluded Scriven.