State Bank of Vietnam Non-performing loans still below Government's 3 percent target

Non-performing loans (NPLs) as of the end of May, 2016 accounted for 2.78 percent of the entire banking system’s total outstanding loans, according to the State Bank of Vietnam (SBV).

Deputy Governor of the State Bank of Vietnam Nguyen Thi Hong said that this figure was still under the 3 percent threshold targeted by the Government. She noted that the central bank would still consider the handling of bad debts a top priority during the last few months of the year. According to a report of SBV released in April, 2016, the bad debt ratio of the entire banking system as of the end of March was 2.62 percent.

Ms. Nguyen Thi Hong added that the SBV had instructed commercial banks, whose NPLs were more than 3 percent, to report measures to resolve the bad debts issue to the central bank. The SBV is controlling strictly the growth of credit to ensure credit quality and to avoid raising new bad debts. Besides that, the SBV asked credit institutions to make provisions for their risky loans.

The SBV’s governor asked the Vietnam Asset Management Company (VAMC) to deal with bad debts in a move to control the total bad debts under 3 percent, Ms. Nguyen Thi Hong said. The government established the Vietnam Asset Management Company in 2012 to help banks offload non-performing loans or toxic debts from their books.

The move was made after concern was expressed about an upward trend in NPLs, as reported recently in H1 financial reports of several commercial banks. Notably, bad debts skyrocketed at Eximbank, surging sharply from 1.86 percent at the end of last year to 5.3 percent by the end of June.

Of Eximbank’s total bad debts worth 4.285 trillion VND (191.29 million USD), subprime debt surged 13 times to reach 2.415 trillion VND, while the increasing rate of doubtful debt and potentially irrecoverable debt was 34.8 percent each to touch 797 billion VND and 1.073 trillion VND, respectively.

Due to the high NPL rate, Eximbank had to double its provisions to touch 324 billion VND in H1, causing pre-tax profits to fall sharply to end at 79 billion VND, down 88 percent year-on-year.

The Bank for Investment and Development of Vietnam (BIDV) also reported that its bad debts increased from roughly 1.6 percent at the end of last year to two percent by the end of June. The increasing bad debts in H1 were worth more than 3 trillion VND, bringing the bank’s total bad debts to reach 13.183 trillion VND. Of these debts, potentially irrecoverable debts and doubtful debts rose from 5.190 trillion VND and 887.76 billion VND to touch 6.343 trillion VND and 2.326 trillion VND, respectively. BIDV is largest commercial bank in terms of assets in Vietnam.

As of the end of June, Sacombank’s bad debts also increased to 2.83 percent from 1.85 percent at the end of last year. Due to the large number of bad debts, Sacombank’s provisions surged 86 percent in H1, causing its pre-tax profit to drop 76 percent year-on-year to touch 363 billion VND.

Experts attributed the increase in bad debts in banks in H1 to the fact that the VAMC bought only a small amount of bad debts in the first half of this year, after meeting the target for controlling bad debts of the entire banking system under three percent at the end of September last year.

According to a government report on the country’s socio-economic results in H1 2016, VAMC has so far bought 241 trillion VND of bad debts. The number of bad debts was nearly the same as compared with those released late last year. It meant that the new bad debts that arose in commercial banks in H1 remained with the banks, instead of being transferred to the VAMC, as was done in previous years.

Vietnamese commercial banks have started the second phase (2016 - 2020) of restructuring which sets higher requirements in settling existing problems and improving competitiveness. While the most important goal of the first phase was debt settlement to improve the quality and M&A to reduce weak credit institutions, the second phase will focus on the improvement of the banks’ governance in accordance with international standards.

Analysts have warned that big difficulties are still ahead. For example, the problems the Construction Bank are facing when trying to collect debts from Phuong Trang, a big client, showed that the bank still has to struggle to clear up the bad debts. Besides that, the Eximbank still cannot organize the shareholders’ meeting because of problems arising from ownership transfer, and bad business performance which has sown division among shareholders. It means that the bank cannot restructure its operation soon.

The SBV has reaffirmed its commitment to keep the bad debt ratio at less than 3 percent of outstanding loans in 2016. Bad debt in the Vietnamese banking system stood at 2.9 percent in 2015, significantly down from 3.7 percent the year before, according to an annual financial report published by the National Financial Supervisory Commission.