Banks attempts to settle bad debts

03-Jan-2019 Intellasia | Dau tu Chung khoan | 6:00 AM Print This Post

The effectiveness of Resolution 42/2017/QH14 on handling bad debts of the National Assembly (NA) has positively influenced the process of settling and recovering bad debts of banks. Under the bad debt purchase mechanism, VAMC issues five-year special bonds to the debt-selling credit institutions (CIs). By this time, the five year have passed, the bad debts sold to Vietnam Asset Management Company (VAMC) have started to return to banks if they are not yet settled, causing the increase in many bank’s on-balance sheet bad debts. That is also the reason why banks buy bad debts from VAMC to try to settle their bad debts early.

In October 2013, for the first time in the history of Vietnam’s banking system, a specific bad debt handling agent was established VAMC. This company buys bad debts of CIs not by cash but by special bonds on a term of five years.

From October 2013 to December 31st 2017, VAMC purchased a total of more than 307.930 trillion dong of on-balance sheet bad debts at purchasing price of 277.755 trillion dong.

From 2018, the company has limited buying more bad debts and gradually shifted to buy bad debts at market prices. VAMC also aims to settle at least 140 trillion dong of the purchased bad debts by 2022. The company recovered 30.641 trillion dong of bad debts in 2017, sold 865 debt items at price of 6.472 trillion dong, and sold 4.865 trillion dong of secured bad debts. As planned, the company would settle 34.504 trillion dong of the debt principal in 2018.

Indeed, five years ago, if accounting and recording bad debts properly, CIs was not strong enough to bear such a large burden of bad debts, and also was unable to carry out the requirements on credit growth and interest rate reduction, etc. Thus, the establishment of VAMC is a solution to temporary relax a part of such burden.

However, after five years, the bad debts are now returning to CIs. For banks which have strong financial capacity and have made efforts in bad debt handling, settling VAMC bonds and the returned bad debts is not too difficult. Among banks. Vietcombank is the first bank to settle VAMC bonds in 2017. Techcombank also settled VAMC bonds worth over 400 billion dong in 2017.

Similarly, Asia Commercial Joint Stock Bank, Military Commercial Joint Stock Bank, etc. have also cleared of the debts which were previously sold to VAMC. As of September 2018, their bad debt ratio declined to respectively 0.84 percent and 1.57 percent on the total outstanding loans. Therefore, their provisions for risks decreased, and were even reversed into their profit in the first nine months of 2018.

Specifically, ACB recorded 4.476 trillion dong of pre-tax profit in the first three quarters of the year thanks to the 56 percent decline in risk provisioning, reaching 660 billion dong. By the end of September 2018, the total assets of the bank reached 312.778 trillion dong, up by 10 percent over the beginning of the year. The bank’s outstanding loans to customers were 218.543 trillion dong, up by 11 percent. Meanwhile, the mobilised capital from customers also rose by 11 percent to 267.975 trillion dong.

Although the ACB’s bad debts increased by 461 billion dong to 1.850 trillion dong, the bank’s bad debt ratio is only 0.84 percent, slightly up compared to the 0.71 percent recorded at the beginning of the year. However, this ratio is generally much lower than the current bad debt ratio of banks. Five years after the case of ACB’s former co-founder Nguyen Duc Kien, the bank has been gradually taking back the image of a bank with the lowest bad debt ratio in the system.

Positive impact on profit

Analysts said that ACB may see a profit of 6.333 trillion dong in 2018 thanks to the reversal of risk provisioning and debt recovery. This profit is higher than the pre-tax profit target set at the beginning of the year at 5.699 trillion dong.

HCM City securities company (HSC) said that with the settlement of bad debt at VAMC and the G6 bad debts which are related to ACB’s co-founder Kien, the bank’s income from bad debt recovery would increase high and boost its profit in 2018, along with the reversal of risk provisioning. ACB’s Net Interest Margin (NIM) is stable at 3.56 percent, higher than the 3.53 percent recorded in 2017.

In addition, analysts believed that in the future, ACB may account an irregular income from the recovery of bad debts exchanged with VAMC’s bonds which are fully provisioned. This is considered the basis of positive impact on ACB’s profit.

On the other hand, ACB is a bank which focuses on Small and Medium Enterprises (SMEs) and Individual customers. In the expansion of SME customers, the bank aims to attract suppliers and distributors of core businesses in the supply chain through a fair price and interest rate policies. Moreover, ACB is applying long-term and synchronous solutions in providing product packages to customers.

Employees of SME customers are also a source of individual customers which receive their salary payment via bank accounts. In particular, ACB plans to increase revenue by increasing the number of products, offering unsecured loans via credit cards, and providing other consumer loans. This segment of the bank currently has over 1.8 million customers and is developing well. ACB sets to have five million customers in 2019.

For the segment of super-rich individual customers, ACB plans to increase mobilisation and income from bancassurance and credit cards. ACB has advantages in consumer lending, but these loans are mainly secured.

The bank’s outstanding secured loans reaches about 900 billion dong, equivalent to just 0.41 percent of its total lending, mainly via credit cards for good-income customers (having income of above 200 million dong each year) with very low bad debt ratio.

ACB began to install Cash Deposit Machine (CDM) in the fourth quarter (Q4) of 2018, allowing the bank to expand unsecured lending to general customers at low operating costs from 2019. However, the bank plans to develop unsecured loans at a moderate growth rate.

To promote retail strategy, ACB strongly focuses on promoting information technology investment. The bank spends 30-35 million US dollars each year to invest in information technology (IT), including two types of costs including operating costs (IT solution, software maintenance, hardware replacement, etc.) and capital costs (servers, equipment,, digital banking, etc.)

ACB’s 2018 annual shareholders meeting approved the investment of 500 billion dong in science and technology funds. From Q4 2018, ACB has started to replace ATMs with more modern CDThe number of CDMs to be install in the next few years is 500 units.

In the period of 2018-2019, ACB will issue Tier-2 bonds to improve its Capital Adequacy Ratio (CAR), in addition to the solutions to increase Tier-1 capital via the payment of dividends in shares. ACB’s current CAR under the Basel II standards is over eight percent, and expected to reach nearly 10 percent in the end of 2019.

In the recent time, to carry out Resolution 42 of the National Assembly, banks have promoted the auction of secured assets to recover bad debts. Nevertheless, many banks are still struggling with the bad debt handling process because many auctions of secured assets were unsuccessful and have to be re-auctioned many times.

The typical case is Saigon One Tower in the centre of HCM City with the auction price offered by VAMC at over 6.110 trillion dong to recover the principal and interest of above seven trillion dong. However, more than a year has passed, this debt has not found a buyer.

Similarly, in the end of 2017, Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) offered to sell three land plots in Duc Hoa III Industrial Park (Long An province) at starting price of nearly 10 trillion dong but was unsuccessful. After that, Sacombank had to lower the price by nearly 800 billion dong in order to sell these three assets, and also had to accept deferred payment of the buyers within seven years.

Recently, Governor of the State Bank of Vietnam Le Minh Hung issued Document no.8425.NHNN-TTGSNH on November 7th 2018, requesting CIs and foreign bank branches (except People’s Credit Funds and micro financial institutions) to continue accelerate the settlement of bad debts.


Category: Finance, Vietnam

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