Banks early provisions for gradually increasing bad debts

05-Feb-2021 Intellasia | Dau tu Chung khoan | 6:02 AM Print This Post

The loans facing debt repayment difficulties due to the Covid-19, which are expected to be gradually moved to different debt group in three years as mentioned in the draft amending Circular 01/2020/TT-NHNN, will not cause banks’ bad debts to increase immediately but gradually go up.

General director of Orient Commercial Joint Stock Bank (OCB) Nguyen Dinh Tung shared that the outstanding loans after restructuring of OCB declined by about one trillion dong of the total outstanding loans of 90 trillion dong by the end of 2020. Many customers of whom debts have been restructured are recovering well, because the selection of customers for debt restructuring and rescheduling in accordance with Circular 01 was strictly controlled by OCB.

Tung said that there were customers who asked for debt restructuring, but because OCB assessed that their situation was not due to the Covid-19 pandemic but due to the poor business administration, the bank refused and reclassified the debts to bad debts. This is the reason why OCB’s bad debt ratio in some past years recorded very sharp increase, reaching up to 2.8%. However, after that, OCB negotiated with customers about the debt settlement and recovery plan. As a result, OCB’s bad debt ratio was controlled at 1.42 percent by the end of 2020.

“OCB is one of the banks that early settled the bonds of Vietnam Asset Management Company (VAMC) two years ago. However, the bank still needs to increase the provisions for risks of the debts restructured/rescheduled according to Circular 01 in order to ensure safety in operations. Thus, OCB’s risk reserve fund has increased significantly. In 2020, OCB set aside about 1.2 trillion dong for risk provisioning,” said Tung.

Vietnam Technological and Commercial Joint Stock Bank (Techcombank) also strongly provisioned for risks in 2020. The bank’s financial statement in the fourth quarter (Q4) of 2020 showed that the provisioning expenses in the period increased by 17%, raising the accumulated provisions in 2020 to 2.611 trillion dong, 2.8 times higher than the beginning of the year.

Meanwhile, the total bad debts of Techcombank as of December 31st 2020 were only 1.295 trillion dong, down by 58 percent compared to the beginning of the year, and that is one of the highlight in Techcombank’s operating picture in 2020, along with the high growth in business results. Specifically, the bank recorded respectively 5.089 trillion dong and 4.078 trillion dong of pre-tax and after-tax profit in Q4 of 2020, up by 28 percent compared to the same period of 2019. In the whole year, the bank’s pre-tax and after-tax profit grew by 23 percent to respectively 15.8 trillion dong and 12.582 trillion dong. In particular, the after-tax profit of the parent bank increased by 22 percent to 12.325 trillion dong.

Similarly, for HDBank, the Q4 2020 provisioning expenses went up by 61 percent to 656 billion dong. In the whole year 2020, HDBank set aside more than 1.788 trillion dong for risk provisioning, up by 39 percent compared to 2019.

The consolidated bad debt ratio of HDBank declined from 1.36 percent to 1.32 percent in the end of 2020, while the separate bad debt ratio was only 0.93%. Regarding business performance, HDBank reported a pre-tax profit and after-tax profit of respectively 5.818 trillion and 4.646 trillion dong in 2020.

Not only large-scaled banks, many small banks also set high provisions for risks in 2020. Typically, Vietnam Capital Commercial Joint Stock Bank (VietCapitalBank) provisioned nearly 347 billion dong for credit risks in 2020, nearly three times higher than 2019.

Ngo Quang Trung, general director of VietCapitalBank, said that since the market faced difficulties due to the pandemic’s impacts, the settlement and recovery of the debts repurchased from VAMC of VietCapitalBank has been affected, therefore it needs to raise provisions for risks in the short term.

Thanks to the use of provisions, the bad debt ratio of VietCapitalBank dropped to 2.7 percent and did not exceed the target of three percent of the State Bank of Vietnam (SBV), although it has purchased all VAMC bonds. At the same time, that dii not much affect the business results in 2020 when VietCapitalBank recorded pre-tax and after-tax profit increase of 28 percent compared to the results in 2019, reaching respectively 201 billion dong and 161 billion dong, completing the set profit plan.

Increasing provisions for risks on one hand helps banks increase their bad debt coverage ratio and create a buffer for banking operations, it on one hand also affects the profitability. Along with that, the restructuring of bad debts, reduction/exemption of interest rates and fees to support customers hit by the pandemic is the factor that further reduces bank profits.

Chair of the Board of directors (BOD) of Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank) Nghiem Xuan Thanh said that the reason why the bank’s profits in 2020 did not grow, in addition to the increase of provisions for risks, is also the reduction of interest rates to support customers, although the bank’s credit and non-credit activities both grew strongly. In fact, in 2020, Vietcombank provided 3.7 trillion dong of support to customers to stabilise production and business activities.

However, year 2020 is the first year that the net profit from business activities before risk provisioning of Vietcombank was at the highest level in the system, reaching over 32.961 trillion dong. The bank’s risk reserve fund also rose to a record high level of 19.344 trillion dong. The provisions for risks alone in 2020 were 9.916 trillion dong.

It is the provision of risk provisioning that helped Vietcombank become the bank with the highest ratio of on-balance sheet bad debt coverage ratio in the system (approximately 377%). The bad debt ratio, at the same time, was pulled down to the historical lowest level of 0.61 percent of the total outstanding loans.

In 2021, Vietcombank targets to increase total assets by six percent, capital mobilisation in market 1 by eight percent, credit by about 12%, and continue to control bad debt ratio below one percent. The bank also aims at a Net Interest Margin (NIM) of 3.1 percent and pre-tax profit growth of 12%, equivalent to 25.2 trillion dong. according to leader of Vietcombank, as the epidemic situation continues to be complicated, it is necessary to increase risk provisioning. That will partly affect the business operations as well as the profit of the bank.

For Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), the profit declined significantly in 2020 with consolidated pre-tax profit of 9.017 trillion dong, down by 16 percent compared to 2019. The separate profit was 8.515 trillion dong, down by 17.3%.

Le Duc Tho, Chair of the BOD of Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank), said that the bank’s profit reduction in 2020 was due to the bank’s active move to cut income by more than 6.4 trillion dong to restructure debts, lower interest rates/ exempt interests and fees to support people and businesses according to Circular 01.


Category: Finance, Vietnam

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