To ensure banks’ capital safety

03-Jan-2019 Intellasia | Dien dan Doanh nghiep | 6:00 AM Print This Post

Asset quality and profitability of Vietnamese banks have been improved, but capital adequacy is still a concern.

The non-performing loan (NPL) ratio of the banking system has been decreasing annually since the peak in 2012. According to the data of BIDV Research Centre, the total on-balance-sheet bad debts, unsettled debts sold to Vietnam Assets Management Company (VAMC) and structured debts on the total outstanding loans have decreased from 17.2 percent in 2012 to about 6.7 percent in June 2018. The reason is partly because the average credit growth rate in the period of 2011-2017 was 14.3 percent per annum (p.a.), much lower than the rate of 34 percent p.a. in the period of 2006-2010.

In addition, the sale of bad debts to VAMC and banks’ promoting bad debt handling also contributed to reducing the NPL ratio of the banking system. The process of dealing with bad debts is actively supported by the reforms that the government is implementing including measures to facilitate both banks and VAMC to enforce collaterals when borrowers go bankrupt.

Meanwhile, asset quality of banks has been improved in recent years, especially when the government and the State Bank of Vietnam (SBV) have been implementing measures to ensure macroeconomic stability to reduce lending in low-productivity or speculative fields like real estate. Circular 06/2016/TT-NHNN must be noted, in which the risk weight for real estate loans is maintained at 150 percent by the end of 2016, then adjusted to 200 percent from 1st January 2017. At the same time, SBV also reduces the ratio of short-term capital used for medium and long-term loans from 60 percent in 2016 to 40 percent at the beginning of 2019. “These changes have contributed to improve assets quality of banks, and at the same time ensure that bubble situation do not appear in the economy. In addition, the real estate market warmed up in recent years also helped banks handle real estate collaterals,” said Pham Hong Hai, general director of HSBC Vietnam.

On the other hand, profitability of banks is also much higher than before. According to Moody’s, the average return on tangible assets (ROTA) of Vietnamese banks has increased from 0.7 percent in 2016 to 0.97 percent in 2017. “Profitability ratios and asset quality will continue to improve in 2018-2019,” said Moody’s.

However, higher profitability does not necessarily mean better capital preservation capacity of banks.

The average capital adequacy ratio (CAR) of banks has decreased in the previous years when bank assets increased rapidly, but Tier-1 capital of banks did not increase accordingly. This is more worrisome in large State-owned commercial banks with about 50 percent of total outstanding loans of the economy. If these banks do not promptly raise capital, CAR may fall below the minimum of eight percent when Basel II is applied in 2020.

Therefore, capital increase in large State-owned commercial banks is the top priority and may become a risk when the deadline for applying Basel II standard in 2020 is close. According to Hai, if banks cannot raise enough capital by that time, the government may have to inject capital. According to the calculations of International Monetary Fund (IMF), the injection may reduce 1-1.5 percent of Vietnam’s Gross Domestic Products (GDP) growth.

Lack of capital is an increasing risk of Vietnam’s economy in the context of credit-based economic growth strategy. Therefore, attracting more investment capital, especially from foreign strategic investors, will contribute to capital raising of banks. However, this poses a need for further reforms, such as improving the quality and transparency as well as macro-security measures to continue reducing bad debts and releasing collaterals.


Category: Finance, Vietnam

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