Risk provisions and bad debts eat up bank profits

Although the ratio of non-performing loans has been kept low, irrecoverable debts have risen in the banking sector-Photo: Le Toan

Debts in Vietnam are classified into five groups, based on the degree of risk, consisting of standard debts, debts with special attention, subprime debts, doubtful debts, and potentially irrecoverable debts (classified as debts of Group 5).

As of March 31, Vietinbank reported a 0.96 per cent non-performing loans (NPL) ratio. However, out of the bank’s VND5.3 trillion ($243.11 million) worth of NPLs, over half of it was potentially irrecoverable debt.

Likewise, Vietcombank was able to keep its NPL ratio at 1.84 per cent as of the end of the first quarter. However, some VND5.8 trillion ($266.05 million) worth of NPLs, out of the total VND7.6 trillion ($348.62 million), were classified as Group 5 debts.

BIDV’s NPL ratio was also on the rise, from 1.67 per cent at the end of 2015 to 1.8 per cent as of March 31. The lender revealed considerable increases of VND900 billion ($41.28 million) in doubtful debts, and VND460 billion ($21.1 million) in potentially irrecoverable debts.

As its Group 5 debts increased, the bank’s provision for NPLs crept up as well to almost VND2 trillion ($91.74 million) in the first quarter, which subsequently severely affected BIDV’s pre-tax profit. The bank reported VND2.07 trillion ($94.95 million) in pre-tax profit, a slide of 10 per cent compared to the same quarter last year.

The situation is similar at other commercial banks. Although ACB’s NPL ratio was maintained at 1.3 per cent in the first quarter, the lender’s potentially irrecoverable debts accounted for 70 per cent of the total NPL, rising some VND200 billion ($9.17 million) from the same quarter in 2015 to settle at VND1.32 trillion ($60.55 million).

At Eximbank, its risk provisions swelled considerably to VND337 trillion ($15.45 million) in the first quarter, technically eating up the lender’s pre-tax profit and post-tax profit as a result. Eximbank’s pre- and post-tax profit stood at VND30 billion ($1.37 million) and VND24 billion ($1.1 million), respectively, as of March 31 – some 94 per cent down from the earnings figures achieved this time last year.

According to Nguyen Van Thuan, head of the Finance and Banking Faculty at the Open University of Ho Chi Minh City, the rising of potentially irrecoverable debts at banks was a result of a rather slow process of soured loan handling at the Vietnam Asset Management Company (VAMC).

Despite a large amount of debts being sold to VAMC, which in turn helped to clean up banks’ balance sheets and trim the NPL ratio to a controllable 3 per cent, the debt agency has found it difficult to manage the towering volume of NPLs on its hands.

Thuan believes that the rebound of the real estate market following a period of hibernation will have a positive impact on the NPL handling process, pushing the collection of collateral and consequently reducing the debts trapped in Group 5.