Risk provisions remain principal burden on banks

A persisting challengeThe performance of banks during the past year has improved. However, due to the requirement of increasing risk provisions, including the giant volume of bad debts that have been transferred to Vietnam Asset Management Company (VAMC) as well as newly incurred bad debts, some banks continue to see shrinking profits.

Eximbank's chief executive officer Le Van Quyet said that in the context of the past year’s difficult market conditions, in the second quarter of 2016, when the bad debts of the bank suddenly surged by 5.3 per cent despite a negative credit growth of 4.62 per cent, the bank adjusted its operation plan.

Then, the risk provisions of Eximbank nearly doubled to VND324 billion ($15.4 million). Therefore, Eximbank's board of directors decided to adjust the 2016 pre-tax profit target to VND400 billion ($19 million), down 44 per cent, which the bank promptly achieved.

Over the past year, Eximbank recovered more than VND2 trillion ($94.6 million) of bad debts and stopped selling to VAMC, but its profit target for 2017 remains modest, only up VND200 billion ($9.5 million) against 2016.

Saigon Commercial Joint Stock Bank (SCB)’s risk provisions made up 92 per cent of its profit in the second quarter of 2016. It only earned VND94 billion ($4.4 million) in net profit, while its credit increased by 18 per cent. In 2016, SCB fulfilled the pre-tax profit target of over VND120 billion ($5.7 million) and recovered over VND3 trillion ($142 million) of bad debts. Therefore, SCB significantly reduced the total volume of bad debts sold to VAMC from VND17trillion ($804.6 million) to VND14 trillion ($662.2 million).

According to a representative of SCB, this year, the bank continues to accelerate the process of bad debts settlement because the debt amount sold to VAMC remains the responsibility of the bank. The provisions pressure is still huge. During the past year, SCB set aside more than VND1 trillion ($47.3 million) for risk provisioning.

"SCB's total provisions fund has increased by nearly VND5 trillion ($236.5 million) and its profit is mainly spent on risk provisions. Therefore, SCB's profit target for 2017 just equals the prior years, standing at about VND150 billion ($7.1 million). SCB cannot expect high profit because the bank has to focus on bad debts settlement,” said Vo Tan Hoang Van, general director of SCB.

Profits riding on bad debts settlement

Nguyen Dinh Tung, general director of Orient Commercial Joint Stock Bank (OCB), said that OCB’s non-performing loans (NPLs) are declining and falling below the average of the market. However, NPLs remain a concern. The profit of banks now depends on debts handling, because if bad debts are thoroughly tackled, banks can reduce risk provisions.

Meanwhile, Do Minh Toan, general director of ACB Bank, said that by the end of 2016, ACB continued the strong restructuring of its asset structure, creating a concrete foundation for sustainable development in the future. ACB's capital adequacy ratio, liquidity, and asset quality are at a very good level.

According to Toan, ACB expects that bad debts and provision expenses will continue to be strictly controlled, just like in 2016. The bank is determined to recover the debts related to the six companies of Nguyen Duc Kien, former vice chairman of ACB. It is expected to handle around VND2.5 trillion ($118.2 million) of bad debts this year to reduce risk provisions.

Credit demand this year is forecasted to be better than last year, and the actual system-wide creditin the first three months of the year rose by 2.81 per cent on year. However, according to OCB’s Nguyen Dinh Tung, to balance the supply and demand of capital, client-businesses must give transparent information, so that banks can correctly assess their financial health. In fact, amidst the current market difficulties, many borrowers do not use capital for the right purposes, so the risk of bad debts is difficult to avoid, leading to high risk provisions.

“Banking is different now. Banks are required to proactively acquire customers and compete in interest rates. Even the banks with good performance and low offering interest rates struggle with luring customers on board,” Tung said.

According to bank leaders, with the current market difficulties, if banks fail to choose the right time of collecting debts, they will miss the opportunity to recover debts and keep them at a safe level. As bad debts soar, banks require large risk provisions, cutting sharply into their profits.

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