Hard times, low margins weigh on bank profits

A customer counts money at an Agribank office in northern Bac Giang province.

Nealy half of all lending institutions saw their profits tumble in 2011, and over 10 per cent of those suffered losses.

"Generally speaking, credit institutions' profitability last year matched the scale of their assets, ownership capital and management capacities, as well as the difficult economic conditions," the SBV wrote on its website.

The figures were released at a time when the public had begun to question why a handful of banks had continued to post significant profits during difficult economic times when production and business activity was stagnant.

The central bank attributed the profitability of some institutions to their efforts to enhance the efficiency of their use of capital. These institutions expanded services related to money transfer, electronic payment and foreign exchange, with total revenues from such services increasing 15 per cent last year over 2010.

However, the SBV admitted that the profitability of the banking system overall was driven by a few banks with large-scale assets and capital and good management. The profits of many banks, they added, were whittled away significantly by the need to establish provisional funds against risk.

The central bank said it was studying revision in regulations related to debt classification, provisional funds and risk management to assist lending institution's to report profits more exactly.

Meanwhile, increasing bad debt levels had continued to weigh on the profits of the nation's lending institutions, and the margins between earnings and costs as of April 30 was "very low" and half the level of the industry at the same time last year, the State Bank said.

Two of the most important indices reflecting a bank's financial health – return-on-assets (ROA) and return-on-equity (ROE) – were lower last year, the State Bank said. Industry-wide, ROA fell from 1.29 per cent in 2010 to 1.09 per cent last year, while ROE declined from 14.56 per cent in 2010 to 11.86 per cent last year.

These figures lagged behind regional averages in Southeast Asia, where the ROE of banks remained at 14-15 per cent.