Banks need to be cautious of bad debts

The financial statements of the third quarter of this year of commercial banks showed that more than two-thirds of banks posted fairly high growth in their profits amid the context that the economy was still facing the Covid-19 pandemic. However, the bad debts in the first nine months of this year of most banks have also started to increase rapidly.
A customer uses banking services at Nam A Bank. (Photo: SGGP)
A customer uses banking services at Nam A Bank. (Photo: SGGP)

Bad debts increase because of the Covid-19 pandemic

The financial statements of commercial banks in the third quarter of this year showed that bad debt increased sharply in the first nine months of this year. The summary from consolidated financial statements for the third quarter of this year of 16 banks, except SeABank and NBC with reduced bad debts, showed that the internal bad debt by the end of September was at more than VND49.6 trillion, up nearly VND12 trillion compared to the beginning of the year, an increase of 31 percent. Noticeably, group-5 bad debts - potentially irrecoverable debts - in many banks increased heavily, with banks climbing three to four times higher compared to the end of last year.

Specifically, Vietcombank's non-performing loans (NPL) rose by 36 percent compared to the beginning of the year, with nearly VND7.88 trillion. Of which, group-3 debts - sub-standard debts - surged by 4.2 times to VND2.92 trillion, and group-4 debts - doubtful debts - grew by nearly three times. The ratio of NPLs over total outstanding loans increased from 0.79 percent at the end of 2019 to 1.01 percent.

TPBank had bad debt gone up 59 percent with VND1.97 trillion, accounting for 1.79 percent of total loan outstanding balance. Of which, group-5 debt mounted by 27 percent to over VND569.5 billion, group-4 debt soared by 82 percent to over VND555 billion, and group-3 debt increased by 76 percent to over VND846 billion.

Sacombank’s bad debts also edged up 19 percent to nearly VND6.84 trillion. ACB's bad debts at the end of September were VND2.48 trillion, up 71 percent from the beginning of this year. ACB's ratio of NPLs over total loan outstanding balance also increased from 0.54 percent to 0.84 percent. MBBank's bad debts also enlarged by more than 39 percent to more than VND4.03 trillion, causing the ratio of NPLs over total loan outstanding balance to increase from 1.16 percent to 1.5 percent.

Not only large and medium-sized commercial banks, but many small commercial banks have seen bad debts increasing sharply. Kienlongbank’s bad debts jumped to VND2.24 trillion, 6.5 times higher compared to the beginning of this year. Those of VietBank hiked by 61 percent to VND867 billion, dragging its bad debt ratio from 1.32 percent to 2.03 percent. MSB's bad debts surged by 31 percent to VND1.70 trillion. VIB’s bad debts increased by 26 percent. LienVietPostBank had a total bad debt of VND2.61 trillion by the end of the third quarter of this year, up 29 percent.

At the regular government press conference in October, explaining the issue that 14 out of 16 commercial banks (at the time of the press conference) announced business results in the third quarter of this year with bad debts increasing by 30 percent, Deputy Governor of the State Bank of Vietnam Nguyen Thi Hong said that, in the first nine months of this year, the Covid-19 pandemic in the world was complicated, seriously impacting all aspects of the economic life, making it difficult for bank borrowers, causing a reduction in revenues and difficulties in the ability to repay debts. That is the main reason leading to an increase in bad debts. The Deputy Governor also acknowledged that if the pandemic continues to cause difficulties for enterprises, international trade, and services, bad debts of the banking system will probably increase in the coming time.

According to Dr. Nguyen Tri Hieu, an expert in banking and finance, the sharp increase in bad debts in the first nine months of this year is not surprising. The reality also shows that not only in Vietnam have bad debts increased heavily, but this is also the general situation in the world. However, Dr. Nguyen Tri Hieu said that the bad debt situation this year was clearly worse than that in 2019 and would continue to increase, so banks should be cautious.

Banks report profits because they count chickens before they hatch

Bad debts increased in the financial statements for the third quarter of this year, but most commercial banks announced profits. By the end of the third quarter of this year, many banks nearly or even reached their profit targets according to their annual plans, namely SaigonBank, MSB, and LienVietPostBank. Other commercial banks also recorded good pre-tax profits. The average profit growth of 18 commercial banks that have released their financial statements is about 10 percent. Many commercial banks have posted a two-digit profit, such as SeABank with an increase of 65.8 percent, MSB with an increase of 56.6 percent, VPBank with an increase of 30.5 percent, VIB with an increase of 38.1 percent, TPB with an increase of 25.7 percent, and ACB with an increase of 15.3 percent.

Explaining this phenomenon, many experts say, this is just a technical move, which includes accrued interest or credit loss provision into profit. Some banks recorded a sudden increase in accrued interest. For instance, VietBank's nine-month accrued interest jumped by 50 percent to more than VND2.4 trillion; accrued interest at VietABank rose by 47 percent to above VND4.59 trillion; LienVietPostBank’s emerged by 41 percent to VND6.02 trillion; TPBank also mounted by 39 percent to VND1.82 trillion. Frankly speaking, the accrued interest is merely the interest on paper because the bank has not actually collected it yet. Adding accrued interest to profit is like counting chickens before they hatch.

This act, according to the analysis of many experts, is extremely dangerous. Dr. Nguyen Tri Hieu assessed that accrued interest is a double-edged sword. If banks cannot collect accrued interest, but they still keep posting it for profit, sooner or later, banks will have to reject the accrued interest. It makes the bank profit figure look better, but not substantial. With that way of calculation, the banking industry's profit in 2020 will remain good because bad debts have not been fully uncovered. However, the situation will be more transparent in 2021, when the collection of accrued interest realizes, said Dr. Nguyen Tri Hieu.

And yet, banks with large profits have not aggressively set up reserve funds. When the money put into the reserve fund is less, the profit is, therefore, less deductible. In fact, with commercial banks increasing the provisioning for reserve funds, profits decrease significantly. For instance, the financial statements for the third quarter of this year of Vietcombank showed that pre-tax profit exceeded VND4.98 trillion, down 21 percent compared to the same period last year, and after-tax profit was more than VND3.99 trillion, down 20.9 percent. The reason is that the main source of income decreased because revenue from net interest and service activities dropped by 1.5 percent and 1.6 percent to VND8.72 trillion and more than VND1.25 trillion, respectively. While operating expenses climbed by 9.5 percent to nearly VND4.58 trillion, and provision expenses increased more sharply by 34.7 percent to more than VND2.02 trillion. In the first nine months of the year, Vietcombank's profit exceeded VND15.96 trillion, down 9.4 percent over the same period.

Similarly, Sacombank's pre-tax profit in the third quarter of this year declined by 12.9 percent compared to the same period last year, reaching more than VND897 billion. After deducting tax, the remaining profit is VND716 billion, down 7.2 percent. It is a sharp increase in risk provisions that led to a decline in profits. Specifically, risk provision was up to more than VND1.28 trillion, more than two times higher than the same period. In the first nine months of this year, Sacombank's credit loss provision soared by 69.5 percent over the same period, so in the first nine months of the year, Sacombank recorded a pre-tax profit of more than VND2.32 trillion, down 6.7 percent compared to the same period.

Dr. Can Van Luc, chief economist of BIDV: NPLs increase, bank profits in 2020 will decrease

In the context of low credit growth and enterprises still facing many difficulties due to the pandemic, the NPL ratio may increase to 3 percent in 2020 and 4 percent in 2021. When bad debts increase, banks must increase provisions besides measures, including debt rescheduling, deferring, and interest rate exemption or reduction, which will definitely affect profits. Accordingly, it is estimated that the profit of the banking industry will decrease by 20-25 percent in 2020.

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