Authorities get to grips with new bad debt mountain
A spike in the amount of bad loans sitting in banks’ books has triggered Vietnamese authorities to seek new paths to recovery,
with the upcoming bad debt exchange platform envisaged to allow investors to buy and sell distressed assets, which can boost market liquidity.
Banks are among the entities hardest-hit by the outbreak. As in the past, they may again sell their bad debt to Vietnam Asset Management Company (VAMC), which allows them to amortise provisioning costs over five years, further limiting the near-term impact on earnings.
According to global rating firm Fitch Ratings, non-performing loans (NPLs) of Vietnamese banks largely comprise of mortgages and personal business loans and are usually secured by property, which may help recovery prospects in the event of default. However, the debt resolution process can be protracted and hindered by the country’s evolving legal framework. Meanwhile, banks’ underwriting standards also remain largely untested.
Deputy chief inspector of the State Bank of Vietnam (SBV) Tran Dang Phi noted the amount of soured loans has rallied since March, but said the situation is under control.
As cited from SBV statistics, by June the bad debt ratio of credit institutions was below 2 per cent, thus the ratio of the whole year may reach the target of below 3 per cent set in the prime minister’s Decision No.1058/QD-TTg dated July 19, 2017 on approving the scheme to restructure credit institutions in combination with NPL resolution in the 2016-2020 period. From 2012 to the end of March, the entire sector handled more than VND1 quadrillion ($43.5 billion) of soured loans.
Nguyen Duc Thach Diem, general director of Sacombank, noted that in the first five months of 2020, the bank successfully auctioned VND9.7 trillion ($42.17 million).
However, despite the rapidly-growing segment, many are facing hindrances accessing the distressed assets.
For instance, Nguyen Mien Tuan, vice chairman of Sacombank’s Board of Directors, admitted the process for auctioning the bank’s Phong Phu Industrial Park might be difficult, so Ho Chi Minh City People’s Committee asked the bank to suspend the sale for further review.
Last month, state-owned lender BIDV announced the latest round of sales at The Era Town project in Ho Chi Minh City’s District 7, with 55 apartments being offered at a 5 per cent discount compared to its initial offer.
Accordingly, the real estate products are on trade at VND2.08-5.26 billion ($90,400-228,700) each. On the other hand, some analysts cautioned the higher asset value is, the fewer buyers would be interested. Projects with total value above VND30 billion ($1.3 million) pale in comparison with lower-value ones.
Meanwhile, foreign bank branches, such as Mizuho Bank, Citibank, Bangkok Bank, and MUFG Bank have recorded a low NPL ratio – the total bad loans of these branches reached VND126 billion ($5.6 million), making up for 0.04 per cent of the whole system.
This is probably because these foreign lenders are focusing on their mainly deep-pocketed customers.
“Our customer base has been so far so good, and we haven’t recognised much of a spike in the NPL ratio. But I don’t think selling distressed assets is a sign of a stagnant economy. In fact, commercial banks should explore new solutions to get rid of NPLs in different mechanisms,” said Nirukt Sapru, CEO for Vietnam and ASEAN and South Asia Cluster Markets at Standard Chartered Bank.
VAMC, as reported by VIR, is preparing the foundation to set up a so-called bad debt exchange platform for 2020-2021, where investors can buy and sell distressed assets easily. This year, the company aims to settle NPLs worth VND50 trillion ($1.25 billion).
However, VAMC’s current charter capital of VND2 trillion ($87 million), which is relatively modest, will itself hinder the firm’s potential to cover more loans from commercial banks.
“In recent years, much has been done to improve the procedural requirements for registering a mortgage of land use rights in favour of a domestic lender, and this has freed up large amounts of capital for the development of residential and commercial properties across the country,” said Frederick Burke, principal at Baker McKenzie Vietnam.
However, foreign lenders cannot take a direct security interest or mortgage of land use rights in Vietnam. Therefore, they have to co-operate with local banks who may not have a balance sheet strong enough to meet the mandatory prudential requirements applicable to both domestic and foreign lenders.
“There are plenty of foreign investors who can deploy various forms of debt and equity capital to take stakes in struggling Vietnamese property companies at the shareholders’ level, as has happened in the financially hard times Vietnam has experienced in years past,” Burke told VIR.
For example, China is now embracing foreign funds as the country grapples with a tide of bad debts. Some US firms, including Oaktree Capital Group and Bain Capital Credit, have already been pushing into one of the world’s largest distressed debt markets. VIR
At Sacombank’s annual general meeting held on June 5 its permanent vice chairman Pham Van Phong said that in 2019 the bank’s pre-tax profit increased by 43.2 per cent to VND3.2 trillion (US$137.5 million), which was 21.4 per cent above the target.
The Vietnam Asset Management Company (VAMC) targeted to settle bad debts worth totally VND50 trillion (US$2.15 billion) this year.