The rise in bad debts in the post-pandemic period is still not under control but has now been offset by recent adverse market movements. It seems that the pressure on banks to handle bad debts will become heavier when the loans cannot be returned.
Burden of debts
According to the State Bank of Vietnam, all credit institutions have handled VND 380,200 bln of bad debts as required under Resolution 42, since 15 August 2017 until 31 December 2021. This figure only accounts for 47.9% of the total identified bad debts. In recent years, after making provisions for bad debts, commercial banks have continuously offered collaterals in a bid to recover capital, even though many properties are greatly discounted, but still have no buyers. The quality of loans in the third quarter financial statements of many banks shows signs of deterioration, and the debts group is likely to lose capital sharply.
At the end of September, OCB's on-balance sheet bad debts ratio had reached 2.5% compared to only 1.3% at the beginning of the year. In absolute terms, subprime debts of Group 3 are at nearly VND 524 bln, up 60%. Doubtful debts of Group 4 are nearly VND 578 bln, an increase of more than 99%. Debts likely to lose capital in Group 5 increased by 131% compared to the beginning of the year to nearly VND 1,700 bln.
NCB's total bad debts also increased more than five times compared to the end of 2021, from VND 1,249 bln to VND 6,648 bln. Accordingly, the bad debts ratio increased from 3% to 14.72%, of which Group 5 debts were at VND 1,353 bln. The total bad debts of VietBank also increased by 35% to VND 2,486 bln, of which Group 5 debts doubled to VND 1,841 bln and the ratio of bad debts to outstanding loans increased from 3.65% to 4.33%.
At this time, Group 5 debts at many banks saw dramatic increase compared to the beginning of the year. Group 4 debts increased by nearly 20% to VND 127 bln, Group 5 debts increased by nearly 43% compared to the beginning of the year and account for 64.7% of the bank bad debts balance of VND 253 bln. ABBank recorded nearly VND 1,896 bln of bad debts, up 17%. In which, Group 5 debts were more than VND 1,207 bln, up 40%. VPBank Group 5 debts are more than VND 5,679 bln, an increase of 2.8 times compared to the beginning of the year.
State-owned commercial banks are no exception to this trend. On-balance sheet bad debts at VietinBank increased by 23% in nine months, to VND 17,650 bln, and bad debts ratio increased from 1.3% to 1.4%. In this, Group 5 debts account for VND 12,413 bln, up more than 138%. Vietcombank total bad debts as of 30 September were nearly VND 9,004 bln, up 47%. Group 5 debts account for more than VND 2,313 bln, 3 times higher than at the beginning of the year. The ratio of bad debts to outstanding loans increased from 0.64% to 0.8%. The total value of bad debts on the BIDV balance sheet was at VND 20,125 bln, up more than 48%, Group 5 debts increased 1.8 times to more than VND 13,130 bln, and the bad debts ratio increased from 0.93% to 1.3%.
Banks face pressure
Starting in 2022, the State Bank of Vietnam has allowed credit institutions to restructure debts repayment terms, also exempt and reduce interest rate and fees, and maintain the same debts group to support customers affected by the Covid-19 pandemic. With this measure, debts that were previously in Group 2 or Group 3 will not be changed when the above regulation takes effect. However, the circular on rescheduling debts repayment after being extended many times expired at the end of June, after three years. Therefore, when terminating the repayment terms, the debts of Group 2 and Group 3, if overdue for more than 360 days, will immediately jump to Group 5, leading to another increase.
In nine months of 2022, there are still seven banks with profits of over VND 10,000 bln. These are Vietcombank with VND 24,940 bln, Techcombank with VND 20,800 bln, VPBank with VND 19,837 bln, MB bank with VND 18,192 bln, BIDV with VND 17,677 bln, VietinBank with VND 15,764 bln and ACB bank with VND 13,503 bln. In the latter group, many banks also experienced outstanding profit growth, such as SHB was up 78.7% to VND 9,035 bln, HDBank was up 31.8% to VND 8,016 bln, VIB was up 46.1% to VND 7,800 bln, LienVietPostBank increased by 72.1% to VND 4,822 bln, and Eximbank increased by 229.2% to VND 3,181 bln.
The total profit before tax of 28 banks that published financial statements reached VND 192,500 bln, up 39% over the same period in 2021. Compared to other businesses, banks are still considered bright stars in business groups. However, this is true only for the top banks. In contrast, the group of small and medium-sized banks are having difficulty in fulfilling their profit plan because they have to set up provisions for bad receivable debts.
Bad debts became worse after stopping the rescheduling of debts repayment terms according to the regulations of the State Bank of Vietnam. But the pressure hasn't stopped. According to a group of market analysts, the Government recently issued Decree 65/2022/ND-CP with stricter regulations on bond investors, bond issuers, as well as other stakeholders. Along with that, the bank deposit interest rate also increased to compete with corporate bonds. The State Bank of Vietnam is implementing a tighter monetary policy, and rising interest rates and the real estate market are also facing difficulties, which may affect the solvency of borrowers, thereby possibly causing a recession which will reduce the assets at banks.
The forecast recently released by SSI Research stated that the growth rate of some banks will slow down in the last quarter of the year. In addition to the main reason due to the decline in NIM, the profit of this industry has slowed down, and it was also due to the need to increase provisioning to face an increase in bad debts in the fourth quarter of 2022 and the whole year of 2023. But that is only in theory, in fact, the bank's risk reserve is not real money, just a figure on the books. Therefore, it will still be difficult for banks to recover capital from bad debts.