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More banks to face losses this year if interest rates stay high

Update: February, 13/2012 - 10:12

HCM CITY — Many banks could report losses this year if interest rates are not cut as expected to help them collect and settle bad debts, independent observers say.

The Ha Noi Building Commercial Joint Stock Bank (Habubank) reported its unconsolidated business results for the fourth quarter of 2011 with a loss of VND41.7 billion (US$2 million), becoming the first loss-making bank in the period.

Under its unconsolidated financial report for the fourth quarter of 2011, Habubank posted gross profits of VND76.57 billion ($3.6 million); however, in this quarter, the cost of setting up its credit risk provisions rose 39.3 per cent to VND132.18 billion ($6.3 million), which affected its net profit.

According to the report, its total pre-tax profit in the fourth quarter of 2011 was VND55.61 billion ($2.6 million), and the after-tax profit was VND41.7 billion. This compares to corresponding 2010 figures of VND81.05 billion ($3.9 million) and VND65.63 billion ($3.1 million).

Despite its fourth-quarter loss, the total cumulative pre-tax profit of Habubank for 2011 was VND431.7 billion ($20.6 million), down 27.4 per cent against 2010. It's after tax profit for 2011 was VND349.9 billion ($16.7 million), compared to VND482.02 billion ($23 million) earned in 2010.

Habubank said that as of December 31, 2011, its total outstanding loans stood at VND17.830 trillion ($849 million). Of these, VND312 billion were subprime loans, two times higher than at the end of 2010.

Its irrecoverable loans were estimated at VND336 billion ($16 million), accounting for 4.7 per cent of the total loans.

Earlier, two other banks had reported losses in the third quarter of 2011.

Nguyen Tri Hieu, a senior financial expert, said banks reported losses in last months because their credit management was not controlled closely. In addition, many borrowers, mainly enterprises, were unable to pay back bank loans due to very high interest rates.

State Bank of Viet Nam Governor Nguyen Van Binh has said that bad debt in the Vietnamese banking system, as of late 2011, was around 3.6-3.8 per cent of total loans.

Hieu told the Thoi Bao Kinh Doanh (Business Times) newspaper that last year's bad debt was the result of several years of doing business and did not arise only in 2011.

Before 2011, the banking sector recorded very high credit growth rates, which averaged between 30 and 40 per cent annually. Some banks even grew 100 per cent, Hieu said.

At this time, banks' credit growth was six or seven times higher than the nation's gross domestic product (GDP), he added.

The typical risks faced by the banking sector arise in three areas: credit, market and professional operation. However, credit-related risks are considered to be the biggest challenge. In recent years, most of the credit-related risks have come from loans injected into the real estate sector.

One of the main reasons that caused losses for the banks was that lending rates were too high (over 20 per cent per year). Many enterprises, including big ones, cannot bear such a heavy financial burden, so they have found it difficult to repay their loans, Hieu said.

At such high lending rates, many enterprises have had to stop business, merge or default on interest payments, causing bad debts to increase sharply.

To reduce bad debts, both deposit and lending rates should be cut, he said, adding this was not an easy task because the inflation rate remained high and the liquidity of many banks was still weak — VNS

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