Analyst's Picks As credit growth has slowed, vulnerabilities in the nation's financial sector have come to the forefront. With the crisis of liquidity now passed, non-performing loans or "bad debt" are now the latest problem bedeviling commercial banks.
Years of hyperactive credit growth, cresting under the economic stimulus package in 2009, have caused the quality of bank assets to decline. With the export and consumer economies all stagnating in 2012, increasing numbers of businesses are facing insolvency. Almost 26,000 businesses failed in the first half of the year.
An increasing non-performing loan ration (NPL) leads to erosion of a bank's profitability, which is largely derived from interest income. This has been reflected in the second-quarter earnings of many banks.
Vietcombank (VCB) has seen credit growth since December 31 of just 2.96 per cent. Meanwhile, the bank's NPL rose from 2 per cent at the end of last year to 3.47 per cent at the end of the second quarter. In the same quarter, profits declined by 10 per cent from the same quarter a year earlier.
At Sacombank (CTG), NPL also jumped from 0.74 per cent at the end of last year to 2.54 per cent at the end of the second quarter of this year. Meanwhile, its profits have dwindled 70 per cent from a year earlier – although this could be partly attributed to the bank making provision for credit losses of VND1.5 trillion in the period, eating up about 66 per cent of pre-provision operating profit. For CTG, loss-making debts have risen this year from VND912 billion (US$43.4 million) to VND2.25 trillion ($107 million), an increase of 147 per cent. The bank's doubtful debts have also jumped nearly nine times from VND200 billion ($9.5 million) at the end of last year to VND1.9 trillion at the end of the second quarter of this year.
Sai Gon-Ha Noi Bank (SHB), Eximbank (EIB) and Asia Commercial Bank (ACB) have also seen doubtful debts surge by 84 per cent, 67 per cent and 53 per cent, respectively. These figures all reflect the impact of the economic downturn, especially the slowdown in the real estate sector, which has contributed significantly to total NPL (nearly 20 per cent).
Prospects for the real estate market remains dim in the medium-term, and the production sector is still facing trouble selling inventories and raising sufficient operating capital to service bank debts. Collateral quality is shrinking, and bad debts are likely to continue to ramp up for the time being.
State Bank Governor Nguyen Van Binh recently suggested that actual NPL throughout the banking system is now around 10 per cent, double the official 4.47-per-cent figure
published in May. In the long term, the increase in bad debt may force banks to write-off debts and dispose of low quality assets in order to improve their capital positions. — BVSC