A transaction office of Vietcombank in Hanoi. Vietcombank topped the list with the highest loan-loss reserve ratio of 402%. (Photo: VNA) According to experts, the move is a positive signal reflecting the preparationof banks for unpredictable fluctuations.
The impact of the COVID-19 pandemic, coupled with a tight monetary policy,spelt trouble for Vietnam’s economy, especially deteriorating bank assetquality. Banks reported a strong surge in NPLs in Q3 2022, resulting from theexpiry of Circular No. 14/2021/TT-NHNN, which allowed banks to reschedule theloan payment time and maintain the same debt group for COVID-19-affectedborrowers, at the end of June this year.
Financial statements of 27 banks showed the banks’ on-balance sheet NPLs in theyear through September amounted to nearly 129.8 trillion VND, up 28.4% againstthe figure earlier this year. Of the total, potentially irrecoverable debtsskyrocketed by 62.5% to 72.4 trillion VND, accounting for 55.8% of the totalNPLs, up 11.8% over January.
To deal with the rising bad debts, 14 out of 27 banks strongly increased theirLLR ratio in the first nine months of this year, Q3 2022 financialstatements of banks showed.
Among the banks, Vietcombank topped the list with the highest LLR ratio of upto 402%. To put it another way, Vietcombank has set aside 4.02 VND for every dongin bad debt.
VietinBank also raised its LLR ratio to 250% by late September, up 70% comparedto late 2021.
BIDV, Military Bank, Bac A Bank, Techcombank and Sacombank also hiked theirratio to 214%, 208%, 190%, 165% and 154%, respectively.
Tran Thi Khanh Hien, head of VNDirect Securities Company’s analysis division,said though banks’ bad debts increased in the third quarter of 2022, theirprovisions for defaulted loans were still well guaranteed and higher than thatat the end of 2020 and 2021. It was a positive signal as banks have readilyprepared for increasing bad debt risks in the future.
According to banking expert Dr. Nguyen Tri Hieu, the loan loss provisioncoverage ratio is an indicator of how protected a bank is against futurelosses. A higher ratio means the bank can withstand future losses better,including unexpected losses beyond the loan loss provision.
“High LLR ratio shows the bank's willingness to use the provisions to write offdefaulted loans. This is a solid buffer for possible shocks in the future.Profits of banks, which have increased their LLR ratio to more than 100%, willnot be affected even if all their NPLs become defaulted,” Hieu told Viet NamNews.
Besides, he said, part of this provision could be reversed when the debt isrecovered, and converted into profit.
Viet Dragon Securities Company (VDSC) also believes profits of many banks,which have already made adequate provisions for restructured debts according toCircular 14, will not be under pressure from the expiry of the circular. Viceversa, banks, which have not set aside enough for provisions, will face thepossibility of rising credit costs.
Though a bank leader, who declined to be named, admitted a recent increase inprofits created favourable conditions for many banks to build a solid provisionbuffer, it would not be easy for the domestic banking industry due toglobal uncertainties.
The bank leader was cautious in predicting that uncertainties in the nearfuture might cause bank profit growth to be no longer as strong as before,which would cause bad debt risks to rise and provision buffer to decline.
In a recent report, Agribank Securities Company (Agriseco)’s analysts alsoforecast banking profits in 2022 and 2023 will find it difficult to maintainthe same high growth as the previous two years as there is not much room forcredit growth while profit margins are under pressure due to rising inputcosts.
VNDirect’s Hien admitted the pressure on interest rates might last until thefirst half of 2023, depending on the interest rate management moves of the USFederal Reserve (Fed).
In addition, she said, higher lending interest rate expenses were reducing theprofitability of enterprises and increasing debt pressure.
On the other hand, limited bank credit room and tightly controlled corporatebond issuance were also making it hard for many firms to arrange capital fortheir production and business, which could adversely affect the asset qualityof banks from 2023 onwards, Hien noted.
However, Hien is optimistic that banks with healthy asset quality will have anadvantage in facing the risks, saying bank profit is forecast to grow steadilyif the bank is allocated high credit growth cap while having a high demanddeposit ratio, a low loan-to-deposit ratio, and a low ratio of short-term fundsused for medium and long-term loans.
Besides focusing on increasing provision buffer, many banks are also rushing tosell collateral to accelerate the handling of defaulted debts. Some of themeven offered a big discount for the assets under the current unfavourableeconomic environment, with 16 banks having sold debts and collateral worth some32 trillion VND via the debt exchange of the Vietnam Asset Management Company./.
VNA
