Banks confront Covid-19 epidemic: Anxiety of bad debt on the rise

	Five groups of imported goods serving for the prevention and control of Covid-19 virus eligible for tax exemption
	Impact from Covid-19: Decrease of VND 150 billion in revenue collection from import-export daily
	Businesses advised to diversify export markets amid COVID-19 complications

The bad debt ratio in 2019 of many banks plummeted is a good sign to cope with difficulties. Source: Internet.

Bad debt has decreased

Banks’ financial statements in 2019 have recorded more members joining the "club" with profits of over VND10,000 billion. Notably, the ratio of bad debts/loans of most banks is on the decline. According to a survey of 22 banks that have released their financial statements in 2019, by the end of 2019, the total bad debt of 22 banks was over VND79.78 trillion, slightly down from nearly VND 80.3 trillion at the end of 2018. The bad debt/customer loan ratio has dropped to 1.47% from 1.72% earlier this year. Up to 17 of 22 banks recorded a decrease in their bad debt ratio.

In particular, ACB, BacABank and Vietcombank have the lowest bad debt ratio in the system of less than 1% and all have improved the debt quality. Specifically, ACB's bad debt is nearly VND1,450 billion, down by 13% compared to 2018, while its credit increased by 16.8%, helping to bring the bad debt ratio down from 0.73% to 0.54% – the lowest, followed by BacABank with a bad debt ratio at 0.68% and Vietcombank at 0.78%. In addition, MSB leads the way in reducing the bad debt ratio in 2019, from 3.01% to 2.04%. Bad debts value decreased by 11% to VND1,300 billion, while outstanding loans increased by 31% to VND63,594 billion, particularly, the possibility of losing capital decreased by 21% to VND981 billion.

The bank that handled many bad debts in the past year is VietinBank, when the value of its bad debt dropped sharply from VND13,691 billion to VND10,813 billion, of which Group 5 debt decreased by 21% from VND9,470 billion to VND7,204 billion; the bad debts ratio also decreased from 1.58% in 2018 to 1.16% in 2019.

Although the number of bad debts has been handled, in particular, the three largest banks in Vietnam are Vietcombank, VietinBank, and BIDV, accounting for nearly 44% of the system's total bad debt, about VND36,000 billion.

On the other hand, the system still has some banks with high bad debts ratios, even increasing and exceeding 3% as prescribed. In particular, VPBank slightly reduced the bad debts ratio from 3.5% in 2018 to 3.42% in 2019 but exceeded the rate of 3% set by the State Bank of Vietnam (SBV). The bank said it has reduced the bad debts ratio of its parent bank, including outstanding loans at the Asset Management Company of Vietnam Credit Institutions (VAMC) from 4.01% at the end of 2018 to 2.18% and complete special bond handling. In addition, some banks have increased bad debts ratio such as LienVietPost Bank with an increase of nearly 21% in value, making the bad debts ratio increase from 1.41% in 2018 to 1.44% in 2019. TPBank also increased bad debt value of 43%, making the bad debt ratio increase from 1.12% to 1.29%.

Resources improved

The good point when talking about the problem of bad banks is that the resources to handle bad debts have improved significantly, causing the "blood clot" of bad debts to be gradually dissolved. The strong growth of profit in the past year also helped banks have more resources to handle bad debts. Vietcombank is currently in the top position when the profit is VND23,155 billion, up by 26.7% YoY and surpassing 13% of the annual target. Next is Agribank with VND12,700 billion, BIDV with VND10,768 billion and Techcombank with over VND12,800 billion.

Besides profits, banks have also increased resources to counter bad debts. As a rule, banks will have to make provision for bad debts. Therefore, in the past year, many banks bought bad debts and sold them to VAMC for self-settlement, including dealing with credit risk provisions. As a result, the ratio of bad debt coverage (LLC - calculated as the risk provisioning balance of bad debts/bad debts) in many banks has increased sharply compared to the previous year.

Typically, at Vietcombank, although the bad debt dropped sharply to over VND5,700 billion, the risk provisioning balance of this bank still increased by VND123 billion to over VND10,400 billion, thereby raising the bad debt ratio to the highest level in the system of 182% from 165.4% in early 2019. Some other banks also have the ratio of bad debt coverage in 2019 to above 100%, such as VietinBank increased from 94.9 % to 119.7%, MB with 110.5%, BacABank with 131.45%. However, there are still some banks with relatively low rates such as Saigonbank of 40.9%, SeABank is 49.5%, VPBank is 46.4%.

According to experts, the ratio of bad debt coverage affects banks' profits but is a necessary resource to handle bad debts. However, with the bank increasing sharply in profit as above, the increase in coverage is understandable.

The ratio of bad debts to outstanding loans in 2019 and 2018 of some banks. Chart: H. Diu.

Are bad debts afraid of COVID-19?

According to the research report by SSI Securities Company, the banking industry will be negatively affected in the short term since the COVID-19 epidemic is spreading worldwide. Therefore, in addition to slowing down credit growth, there is also concern about increasing risk of bad debt. Banks assessed that the customers most affected by COVID-19 were enterprises in the fields of transportation and warehousing;tourism and restaurants,with businesses with export markets and the main source of imported materials from China. Enterprises in these sectors account for a large number of customers of banks, so the risk of increasing bad debt is unavoidable.

According to VPBank's estimates, the total number of VPBank customers affected by the COVID-19 epidemic may reach nearly 1,000 businesses and may increase if the situation is prolonged.

Pham ToanVuong, Deputy General Director of Agribank, said that Agribank had not yet assessed how many customers were impactedand the number of losses, but the epidemic will surely affect customers' cash flow of debt repayments. Accordingly, Vietnam's agricultural exports to China will be severely affected, while in Agribank's lending structure, agriculture accounts for 70%. This can also increase the risk of bad debt.

However, according to experts, although the underlying bad debt is real, if banks actively take part in it, they can solve these difficulties. Therefore, the State Bank of Vietnam recently issued a proposal to credit institutions to proactively grasp the situation of production and business, review and assess the extent of damage and influence of customers who are borrowing capital due to COVID-19 to restructure loan repayment terms, exempt or reduce interest rates, temporarily keep the debt group for customers for debts affected by COVID-19 and have outstanding principal and/or interest The repayment period is from January 23, 2020 to March 31, 2020, until the State Bank issues a circular guiding this issue.

Therefore, many banks have simultaneously launched a series of solutions such as launching preferential credit packages, reducing lending rates, debt repayment structure, but still keeping the debt group, preferential repayment fee before maturity to customers affected. With this decision, banks said that they may have to sacrifice part of their profits, but this is a necessary action to support customers, because when customers facedifficulties, the credit quality may be affected.Bad debts, therefore, may increase and return to a direct impact on bank costs and profits.

COVID-19 an opportunity for Vietnamese businesses to change course COVID 19 makes it a good time for businesses to look into new ideas and unite to ...

Moreover, in order to prevent risks when banks carry out debt restructuring in this disease outbreak, the SBV's document also requires credit institutions to assess the extent of damage, influence, financial capability and repayment ability of customers after the debt repayment is rescheduled. In addition, credit institutions must also proactively implement exemption and reduction of loan interest and debt structure in a strict, safe and right manner; prevent the abuse of mechanisms to reflect credit quality discrepancies.