Vietnamese banks' bad debt burden is getting bigger

Earning reports for the first quarter of 2023 reveal that a majority of banks are seeing a significant rise in bad debt. At OCB, bad debt at the end of the first quarter rose to over VND4,000 billion, up 51% from the beginning of the year. Military Bank also had a significant rise in bad debt. As of March 31, total bad debt was VND8,452 billion, an increase of 68% from early 2023. Eximbank's bad debt has risen by 30%.

State-owned banks are facing the same situation. BIDV recorded an on-balance sheet bad debt increase of more than 40% in the first quarter of 2023, to VND24,730 billion. Vietcombank's bad debt climbed by more than 27%, to VND9,942 billion. If liquidity and interest rates are the major threats to the banking sector in 2022. They will be the largest threat in 2023, commented Le Thanh Tung, a member of VietinBank's board of directors. 

According to Nguyen Duc Thai Han, Deputy General Director of ACB, the difficulty for the Bank is to adjust growth in association with bad debt control. The restructuring of the repayment term and keeping the debt group unchanged to support customers in difficulty, a part of the risk is shifting from the business to the bank, while the bank itself is also operating as a business in a special business.

Commercial banks' asset quality is deteriorating and the problem of managing bad debt is fraught with challenges, said Nguyen Quoc Hung, chairman of the Vietnam Banks Association. 

Statistics from the State Bank of Vietnam show that the bad debt ratio of the whole system at the end of February 2023 has reached 2.91%, a sharp increase compared to 2% at the end of 2022 and nearly double at the end of 2021.

The total bad debt on the balance sheet, unresolved debt sold to VAMC, and potential bad debt of the system of credit institutions by the end of February 2023 was estimated to account for billions of US dollars, accounting for 5% of the total outstanding balance, according to Governor of the State Bank of Vietnam Nguyen Thi Hong. 

It can be seen that the risk of bad debt continues to put tremendous pressure on the financial system as the real estate and corporate bond markets have yet to recover. Adverse developments in the world economic and political situation and difficulties in the domestic economy, and the decline in the solvency of many enterprises are factors that cause bad debt to tend to increase.

According to VNDirect's assessment, difficulties from the real estate market are still a big challenge for the prospects of the banking industry when this sector accounts for 21% of system credit by the end of 2022. Though is no bad debt ratio of corporate bonds in the banking system, according to FiinRatings statistics, the bad debt of non-financial corporate bonds as of early May 2023 has also reached 16.3%.

Banks with good reserve buffers and non-real estate-focused loan portfolios such as Vietcombank, ACB, etc. will limit current risks. However, the pressure of provisioning and the risk of bad debt of banks such as Techcombank, MB, VPBbank... is expected to be reduced in the coming time, when the cash flow of real estate businesses can improve partly thanks to the promulgated support policies and the legal removal of some real estate projects.

However, with the risk of bad debt eating away at the profits of many banks, VNDirect said that this year, the banking industry's profit increased by only 11%. This figure is remarkable when in the past 2 years, the profit growth rate of the banking system is over 30%. In 2022 alone, the average profit growth of 29 banks will be 34%.

In the context of many large banks in the US collapsing and dozens of other banks facing the risk of failure, banks in Vietnam also raised the warning level in risk management, especially when many banks have higher risk ratios. capital adequacy (CAR) is still low. For example, according to the State Bank, by the end of February 2023, the Big 4 (Agribank, Vietcombank, VietinBank, BIDV) accounted for more than 50% of the country's credit market share. Still, the charter capital was only 38% of the charter capital. of private joint stock commercial banks.

Chief Economist of BIDV and member of the National Monetary and Financial Policy Advisory Council Can Van Luc said that the pressure to raise capital on Vietnamese banks is increasing in the context of risks. instability in the world increased and business health in the country deteriorated.

The general assessment shows that, if the capital increase plans are successfully implemented, this year, the financial buffers of banks will continue to be enhanced, helping banks have more potential to cope with difficulties. Besides, when risks are high, banks should focus on increasing capital and increasing asset quality management rather than chasing growth.