Challenges of bad debts
Bad debts are a common occurrence in Vietnamese banks and the State Bank of Vietnam has constantly been reminding commercial banks (CBs) that credit growth must have credit under control. However, late in the third quarter of 2019, the total of bad debts in loans at 26 commercial banks was on the rise, reaching VND 98,242 bn. That was more than 16% higher than in late 2018. Four of these 26 commercial banks had bad debts of more than 3%, with BaoVietBank showing the highest percentage.
Particularly, bad debts at BaoVietBank had reached VND 1,088 bn in late September 2019, increasing by almost 6.33% compared with the figures at the beginning of the year. Bad debts made up 4.4% of all the debts. In late 2018, bad debts at BaoVietBank amounted to VND 1,024 bn, making up 3.97% of all debts. Actually, the increase of bad debts was not big, but the problem is that bad debts have increased while the bank lending over the past nine months was at minus 3.98%, falling to VND 24,722 bn. Worse still, extremely bad debts (group 5 debts), which means potential loss, made up more than 50%, with VND 637 bn while doubtful debts (group 4) made up VND 296 bn.
The rise of bad debts resulted in an increase in risk prevention funds at the bank. In the third quarter of 2019 alone, the bank put VND 143 bn in risk prevention funds (last year figure was VND 61.2 bn). Although the gross profits reached VND 150.2 bn in the third quarter, with a year-on-year increase of nearly 113%, the figure was just VND 7.1 bn before tax, after a significant deduction went to risk prevention funds. In the first nine months, the bank put almost VND 265 bn in risk prevention funds, pulling profits before tax down to VND 18.4 bn, which is a year-on-year fall of more than 45%.
The financial statement of the third quarter did not mention the debts which had been sold to Vietnam Asset Management Company (VAMC), but in the second quarter, the figures showed that BaoVietBank had bad debts of almost VND 1,665 bn at VAMC, with more than VND 738 bn put in risk prevention funds. The figures of such bad debts are a big concern for BaoVietBank in the context that the banking system must act in accordance with Decision No.1058/QĐ-TTg issued on 19 July 2017 by the Prime Minister, requiring the bank to reduce their percentage of bad debts on the balance sheet and bad debts sold to VAMC, along with classified debts to below 3% by the year 2020.
BaoVietBank was established in early 2009, with a starting chartered capital of VND 1,500 bn, while its current charter capital is now VND 3,150 bn. Its founding shareholders were Bao Viet Holdings, Vinamilk and CMC. In late September 2019, Bao Viet Holdings was holding 49.52% of the charter capital, Vinamilk was holding 14.3%, CMC was holding 10.3%, HiPT Group was holding 2.29% and other shareholders were holding 23.86%. In September, the CMC Board of Management decided to transfer all of its shares from BaoVietBank.
It was not too hard to understand why a founding shareholder wanted to withdraw its capital from BaoVietBank. In fact, the bank’s poor performance over the years explained it all. According to the financial statement in the third quarter of 2019, in addition to high bad debts, the accounting balance sheet also showed that BaoVietBank’s total property in late third quarter was worth VND 53,622 bn. This figure was a year-on-year fall of nearly 4%. Credits reached almost VND 24,369 bn, similar to the 4.31% decrease in the first quarter. Looking back at previous years, BaoVietBank profits were not too much. In 2016 for instance, its profits before tax were VND 117 bn, just VND 6 bn more than 2015. In 2018, its profits before tax were VND 104 bn, dropping by 29.3% over 2017. This year, the profits in the first nine months were just VND 18.4 bn, because the bank deducted a larger amount for risk prevention funds than last year.
The brand of BaoVietBank has been fading in the market because it does not have many branches and offices. The bank has not improved or moved to modernize and digitalize its services while other banks have already moved forward with the time. Instead, BaoVietBank offers high interest rates to attract deposits. Individuals may get the highest interest rates of up to 8.2% per year while companies can get the highest interest rates of 7.4% per year. However, the fact that its brand is not so well-known could have been the reason why it has had certain difficulties in attracting deposits.
Late in the third quarter, deposits from customers amounted to VND 25,810 bn, a year-on-year decrease of 4.56%. BaoVietBank is not a very strong brand and separate from Bao Viet Holdings. It is now a joint venture rather than a subsidiary of Bao Viet Holdings. However, BaoVietBank still relies heavily on this corporation. According to reports, Bao Viet Holdings and its subsidiaries have lots of deposits and bonds at BaoVietBank. The profits related to this group over the past nine months were about VND 200 bn.