ADB: Financial sector remains vulnerable

Restructuring and bad debt resolution remain tardy, ADB notes in latest report.

Progress on bank restructuring and non-performing loan (NPL) resolution has been slower than hoped, leaving banks exposed to large contingent liabilities, the Asian Development Bank (ADB) wrote in its latest report on Vietnam economic outlook.

Although the official bad debt ratio in 2015 and 2016 remained low, at about 2.5 per cent of outstanding loans, this largely reflects the transfer of $12.7 billion in bad debts from banks to the State-owned Vietnam Asset Management Company (VAMC).

As at the end of 2016, the debt bank had resolved only 18 per cent of NPLs purchased from banks. Real progress in reining in NPLs would thus depend on how fast it can resolve its impaired assets and at what cost. Moreover, progress in consolidating the banking system continues to languish, with no mergers or acquisitions completed in 2016, the report notes.

As at December 31, the ratio of bad loans on balance sheets, those bought by VAMC from banks, and loans that may turn sour had reached 8.86 per cent of all outstanding loans, given the difficulties in dealing with assets used as collateral for bank loans and settling bad debts.

The capital adequacy ratio was the regulatory minimum of 9 per cent, but it was not calculated according to international Basel II standards. “With the government planning to have all commercial banks meet Basel II capital standards by 2020, they will likely need capital injections from foreign investors,” Mr. Aaron Batten, Country Economist for Vietnam, told the “Asian Development Outlook 2017: Transcending the Middle-income Challenge” conference on April 10.

Vietnam may increase the limits on foreign ownership in banks as early as this year to quicken the overhaul of the country’s banking sector and further attract overseas investments to boost economic growth, Prime Minister Nguyen Xuan Phuc told foreign media on January 13. “Right now, if there are any foreign investors interested in buying any of our under-performing banks, we will sell them entirely,” he said.

While the Prime Minister didn’t specify the new ceiling to be introduced, with the cap currently standing at 30 per cent, he indicated that the government may completely sell the more troubled banks. No progress has been seen so far this year.

As the State Bank of Vietnam (SBV) targets credit growth of 18 per cent in 2017, the rise of domestic lending at a faster rate than deposit growth also challenges the maintenance of bank liquidity. “This will require significant improvements to the legal framework, including the lifting of limits on foreign ownership of banks,” Mr. Batten added.

During the first quarter this year, the SBV continued to follow a stable inflation target in a cautious manner, contributing to reducing pressure on inflation. Overall liquidity increased 3.5 per cent year-on-year, slightly lower than in the same period last year.

On the capital market, the modest decrease in mobilization together with the sharp increase in credit caused slight disturbances to deposit rates in the first quarter. The exchange rate followed a stable trend in the last few weeks, significantly reducing the differences between commercial banks’ exchange rate, the average inter-bank exchange rate, and the free rate.

by Duy Anh / VET