Vietnamese banks’ growth unsustainable

Profits in 2016 showed that banks had good performance, but the growth in expenditures is higher than that of profit, which raised questions about the effectiveness of banks’ operations.

Expenditures outweigh profits

According to Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank)’s consolidated financial statement for the fourth quarter of 2016, profit after tax in 2016 was VND6.85 trillion ($300 million), increasing sharply compared to the VND5.3 trillion ($233.1 million) in 2015. However, operation expenditure was VND9.99 trillion ($437.2 million), increasing by almost VND1.7 trillion ($74.5 million) on-year.

Vietcombank noted in the financial statement that costs for employees, including salaries, bonuses, and allowances for people who were let go was more than VND5.4 trillion ($234.8 million), a hefty increase compared to 2015 figures (almost VND4.3 trillion or $188 million).

Similarly, Military Commercial Joint Stock Bank (MBB)’s financial statement showed that its accrued operation expenditures during the four quarters of 2016 were VND4.2 trillion ($182.9 million), rising significantly compared to the VND3.5 trillion ($151 million) in 2015, whereas profit after tax was almost VND2.9 trillion ($126.3 million), a slight increase compared to the VND2.5 trillion ($110 million) in 2015. As of December 31, 2016, there were 10,656 staff members in this bank and its subsidiaries.

MBB noted in the financial statement that salaries and allowances contributed the most to costs, with VND2.1 trillion ($90.8 million) in 2016 and VND1.5 trillion ($67.2 million) in 2015. “Other expenditures” followed with VND1.8 trillion ($77.7 million) in 2016 compared to VND1.6 trillion ($70.8 million) in 2015.

At Asia Commercial Joint Stock Bank (ACB), 2016 operation expenditures were more than VND4.7 billion ($204.9 million). This figure in 2015 was VND4 trillion ($176 million). Profit after tax in 2016 was approximately VND1.3 trillion ($58 million), increasing slightly compared to the VND1 trillion ($45 million) in 2015. The number of staff members of this bank and its subsidiaries was 9,822 people as of December 31, 2016.

To this bank, the largest expenditures went on the staff, including salaries, allowances, and costs associated with salaries, with about VND2.3 trillion ($101.1 million) in 2016 and VND1.99 trillion ($87.5 million) in 2015. Expenses for administration and assets also tended to increase.

BIDV’s operation expenses almost doubled from VND7.4 trillion ($325.7 million) in 2013 to VND13.5 trillion ($592.3 million) in 2016. In the fourth quarter of 2016, operation expenditure was VND4.6 trillion ($203.8 million) compared to the VND3.6 trillion ($157.7 million) in the same period last year. In contrast, profit reduced over year. The number of staff members in this bank and its subsidiaries was 25,088 as of December 31, 2016.

BIDV’s financial statement notes indicated that expenses for employees, administration, and depreciation of fixed assets soared.

Gradually falling effectiveness

Dr Nguyen Tri Hieu, finance and banking specialist, said that the increase in operation expenses should match the growth of bank operations, including lending, services, investments, and deposits. On average, the growth of operation expenditure should be proportional to that of credit, deposit, investment, and income from services. The growth of operation expenditures outstripping the growth of liabilities and earning assets indicates inefficiency of banking operations, which may result in the decline in ROE, ROA, and vice versa.

In general, in 2016, banks’ operation expenses increased sharply due to the cost of human resources, depreciation of infrastructure and technology, provision of bad debts, while net interest margin (NIM) was quite low at about 2.5 per cent. This resulted in low profit before tax.

“In 2017, if banks can control their expenses, profits may be improved”, Hieu said.

By Nhue Man / VIR