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Moody’s positive about bad debt settlement in local banks
Thanh Thom
Wednesday,  Feb 7, 2018,18:25 (GMT+7)

Moody’s positive about bad debt settlement in local banks

Thanh Thom

HCMC – Some Vietnamese banks have made meaningful progress in the settlement of legacy problem assets, which has helped improve banks’ asset quality and removes a drag on their profitability, according to Moody’s Investors Service.

Moody’s says in its latest Credit Outlook released on Monday that the Asia Commercial Bank (ACB) has recently published its full-year 2017 results including a full write-down of bonds issued by the Vietnam Asset Management Company (VAMC).

Earlier, the Bank for Foreign Trade of Vietnam (Vietcombank), the Vietnam Technological and Commercial Joint Stock Bank (Techcombank), and the Military Commercial Joint Stock Commercial Bank successfully wrote down their VAMC bond exposures from their balance sheets in the fourth quarter of 2017. As a result, these banks no longer have to set aside a 20% annual provision cost.

Moody’s notes that asset quality at many local banks stabilized last year, helped by healthy macroeconomic conditions. Banks’ profitability also improved as higher-yielding retail loans increased, enabling them to allocate higher provisioning expenses to write off their VAMC bonds ahead of schedule.

Notably, since the National Assembly’s Resolution 42/2017/QH14 on settlement of non-performing loans (NPLs) at credit institutions came into force in August 2017, VAMC and local banks have rapidly repossessed collateral in the event of a borrower default.

In other words, the resolution has allowed banks to be more active in managing bad debt. As a result, the total stock of VAMC bonds at rated banks decreased in 2017, the first decline since the establishment of VAMC.

Although asset risks remain elevated for some banks owing to their large legacy problematic exposures, Moody’s predicts that local banks are on a positive track toward resolving their bad debt.

Given a favorable macroeconomic environment and the help of new laws like Resolution 42, other rated banks are also likely to make progress in resolving legacy problem assets over the next 12 to 18 months, Moody’s forecasts.

Generally, with improved profitability, banks are now capable of increasing credit provisions and building up buffers against problem assets. At this pace, more banks are likely to fully write down their VAMC bond holdings by the end of this year, according to the agency.

Set up in July 2013, VAMC has a policy mandate to take over bad debts that had plagued Vietnamese banks in prior years and to manage recovery work.

The company takes NPLs off banks’ balance sheets in exchange for special bonds it issues. The VAMC bonds do not carry interest, and banks have to recognize losses related to the NPLs effectively, as they provision for the VAMC bonds over either five or 10 years, so these assets add to credit costs and hurt profitability.

Alternatively, if VAMC succeeds in recovering a bank’s transferred NPLs, any recovered value can be transferred back to the bank. However, the cumulative NPL recovery rate by VAMC has been low at approximately 20%.

Through this mechanism, banks have been able to lower their reported NPL ratios, but they can only truly resolve bad debts through a full write-down or cash recovery of the VAMC bonds.

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