Bad debts tend to rise despite slow credit expansion

Non-performing loans are still increasing despite slow credit expansion as the COVID-19 pandemic stretches many businesses to their limits.

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A transaction office of VietinBank (Photo: VietinBank)

The first-half financial statements of big banks like Vietcombank, BIDV and Vietinbank all indicated an increase in non-performing loans (NPLs).

Total NPLs of Vietcombank increased 11% in the last six months, pushing the bad debt ratio up to 0.83% from 0.79%, of which subprime loans jumped 58% and doubtful debts climbed 56%.

Ending June, NPLs at BIDV grew 17% over the beginning of the year, of which subprime and doubtful loans increased by 11% and 21%, respectively. The lender’s bad debt ratio increased from 1.75% to 2%.

The ratio of bad debt to outstanding loans at Vietinbank rose from 1.16% to 1.7% after NPLs jumped 48% in the first half. Subprime and doubtful debts climbed 250% and 84%, respectively.

This trend could also be seen in smaller banks.

Sacombank’s bad debt ratio increased from 1.94% to 2.15% by the end of June. This ratio was 1.93% in Orient Commercial Joint Stock Bank (OCB), up from 1.84% at the beginning of this year.

Asia Commercial Bank’s bad debt ratio was up from 0.54% to 0.68% after NPLs climbed 32% to VND1.9 trillion (US$82.3 million), excluding debts worth VND2.08 trillion at ACB Securities.

Bad debts at Eximbank increased 12% to VND2.16 trillion by the end of June, lifting the bad debt ratio to 2.08% from 1.71%.

The COVID-19 pandemic had negatively affected business activities, leading to an increase in NPLs at many banks, even though banks have rescheduled debts for customers affected by the pandemic until the end of September 2020 under the direction of the State Bank of Vietnam (SBV).

According to Tran Du Lich, a member of the National Advisory Council on Financial and Monetary Policies, rising bad debts at banks is inevitable but are still under control.

In fact, the central bank has warned bad debt of the whole industry will likely increase to 3-4% this year, which is still kept in check, with banks quickly setting up risk provisions.

In the first six months, Sacombank’s provision for credit losses increased by 50% to nearly VND1.57 trillion. Eximbank also set aside more than VND220 billion for a loan loss reserve fund which lowered its pre-tax profit by 28% to VND552 billion.

Increases in subprime and doubtful debts also compelled OCB and Vietcombank to increase its loan loss provisions by 49% and 21%, respectively.

Credit to rise slowly in H2

A recent report of SBV showed demand for credit was very weak in the recent past, especially in April and May when the country was affected by the lockdown due to the pandemic.

Credit increased by just 0.12% in April and 0.53% in May and improved by 1.28% in June. By mid-July, credit expansion reached a seven-year low at around 4%.

In its July report, Bao Viet Securities (BVSC) said liquidity of the banking system is still abundant, reflected in very low interbank interest rates (0.15-0.3% per annum for overnight, 1-week and 2-week terms).

BVSC expects credit to improve in the second half albeit slowly amid the complex developments of the pandemic in the country, making enterprises more vigilant on business prospects and production expansion plans.

Credit growth for the whole year is forecast at around 10%.

Meanwhile, a survey on business trends in the third quarter of 2020 of credit institutions, conducted by the SBV’s Monetary Forecasting and Statistics Department, showed credit institutions have lowered their forecasts on outstanding loan growth in two consecutive survey periods.

The outstanding credit of the banking system is predicted to grow by 3.5% in the third quarter and 10.5% in 2020, considerably lower than the expectation of 13.1-14.1%, respectively recorded in the two previous surveys.

The pressure to set money for loan losses reserve fund is expected to greatly affect the income and pre-tax profit of banks in 2020.

Finance-banking expert Can Van Luc also predicted although credit demand will recover in the last half, credit growth for the whole year will not be too high at around 9-10%.