VietinBank’s NPL plan highlights Vietnam banks’ legacy issues

The effective implementation of a balance-sheet clean-up would be a positive step, but there is still uncertainty about if and when this review will lead to full recognition of problem loans at either a bank or system level. Weak asset quality weighs on VietinBank’s credit profile, as with other Vietnamese banks. 

A restructuring plan focused on non-performing loans (NPLs) will be implemented over the next two years, and has been approved by the State Bank of Vietnam. The first increase in NPLs and provisioning is likely to show up in figures for the fourth quarter of 2018, as management may look to take advantage of improved earnings in 2018, Fitch Ratings believes.

Recognition of problem loans would increase the transparency of the balance sheet, while progress on resolving bad loans could eventually improve underlying health. The supportive property market and the passing of the National Assembly’s Resolution No. 42/2017/QH14 - aimed at improving the debt-resolution environment by strengthening banks' ability to foreclose assets - may help the system to gradually wind down the remaining bad debts.

VietinBank reported an NPL ratio of some 1.4% in late September 2018, and even adding in “special mention” loans only brings up the ratio to 1.7%. Other major local banks report similarly low problem loan ratios, which Fitch Ratings also believes understate their true asset-quality issues.

However, Vietcombank, ACB, and Military Bank (MB) have at least reported more progress in cleaning up their balance sheets in recent years, helped by slower NPL formation and rapid loan growth in a supportive operating environment.

According to Fitch Ratings, VietinBank is also likely to have benefitted from these trends, but its consistently low problem-loan ratios and decision only now to intensify efforts to tackle asset-quality issues suggest a risk of larger unresolved legacy problems than the other banks.

Nevertheless, the impact of the clean-up on the financial profile remains uncertain, and will depend on the size of its unrecognised bad loans and how far the bank is willing to push the process.

Fitch Ratings believes the true problem-loan ratio is at least 3%, but it could be much higher. It also estimates that profit could absorb an increase in its NPL ratio to around 5.0% by end-2019, assuming the bank provisions for 70% of the newly recognised NPLs.

Beyond that, the bank would be likely to make a loss in 2019, and its capital ratios would be put under further pressure, Fitch Ratings predicts. Alternatively, the bank could sell recognised problem loans to the Vietnam Asset Management Company (VAMC), which may allow the bank to avoid short-term lumpy provisioning costs.

VietinBank’s capital buffers are already thin, posing a challenge in meeting requirements under Basel II Accord, which is scheduled to be implemented on January 1, 2020.

More stringent NPL recognition could add to its capital needs. VietinBank is already pushing up against Vietnam’s 30% foreign-ownership limit for banks, Fitch Ratings notes, adding that this will hamper its ability to raise common equity which is viewed as the best form of loss-absorbing capital, unless the limit is relaxed.

For now, the bank will issue Tier 2 capital via subordinated debt to address the regulatory shortfall, Fitch Ratings assumes.

The plan could also be contingent on the Government's stance on its system-wide credit-growth target, which is 14% for 2019. Fitch Ratings holds the bank’s loan growth is likely to be lower than this as management focuses on the balance-sheet clean-up and Basel II implementation.