Vietinbank: Case study on bank restructuring

14 Apr

Vietnam Joint Stock Commercial Bank For Industrial And Trade (CTG : HOSE)

The next bank that I am going to discuss is VietinBank, which is a State Owned Commercial Bank (SOCB). Much has been said and written about how SOCBs are badly managed and not commercially orientated. For instance, they may have to provide compulsory loans to state owned/related entities with little regard to credit worthiness and loans to fulfill national agendas instead of commercial objectives etc.

While most of the aforementioned is true and is still largely true of the loans made a long time ago, things have changed significantly. As Vietnam becomes more market orientated, the SOCBs are changing as well. VietinBank is a case study of how SOCBs can be rehabilitated and restructured so they can survive (and even thrive) in the new market orientated economy.

The banking industry in Vietnam on the whole has a lot of room to grow. The government has still got several unlisted banks (and other financial institutions) which they want to sell to investors. The government is hence motivated to ensure that the early investors into these banks do well so they could sell stakes of other government linked businesses later on. Like in China during the equitization and IPO of ICBC bank etc, the early investors in these banks did relatively well.

Hence, I believe one does not really need to be afraid of bad loans in SOCBs like we are afraid of bad loans in another bank like say Citigroup or Royal Bank of Scotland. As these SOCBs get rehabilitated and because they have more scope to grow, these banks largely grow out of their problems. Bad loans here are not as dangerous as one might think.

Brief History of the Financial Restructuring of VietinBank

VietinBank was previously called Vietnam Industry and Commerce bank or Incombank and in 2000 was among the worst banks in Vietnam at that time. It had a crazy amount of NPLs amounting to over 10 TRILLION VND (and that was in 2002). Its NPL ratio in 2000 stood at an eye popping 28%(!). It was only after restructuring over 6 years that NPL ratio finally dropped to a more managable 1.38% in 2006. How was this restructuring done?

Management of bad debts

Vietinbank had to liquidate the collaterals of entities that could not pay their debts. A example of this type of thing was that of the Minh Phung Company in Ba Ria-Vung Tau. This was an old 2003 news article on the issue:

4-SEP-2003 The Saigon Times — Vietnam Industrial and Commercial Bank of Vietnam (Incombank) will auction off certain warehouses of the insolvent Minh Phung Company on September 17 to take back part of the bad debt totalling three trillion dong-plus (US$193.5 million).

The reserve price for all the warehouses is 368 billion dong, of which 230 billion dong is the value of the 42-year land lease and the remainder that of assets.

The company had claimed back some 900 billion dong from auctions of some assets owned by Minh Phung, of which the director, Tang Minh Phung, was sentenced to death in the Epco-Minh Phung graft scandal in the late 1990s. Total assets involving the case were put at 4,000 billion dong in 1997, said Dang Xuan Bao, director of the bank’s asset management company.

Actually this Minh Phung Company is quite interesting as a case study on bureaucratic corruption. The paper below gives a detailed discussion of the case and other matters:

Minh Phung paper: minhphung

Some of the debts were also sold to the Debt and Assets Trading Company (DATC). This latter company is also a very interesting stateowned company in that it functions a lot like a private equity fund. (I have kept quite a bit of information on this company and may write something about DATC in a latter post.)

Vietinbank also recieved government grants to compensate for loans granted to fulfill national objectives, e.g. underwriting debts of stated owned garment companies and loans to rebuild after a storm in 1997.

Other than reducing its NPL, Vietinbank also increased its chartered capital to strengthen its capital position.

Charter Capital Increase and IPO

In 2000 before the bank was restructured, Vietinbank’s chartered capital was only 1,100 billion VND. In 2002, 2003 and 2004, the bank was given 1,000 billion VND, 800 billion VND and 400 billion VND respectively by the government in the form of bonds which converted into shares to increase the bank’s chartered capital to 3,300 billion VND.

With the addition of retained earnings, the chartered capital of the bank stood at 3,616 billion in Dec 2006.

After restructuring and disposal of its NPLs, Vietinbank launched an IPO for the bank during the depressed time in the Vietnamese stock market on Christmas day of 2008. 52 million shares were offered at a price of 20,000 VND per share. Finally however, despite the bad market situation at that time, shares were sold at a price of 20,265 VND per share.

Features of Vietinbank

Vietinbank is generally considered to be a wholesale commercial bank, lending mainly to huge corporations. Even so, it has certain features which make it a big player in the retail scene. For instance, Vietinbank is a significant player in the credit/debit card business. In addition, it also has the most branches and transaction points (e.g. ATMs) among the banks in Vietnam. This gives it a huge advantage over other commercial banks in the retail banking segment.

However, this is done at a huge cost to Vietinbank. To maintain the large number of branches, the operating cost of Vietinbank is the highest among the listed banks although in the past couple of years, revenues and earnings have caught up with its cost structure.

It also has several subsidiaries like Vietinbank securities (75% owned), Vietinbank leasing, Bao Ngan Insurance and Vietinbank asset management (all wholly owned).

With the recent capital raise, it now has the largest chartered capital among the listed banks in HOSE/HASTC.

Interestingly due to Vietinbank’s aggressive write down of its legacy portfolio of bad debts in the past, it ironically has a large source of income from the recovery of bad debts listed under the “other income” segment. In 2011, it had accounted almost 20% of its after tax income! Because this is such a significant source of income for Vietinbank, one has to take note of this … and there is absolutely no way one can predict how much this income could be for any given year.

Another interesting note is that the bank has a huge land bank of about 565,000 square meters. I am unable to find out much information on this real estate portfolio, except for the fact that the value of real estate on the company’s books is rather small, about 174.2 billion VND for this huge amount of real estate. It is difficult to guess how the bank will use this real estate. However I do not think you will see the value of this real estate unlocked anytime soon.

Financial Information (Years 2002 to 2011)

2002 0.26% 5.51% 2.16%
2003 0.25% 4.94% 2.35%
2004 0.23% 4.21% 2.99%
2005 0.35% 7.95% 3.03%
2006 0.45% 10.69% 2.62%
2007 0.69% 10.80% 2.82%
2008 0.93% 14.63% 3.71%
2009 0.52% 10.13% 1.83%
2010 0.93% 18.74% 3.29%
2011 1.36% 21.92% 4.35%
Average 0.60% 10.95% 2.91%

As one can see from the table, in the earlier years, the bank was undergoing restructuring and the shareholder returns were very bad … not that the state minded at all. Profitability of the bank only started to pick up after the restructuring was completed in 2006. Even so, the profitability of the bank was only average. In 2011 the bank had an outstanding year, no doubt helped by the huge amount of capital it raised.

Vietinbank has a rather high NIM compared to other commercial banks. Like the other SOCBs, it is able to pay depositors a lower interest rate compared to the other commercial banks as being state owned, people perceive the bank to be guaranteed by the government.

This alone however, is not the entire story. Huge amounts of bad debts necessitate the government to rescue the bank by pumping in lots of capital in the form of equity during the early days of restructuring. All these new capital being shareholder equity, count as capital of the bank and can be lent out without requiring the bank to pay interest on it. This gave rise to the fantastic NIM of the bank. Notwithstanding this, the bank had to write down many of its bad loans and I am sure this hurt profits and hence this accounted for the low profitability and anaemic ROA/ROE of the bank in the early years of restructuring. It is only after the restructuring was completed in 2006 before the ROA/ROE is halfway decent.

Growth of Vietinbank

CAGR (Years 2002 to 2011)
Total Assets 21.09%
Shareholders’ Equity 24.54%
Net Income 42.98%
Net Interest 29.88%

Compared with the other commercial banks, this type of growth is not very good. However, this is typical of the growth of a SOCB. Generally I believe that one invests in an SOCB not looking for the fantastic growth of private joint stock commercial banks but because of the relative safety and the advantages that these SOCBs have over the private banks. Nevertheless, given the growth of Vietnam as a country, one would expect steady growth over time.

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Posted by on April 14, 2012 in Vietnam


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