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Vietnam starts to clean up bad loans in banks

 
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Posted by on August 7, 2013 in News, Vietnam

 

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Vietnam Banks’ Non Performing Loans

First of all, a disclaimer: This is just a very rough estimate of the Non-Performing Loans (NPLs) in the various banks in Vietnam. Due to the difficulties of NPLs classification, most of the figures here are the self-reported figures by the banks themselves. Some of these NPLs have already been resolved or there is a concrete plan of resolution (e.g., Saigon Hanoi Bank) while for others may be an underestimate, caused by “head-in-the-sand” accounting.

Circular No. 02/2013/TT-NHNN Delayed

In particular, we learn recently that implementation of Circular No. 02/2013/TT-NHNN will be delayed. To recap, this Circular aims to:

  • Define more clearly what constitutes “Debt” in financial institutions. Specifically, (i) bond purchases purchased in the OTC market; (ii) credit trust; (iii) interbank deposits (excluding payment account deposits); and credit card issuance were all officially considered liabilities which require provisioning if impaired.
  • Define more clearly what constitutes “Bad Debt” in financial institutions. 5 categories of loans depending on their level of impairment was specified in detail, with both qualitative and quantitative criteria applied to classify these loans. Specifically, the Credit Information Centre (CIC) will be the agency to review debt classification and assign the final credit rating of the debt and the institutions what own these debt.
  • Improve risk management and transparency at banks. Lending to related parties will be limited and loans valued above 50 billion VND to related parties will need independent evaluation.
  • Notwithstanding this, interbank and government bond repo transactions will be excluded from this process unless instructed by the State Bank of Vietnam.
  • Resolution of Bad Debt. Specific procedural steps to resolve the bad debt were also described.

Should this circular come into effect according to plan on 1 Jun 13, bad debt ratios may rise but since it is being delayed, this would ease pressure on bank’s NPL provisioning. In addition, bad debt ratios is expected to remain stable or lower.

In particular, we learn from the government announcement recently that NPL is 4.5% (in March 2013) rather than 7.8% which was announced in Dec 2012. Nevertheless, in this chart, we shall use the higher Dec 2012 figure.

The Non-Performing Loan (NPL) Ratio of Major Vietnam Banks

The Non-Performing Loan (NPL) Ratio of Major Vietnam Banks (for FY2012)

Taking the 3% NPL cutoff, since the State Bank of Vietnam considers this as a “safe” ratio, more than 10 banks will be required to sell part of their NPLs to the Vietnam Asset Management Company (VAMC).

Among them, the bank that requires the most help will be that of the Agriculture Bank of Vietnam (Agribank) with an NPL ratio of nearly 6%. In absolute terms, it has more NPLs than that of the other 3 major State Owned Commercial Banks (SOCBs) combined together (i.e. Vietcombank, Vietinbank and BIDV Bank).

Some of the outliers will be Saigon Hanoi Bank which has 8.53% of NPLs which mainly arose out of its merger with Habubank. These bad debts are mainly related to Vinashin. As the bank already has a concrete plan of action to tackle these bad loans, the NPL should drop from here.

Saigon Commercial Bank is in this situation as well, with 7.2% of its loan book made up of NPLs. These NPLs arose out of its merger with Ficombank and TinNghiaBank.

Others, e.g. Western Bank and Navibank, are awaiting restructuring.

There are some surprises though… Oceanbank and Techcombank, both of which have reputations of being well managed, spotted rather high NPLs of about 3.5%.

 
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Posted by on June 5, 2013 in News, Vietnam

 

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Decree 53/2013/ND-CP on Vietnam Asset Management Corporation (VAMC)

The wait is now over, the Decree 53/2013/ND-CP on the setting up of the Vietnam Asset Management Corporation (VAMC) has been signed into law on 18 May 2013 and effective on 9 Jul 2013. As I only have the Vietnamese version (vamcvn) of the law, I will attempt to translate/summarise it in plain english as best as I can.

Foreign investors in bad debt settlement

In the meantime, an interesting tidbit came up in Saigon Times, the country’s economic newspaper. The government is also considering allowing foreign investors to bid on the bad debts of the banks. I don’t know if this is a good idea for a foreign investor (who will be at a disadvantage in the collection of such debts) but the auctioning of bad loans is specifically provided for by the Decree 53/2013/ND-CP as we shall see later.

Notwithstanding this, opening up these debt for bidding will surely give investors a glimpse on what kind of toxic loans are in the banks and improve transparency overall.

Saigon Times, April 23,2013 — Policies should be made more liberal for foreign investors to get involved in debt trading, and thus bad debt settlement can be accelerated, said Dr. Le Xuan Nghia, member of the National Advisory Council for Monetary Policy.

By Thanh Thuong and Tu Hoang — The scheme on establishment of Vietnam Asset Management Company (VAMC) will be put forward at the next meeting of the Government. However, bad debt cannot be solved with domestic resources alone, said Nghia at a workshop on interest rate management and demand for senior finance-banking human resources held by the University of Finance and Marketing.

VAMC, with estimated chartered capital of VND100 trillion, will buy debts from banks via bond issuance, meaning bad debts from banks will be transferred to VAMC.

Banks will have to extract provision worth 20% of the total value of bonds issued by VAMC. After five years, debts will be replaced by provisions, which will directly affect profits of banks.

Regarding the question who will buy collateral from VAMC, Nghia informed foreign investors had a really great demand. They want to buy land in Vietnam, but most of them encounter legal obstacles.

He suggested laws should be revised to allow foreign investors to set up investment funds and finance companies, directly buy and sell assets, and purchase houses in Vietnam.

In the countries hit by the 1997-1998 crisis, 60% of bad debts had been bought by foreign investors and then, their situation got improved.

When bad debts owed by enterprises are cleared, they should be granted new loans. If credit could not flow into the economy, bad debt settlement should be considered as a failure, said Nghia.

In an interview with the Daily, Dr. Vo Tri Thanh, vice president of the Central Institute for Economic Management (CIEM), said VAMC cannot magically wipe out bad debt, but it needs other solutions to jointly cope with this issue.

“VAMC must be associated with the process of handling weak banks and State-owned enterprises (SOEs), aiding the economy to warm up the property market a bit, and managing the money supply to ensure macroeconomic stability. In other words, VAMC must be put in the overall picture; it alone cannot solve the problem,” he said.

VAMC by nature is to handle collateral only, whereas SOEs have a lot of non-collateral loans. Therefore, restructuring of SOEs and several other measures are necessary in order to resolve this problem, he said.

In regard to interest rates, Nghia predicted the ceiling deposit rate would be lowered by another percentage point this year.

For deposit and lending rates to go down more considerably, he deemed it necessary to deal with weak banks. They should either go bankrupt or receive financial support to tackle liquidity constraints. — by Saigon Times.

Decree 53/2013/ND-CP on the VAMC

General provisions

  • This decree shall take effect on July 9, 2013.
  • This decree provides for the establishment, organisation and establishment of the Asset Management Company (VAMC) of the credit institutions in Vietnam.
  • The VAMC will be established by the State Bank of Vietnam (SBV) for the purpose of handling bad debt and the promotion of reasonable credit growth to the economy.
  • The VAMC is a specialised enterprise in the form of a one member limited liability company with 100% of the charter capital held by the State but subject to the management, inspection and monitoring conducted by SBV.

Organisation, Management and Administration of VAMC

  • VAMC will have a charter capital of 500 billion VND.
  • VAMC will be headquartered in Hanoi and branch offices shall be approved by SBV.
  • Management of VAMC will include: Council members (not more than 7 members), Supervisory Board (not more than 3 members), a Vice-President and a Chief Executive Officer.
  • The SBV will be responsible for the appointment and dismissal of the above mentioned executives of VAMC.

Operations of VAMC

 Responsibilities of the VAMC include:

  1. Purchase of bad debt from credit institutions;
  2. Recovery of bad debt: i.e. collection, handling and sale of collateral;
  3. Restructuring of bad debt: i.e. adjusting of debt conditions and payment conditions, conversion of debts into the equity of the borrower.
  4. Investment, repair, upgrade, use and leasing of properties which are foreclosed by the Property Management Company.

Rights and Powers of the Property Management Company

  1. Power to request and obtain information and documents from credit institutions relating to bad loans and collateral of the bad debt sold to VAMC.
  2. Power to force credit institutions to sell bad loans to VAMC if bad loans exceed threshold level.
  3. Participate in the restructuring, i.e. contributing capital or buying shares in the borrower.
  4. Seize collateral;
  5. Power to request state management agencies and law enforcement agencies to support the process of seizing collateral and recovery of debt;
  6. Power to inspect and supervise credit institutions;
  7. To be entitled to a percentage of the proceeds of the recovered bad debt;

Obligations of VAMC:

  1. To preserve and grow the capital of the State;
  2. Perform an independent annual audit;
  3. Accept accountability of its activities before state agencies and the public.

Buying NPLs from Credit Institutions

Credit institutions with an NPL of 3% or more will be required by the SBV to sell the NPL to VAMC until the requirement is met.

Those credit institutions who do not comply with this directive will be subject to external audit by an auditing firm and/or an independent valuer to assess the quality and value of the assets, equity and capital of the credit institution. After the said audit, the credit institution will have to:

  1. Sell bad debts to VAMC until NPLs reach a safe level and/or;
  2. Make sufficient provision on their bad debt and/or;
  3. Face compulsory restructuring by the SBV.

The cost of such an audit/valuation will be borne by the credit institution.

VAMC will purchase bad debt based on:

  1. Market value on a “willing buyer and a willing seller” basis with the debt valued based on the collateral and the ability to recover capital. If an agreement could not be reached on the value of the bad debt,  an independent valuation of the debt will be conducted as necessary;
  2. Book value net of any previous provision on the debt already made by the credit institution. Where this is the case, the credit institution will be obliged to provide VAMC the information and documents on the entire outstanding principal and unpaid interest of the borrower.

In case (1), VAMC may purchase bad debts in cash or funding from its equity or other sources while in case (2), VAMC will purchase bad debts with VAMC bonds.

For VAMC to purchase bad debts with VAMC bonds, the bad debts should satisfy the criteria of:

  • Collateral assets must have proper title documentation;
  • Debts and collateral assets must be legal;
  • Borrowers must still be in operation and otherwise contactable and verifiable.

If cash or funding from equity or other sources, bad debts should satisfy the above mentioned criteria. In addition, it must also:

  • Have collateral that is assessed as valuable and recoverable;
  • Borrower has the financial capability to repay bad debts.

VAMC Special Bonds

SBV has approved the VAMC to issue Special Bonds towards the purchase bad loans from credit institutions. Special Bonds have the following characteristics:

  • Bonds will be issued in the form of certificates, book entry or electronic data format;
  • Bonds will have a tenor of a maximum of 5 years and an interest rate of 0%;
  • Bonds can be used as a collateral to obtain financing from the SBV. However, the SBV reserves the right to determine how much is the refinancing amount (independent of the face value of the Special Bonds) and the interest rate of the refinancing loan from SBV which can vary from time to time.

Should VAMC issue other types of bonds (e.g. corporate bonds), they will not be eligible as collateral to obtain refinancing with SBV.

Rights of Credit Institution Bondholders of VAMC Special Bonds

  • Bondholders are allowed to obtain refinancing from the SBV with Special Bonds as collateral;
  • Bondholders have the right and obligation to recover the outstanding amount of the bad loans sold to VAMC via Special Bonds under the provisions of Article 19 of this Decree.

Article 19: Dealing with debt recovery for bad debt purchased with Special Bonds

  • Credit institutions are still obliged to recover debts (by way of repayment, sales of bad debt and/or selling and disposal of collateral) from borrowers of bad loans already sold to VAMC.
  • After deducting costs related to handling of collateral, VAMC will be paid a share of the proceeds from the recovery of the bad debt.

Obligations of Credit Institution Bondholders of VAMC Special Bonds

  • Setting up an annual allowance of 20% of the par value of the Special Bonds as operational costs;
  • Credit Institutions are allowed to use the Special Bonds to repurchase bad debt sold to VAMC (which have not been fully recovered yet) at book value. Procedures as specified in Article 22 of this decree.

Article 22: Procedure of Repurchase of Special Bonds by VAMC and sell back of bad debt to credit institutions

  • Must be conducted earlier than 5 working days prior to setting aside annual provision of 20% of par value of Special Bonds or the maturity of Special Bonds;
  • Refinancing obtained from SBV with Special Bonds as collateral must be repaid;
  • If debt is not fully recovered, credit institutions need to return the Special Bond to VAMC in exchange for the bad debt at book but pay the share of VAMC’s entitlement of the debt recovery amount in accordance to Article 19.
  • If debt is fully recovered, credit institutions need to pay VAMC the proceeds from the recovery of the debt and the share of VAMC’s entitlement of the debt recovery amount in accordance to Article 19.

Article 17: Measures to Restructure Bad Debt

VAMC is tasked to restructure bad debts according to Article 17 of the decree.

  • VAMC can adjust the repayment period, in accordance to the conditions of business of the borrower.
  • Review the interest rate in accordance to the repayment capability of the borrower and market conditions.
  • Reduce or exempt the overdue interest in the case of borrowers who cannot repay their debts.
  • In cases of enterprises of good standing, VAMC can consider further investment or financial support by emergency lending to resolve short term financial difficulties to ensure continuation of the business.
  • Provide credit guarantees to companies who have viable projects so companies can obtain loans from credit institutions.

Article 18: Liquidation of Collateral Assets via Auction

Collateral assets will be auctioned if there is no agreement with the parties concerned on a mutually acceptable way to restructure bad debts. Auctions will be carried out through a third party or organised by VAMC.

VAMC can decide to auction the collateral assets without the consent of the guarantor but must be in accordance to the law and in a transparent manner. The guarantor will be informed by VAMC in writing no later than 10 working days before the start of the auction. For the purchaser of assets in the auction, they will receive ownership and use rights from the relevant state agencies while the ownership and use rights of the guarantor will be terminated.

NOTE: It is left open if foreigners can participate in such auctions in the Decree.

Conclusion

Overall, Decree 53/2013/ND-CP gives VAMC sweeping powers to manage bad debts.

There are few surprises … basically the VAMC will be structured as what we expected it to be as mentioned in our previous article on VAMC. More specifically, it will be a way where banks can defer (for 5 years) taking write-offs of their bad loans by swapping the bad loans for VAMC bonds.

In the short term, this decree will provide a much needed liquidity boost to the banking system, especially for  banks with the most bad debts (i.e. weaker banks). Ironically, the more bad debts the bank has, the more it stands to benefit from Decree 53.

In my next post, I will compile the most current information that I have on the NPLs of as many banks that I have information on. It will be an interesting exercise.

 
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Posted by on May 27, 2013 in News, Vietnam

 

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Vietnam Asset Management Company approved by PM

 
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Posted by on May 24, 2013 in News, Vietnam

 

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China Cinda Asset Management: Lessons for Vietnam’s VAMC

Lessons from a Crisis Past …

By the end of this year, China Cinda Asset Management will launch an IPO in Hong Kong. This promises to be one of the largest IPOs this year.

One would remember that China Cinda is one of four companies formed after the Asian Financial Crisis more than 10 years ago to take on the bad loans in the Chinese banking system, a similar function to what Vietnam Asset Management Company (VAMC) will be tasked to do.

cinda

The fact that China Cinda managed to secure high profile investors, including people like Li Ka Shing and Jiang Zhicheng (grandson of Jiang Zemin) and financial institutions UBS, Standard Chartered bank and Carlyle Group is interesting for us to contemplate as it may be a lesson of what Vietnam’s VAMC will become in the longer term.

Banking Crisis in China post Asian Financial Crisis

What happened to the Chinese banking system in the late 1990s was a story to which Vietnamese investors would have found familiar.

After the disastrous Chinese Civil war which preceded independence, China underwent years of stagnation due in part to the Great Leap forward and Cultural Revolution. Things really started to move forward only after Deng Xiao Ping started a series of economic reforms in 1978. Interestingly, this event foreshadows what would happen to Vietnam about 10 years later, when Doi Moi was initiated in Vietnam.

Well, this initial phase of liberalisation ended not unexpectedly, with the lax lending of the banks and rampant property speculation in the early 1990s causing a mountain of bad loans when the market turned south during the Asian Financial Crisis in 1998.

At that time, total loans in China were 150% of GDP and non-performing loans (NPLs) 40% of the total loans outstanding in the banking system. Indeed, one can see easily that this situation was far worse than what Vietnam is experiencing now. In addition, much of these bad loans were concentrated in the manufacturing sector (almost 50%) while a much smaller proportion (less than 10%) was in the area of real estate.

This distinction is important because from the experience of other AMCs (e.g. Resolution Trust Corporation in USA), real estate NPLs are far more collectable than those NPLs from manufacturing and other sources.

NB: In the case of Vietnam, real estate NPLs make up the bulk of NPLs.

To solve the banking crisis, China created four asset management corporations, one for each of the large banks. In the case of China Cinda, it was tasked to manage the NPLs of China Construction Bank.

China Cinda Asset Management

Like Vietnam’s VAMC, China Cinda acquired NPLs from China Construction Bank at book value. This was necessary (even in the risk of moral hazard) to preserve the solvency of China Construction Bank and ensure the latter returns to profitability within 3 years.

The funding for China Cinda was via a nominal 10 billion RMB in equity from Ministry of Finance as compared to 373 billion in NPLs that were transferred to China Cinda. In addition, only about a quarter or so of the 10 billion RMB equity funding was in cash. Research has shown that most of the equity injection into China Cinda was made in the form of office properties, office equipment and money losing business (gulp!) owned by China Construction Bank!

Nearly all the capital needs of the company was met by direct bank loans from the People’s Bank of China (the policy bank of China) and bonds issued by China Cinda (somewhat like VAMC bonds in Vietnam) roughly in the proportion of 40/60. In many cases, these bonds issued by China Cinda were swapped directly for the NPLs from China Construction Bank.

Differences between China Cinda and VAMC

There are several differences in China’s case though, from what is going to happen in Vietnam.

The policy bank (i.e. People’s Bank of China) was heavily involved in the NPL transfer process by not only injecting equity capital but also by lending directly to China Cinda (via direct bank loans). This exposes the policy bank (and in turn the State) much more to the risks of the NPLs. In contrast, the State Bank of Vietnam only provided a silver of equity to VAMC and hence this equity is the most that the State Bank of Vietnam could lose (i.e. a mere USD 24 million).

The allocation of the eventual losses arising out of the NPLs remains uncertain between the People’s Bank of China and China Cinda. (China Construction Bank essentially got off scott free.) In the case of Vietnam’s VAMC, this is by no means uncertain. The losses from NPLs remains with the bank that originated the NPL. Neither the State Bank of Vietnam, nor VAMC is responsible for the losses from NPLs.

This is an important and crucial distinction. In China’s system, there is a risk of moral hazard but in Vietnam’s system, this risk of moral hazard is not present. You reap what you sow, if you created the bad loan, you will have to eat the losses as well.

For both China Cinda and Vietnam’s VAMC, the restructuring of the banking system was debt financed. As a result, the accrued interest for the bonds and bank debt (at the prevailing 1 year official deposit rates) stood at the rate of about 5 to 10 billion RMB per year in the case of China Cinda. This far exceeded the annual cash recovery rate of the NPLs of China Cinda. Up until now, more than 10 years later, it is still a mystery how China Cinda managed to cough out this interest payment all these years. It was possible that the People’s Bank continued to support China Cinda throughout this time, directly or indirectly.

In the case of Vietnam’s VAMC, the bonds have a zero interest rate. This obviates the need for further capital outlay both for the troubled banks and VAMC. Neat!

Thoughts on Vietnam’s VAMC

In all, Vietnam’s policy makers certainly learned from how China handled her own banking crisis more than 10 years ago. In this situation, Vietnam certainly made better use of resources as we can see.

Importantly, we note that the amount of equity that the VAMC has is not an important element of success in this business of NPL resolution. The key is to be able to issue bonds which have a quasi-government-backed status. In this case, the State Bank of Vietnam managed to get itself a good deal, by not backing the VAMC directly with loans. In this way, it capped the State’s exposure to NPL losses to merely USD 24 million, the equity injected into VAMC.

Besides limiting its exposure, Vietnam’s system also crucially gets rid of the moral hazard problem. Banks who made the bad loans ultimately are responsible for absorbing the losses from NPLs (albeit not immediately). This discourages reckless risk taking.

Admittedly, when compared to China’s banking crisis, Vietnam seems to have a relatively smaller problem on its hands both on a relative and absolute basis.

By even the most conservative and pessimistic estimates, the NPLs in Vietnam are estimated not to exceed 18%, less than half of China’s NPLs at 40% of total outstanding loans at its peak. In addition, most of the NPLs in Vietnam’s case are real estate related and hence the outlook for the recovery of these loans is relatively much better.

The pivotal significance of the VAMC however, is that it is a measure by the country to actively solve the NPL issue of banks and once it starts operating, the banking crisis is at its end.

In China’s case, soon after China Cinda Asset Management started operating, we witnessed many market moving events, like the 2000 Internet bubble bursting, 9/11 incident, out-break of the Severe Acute Respiratory Syndrome (SARS) etc. Despite all of these, China Construction Bank returned to profitability within 3 years as planned and managed to launch a successful IPO in 2005.

Conclusion

Compared to China post Asian Financial Crisis, Vietnam’s current banking problems would seem smaller relatively speaking, and VAMC would appear to be better thought out than China’s Cinda Asset Management. With any luck, the macroeconomic environment may be more benign (this is arguable though).

VAMC seems to be in a good position to resolve the banking issues in Vietnam. Very likely, the banks in Vietnam will return to normal profitability earlier than the 3 years it took China’s banks.

With the founding of VAMC, I dare say Vietnam has put the banking crisis behind.

 
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Posted by on May 12, 2013 in News, Vietnam

 

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Banking Reforms: Vietnam Asset Management Company

The recapitalization of the banks in Vietnam will come in 2 main forms. The first will be to increase the current foreign ownership of banks or financial institutions to above 30%, either by a straight increase in the ownership limit or by non-voting shares. This should not be that difficult as Vietnamese banks have always been interesting for foreign investors. Below is a list of the 10 largest investments into Vietnamese financial institutions:

vnbankdeals

Vietnam Asset Management Company (VAMC)

The other would be the setting up of a troubled-asset management company. This month (if it is not delayed again), the Vietnam Asset Management Company (VAMC) will be set up to take over bad loans from the banks that own them. This will be the real test of the Vietnamese government’s resolve to clean out the bad debts in the banking system. The VAMC will be directly controlled by the central bank of Vietnam.

To perform this task, VAMC will be capitalised by the Vietnamese government with only a silver of equity of about VND 500 billion (USD 24 million). While detractors will question if this small amount of equity is sufficient to to meet the task of cleaning up the estimated USD 10 billion of bad debt, I believe that this question is a moot point. Like the United States Treasury which successfully carried out the Troubled Asset Relief Program (TARP), VAMC can be seen as another arm of the state treasury which has an almost limitless ability to issue valuable papers and bonds to meet its capital needs.

Indeed, the State Treasury has been rather successful recently in selling government bonds to foreign investors and gold bars to local investors, so I see no problem in meeting the capital needs of VAMC.

Indeed, nearly all the capital needs of VAMC will be met by the issuance of bonds. Using these bonds, the VAMC will exchange them for the bad debts of the banks.

How the VAMC works

According to government decree, VAMC will purchase bad debts by paying prices equal to the book values of the debt. Nevertheless, as VAMC is a state-owned, quasi-government institution, it cannot take losses on the bad debt that had been purchased. How VAMC is going to do this is quite interesting:

The bonds to be issued by VAMC in exchange for bad debts would be valid for 5 years only, at the interest rate of zero percent. In this scheme, banks whose debts had been “sold” to VAMC will have to “guarantee” the recovery of the debts or take back these debts after 5 years. This means that though VAMC buys bad debts from banks, it will not take over the responsibility of dealing with the bad debts as the responsibility of dealing with the bad debts still remains with the bank that “sold” them.

Also under the draft decree, during the 5 years, the seller banks will have to make the provision (as credit loss) of 20 percent for the bonds each year. If the bad debts cannot be sold after 5 years, VAMC would not bear any loss, because the banks would have made 100 percent provision for the bonds already.

By that time, banks would “buy” the bad debts back from VAMC, incurring a large charge-off on their books.

In the 5 years, banks can use the VAMC bond which they get after “selling” their bad debts to VAMC as collateral to borrow money from the State Bank of Vietnam. In the case of Vietnam, interbank loans are normally short term, of 1 year duration or less so this is possible.

Essentially, VAMC acts as a temporary conduit, or even a vehicle whereby the government provides a temporary 5 year loan at zero percent interest to the bank to tide over the tough times. It is similar in function to the Troubled Asset Relief Program (TARP) in the United States which a few years ago rescued the US economy.

This is indeed an ingenious scheme to clean up the bank’s books, albeit for only 5 years. It is anticipated that in 5 years, either:

  1. Collateral assets of defaulted debt would have recovered sufficiently in their prices for the banks to collect back their principal, or;
  2. The accumulated earnings of the banks in 5 years would have made writing off the bad debts less painful, or at least not affect the solvency of the banking system.

How now?

The question now is whether banks would take up this scheme. It is still difficult to say because this way of dealing with bad debts is very expensive for the banks. Banks would have to make a yearly provision of 20 percent for every debt sold to VAMC, which means that the banks’ profit would decrease dramatically, especially in the first year.

In addition the VAMC charges a high fee for collecting the bad debt. Even in the case where VAMC is able to sell or otherwise fully recover the debt, not all the income will be given to the originating banks/credit institutions. The income (after subtracting related costs) would be distributed at the ratio of 85% in favour of the credit institutions and 15% for VAMC.

Given this situation, it is highly unlikely that banks would exchange bad debts which they are confident of reclaiming back in the future or debts in Group 5 (where full provision has been made). Indeed, much of the worst debt are in Group 5 now where 100% provision has been booked … … consider this:

In July 2012, the State Bank of Vietnam announced that bad debts in the banking system amounted to VND235 trillion (US$11.2 billion), or 8.6 percent of total outstanding loans. However, by late January this year the ratio had fallen to 6 percent. Theoretically, this means that bad debts worth VND55 trillion had been resolved within these 6 months, even without the assistance of VAMC. Of course, much of this had been credited to the interest rates dropping, allowing borrowers to refinance their loans at a much lower rate.

Essentially, it only makes sense for banks to utilise VAMC for debts that banks do not think will be collectable but provision has not been booked for sufficiently. This is especially for those debts that could significantly affect earnings and liquidity in the short term. How much of the USD 10 billion of bad debt is in this category is anyone’s guess. It may be lower than what we think.

Which banks will benefit most

After exchanging the bad debts for the VAMC bonds, banks can use the bond as collateral to either (1) lend to clients or (2) purchase valuable papers like government bonds to earn interest.

Overall, smaller banks are more likely to benefit as larger banks have already made sufficient provisions to cover bad debts in the past few years.

Among the listed banks, it would seem to me that Saigon Hanoi Bank would stand to benefit most from VAMC once it is implemented. I continue to own Saigon Hanoi Bank shares and believe that this bank will do the best among all the listed banks once the banking sector recovers.

 
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Posted by on May 5, 2013 in News, Vietnam

 

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Banking Reforms: The Progress So Far

Timeline for Vietnam’s Banking Sector Reforms

The banking sector of Vietnam had been one of the first to get into trouble in this very long economic crisis in Vietnam. Hence banking had been one of the first sectors of the economy to undergo reform. Let’s see if the rhetoric matches up to what had been achieved so far.

In March 2012, the State Bank of Vietnam issued a directive, Decision No.254/QD-TTg on “The restructuring of credit institutions in the 2011-2015 period“. This is a write-up of the policy by Mr Nguyen Manh Cuong from Mayer Brown JSM (reproduced with permission):

Objective of Restructuring Credit Institutions

  • The Schedule aims to basically, thoroughly and comprehensively restructure the system of credit institutions, expecting local banks to achieve safe operation and sustainable performance with diversified structures of ownership, sizes, and types to be more competitive and consistent with international standards and to better meet the demand for financial and banking services of the national economy.

  • In the 2011-2015 period, Vietnam will focus on improving the health and strengthening the operational capacity of credit institutions; improving their safety and operational efficiency; improving market discipline inbanking operation; and striving to form at least one or two commercial banks operating on the regional scale by the end of 2015.

Directions and Solutions with Respect to State-owned Commercial Banks

The Schedule aims to:

  • enhance the leading role and dominant position of State-owned commercial banks; ensure that State-owned commercial banks are the main force of the whole system with large scale, safe and efficient operation, advanced management capability, and enhanced competitiveness both at home and abroad;

  • further promote the equitisation of State-owned commercial banks, including Vietnam Bank for Agriculture and Rural Development (Agribank); ensure that the State holds controlling shares at the State-owned commercial banks after their equitisation;

  • control bad debts of State-owned commercial banks below 3% of total loans pursuant to the VietnamAccounting System;

  • diversify capital raising methods; control credit growth in consistency with the size and term structure of deposits; gradually reduce loan-to-deposit ratio to below 90% by 2015.

Restructuring Commercial Banks and Finance Companies

Joint stock commercial banks, finance companies and financial leasing companies will be assessed with respect to their financial conditions, operation, management, especially quality of their assets, liabilities, capital and safety levels to be classified into three groups:

  • healthy
  • temporary short of liquidity; and
  • weak

The Schedule provides measures to restructure the three bank groups, including reorganisation, merger or acquisition, reform of risk management systems, or intervention by the SBV or other agencies.

The SBV will create favourable conditions for healthy credit institutions to further develop and extend refinancing credits for banks in lack of liquidity.

As for weak credit institutions, they are encouraged to merge with each other voluntarily. A tougher measure will apply in the case of weak banks not wanting to merge voluntarily: they will be enforced to merge, or the SBV will buy or direct other commercial banks (including foreign credit institutions) to buy back their shares.

In addition, they will be closely and comprehensively supervised by the SBV in terms of management, governance, financial conditions and operation.

The Schedule also highlights the solutions and details roadmaps to strengthen and develop People’s Credit Funds, microfinance institutions and foreign credit institutions.

Restructuring Foreign Credit Institutions

Under the Schedule, foreign banks will be encouraged to compete equally as well as to conduct business cooperation with domestic credit organisations. Close links between domestic and foreign credit institutions will also be called for to help develop products, improve governance and modernise technology.

Foreign ownership ratios will be increased, particularly for weaker joint stock commercial banks. Foreign credit institutions may contribute capital and purchase shares in weaker domestic entities, while parent institutions overseas are requested to guarantee the payment capacity of their affiliates in Vietnam.

Roadmap for Restructuring Credit Institutions

Amongst other things, the directive gave a time-line for bank restructuring process.

The roadmap for restructuring credit institutions is as follows:

  • 2011-2012: Assess actual operations, assets quality and bad loans of credit institutions. Develop plans to reorganise unhealthy credit institutions to basically ensure the liquidity of the banking industry and control over weak credit institutions. Expected outcomes: Liquidity of credit institutions is basically guaranteed.

  • 2013: Continue to improve financial health of the credit institutions, amend and supplement the regulations on safety operation, finish restructuring legal ownership of unsound joint stock commercial banks, to eliminate the risk of system collapse. Expected results: The risk of banking system collapse is eliminated. Weak credit institutions are basically handled.

  • 2014: Complete the basic financial restructuring of credit institutions. Credit institutions are expected to meet capital requirements, obligatory standards and limits ensuring safe operations. Continue voluntary merger, acquisition and consolidation.

  • 2015: Complete restructuring operation and management. Expected outcomes: The banking governance is essentially improved; credit institutions fully meet requirements on capital and safe operation.

Normura has helpfully summarized the schedule for us in the chart below … …

timelinebanking,png

Phase I (2011 to 2012)

The main focus of the first phase of restructuring (lasting 2 years from 2011 to 2012) for the banking sector had been:

  1. Identify the weak banks and the total non-performing loans (NPLs) in the banking sector.
  2. Restructure or otherwise recapitalize the weak or insolvent banks.

Identify Weak banks and NPLs in the banking system

In a departure from the traditional culture of secrecy with regards to the health of banking system, the State Bank of Vietnam was surprisingly upfront on the total NPLs in the banking system and identifying which were the weakest banks in the system.

While the figures that were published were already public knowledge by that time, the official admission by the State Bank on the high levels of NPLs and zombie banks was a step in the right direction to be more transparent and accountable to the public on these matters.

Mergers and Bailout of Insolvent Banks

By the beginning of 2012, the mergers of insolvent banks had already begun in earnest, starting with the mergers of Ficombank, Viet Nam Tin Nghia Bank and Saigon Commercial Bank.

The other well known bank merger will be that of Habubank and Saigon Hanoi Bank. Habubank, which was heavily exposed to the defaulted debt of Vinashin, had an unsustainable amount of bad debts and was rescued by Saigon Hanoi Bank in a well-publicised merger. We participated in the merger by arbitraging the shares of both banks.

Other banks were bailed out by the private sector.

Gia Dinh Bank, was bailed out by VietCapital Securities in a deal involving selling half of its issued capital to the new investor and changing its name to VietCapital Bank.

This year, we also learned that Trust bank would be bailed out by private investors, effectively taking up to 84% of equity. Of the new shareholders, Thien Thanh Group alone would hold over 9% of the new entity.

Western Bank saw its major shareholder Kinhbac City Development withdraw their investment and PetroVietnam Finance Corporation stepping up to bail out the struggling bank by merging with it. It would seem that the central bank and the PetroVietnam Corporation will lend a helping hand in the merger.

It also seems increasingly likely that Dai A Bank and HD Bank will be going to merge soon, so are banks like Navibank, GP Bank.

Comments

In all, for the first phase of the bank reforms, I would say that the Vietnamese government managed the restructuring with much finesse and a minimum amount of state capital was expended.

I would say that the banking recapitalization was much better handled compared to the messy situation currently happening in Greece and Cyprus.

I give the government much credit to execute this smoothly (so far) and with the mergers happening, it now looks like the worst of the banking crisis is over. While much remains to be done, this successful implementation of the first phase of restructuring puts the country in a much firmer footing to carry out the next phase of restructuring planned for this year.

Phase II (Year 2013)

This year marks the start of the second phase of banking reform. In this Phase II, the government aims to:

  1. Revise and add regulations concerning the safety of bank operations.
  2. Ensure financial soundness of banks through NPL disposal and recapitalization.
  3. Restructure finance and lease companies.

Circular No. 02/2013/TT-NHNN

It would seem to me that the government was trying to address the first objective on tightening up their regulations on the safety of bank operations when they issued the Circular No. 02/2013/TT-NHNN dated 21 Jan 2013. This circular is supposed to:

  • Define more clearly what constitutes “Debt” in financial institutions. Specifically, (i) bond purchases purchased in the OTC market; (ii) credit trust; (iii) interbank deposits (excluding payment account deposits); and credit card issuance were all officially considered liabilities which require provisioning if impaired.
  • Define more clearly what constitutes “Bad Debt” in financial institutions. 5 categories of loans depending on their level of impairment was specified in detail, with both qualitative and quantitative criteria applied to classify these loans. Specifically, the Credit Information Centre (CIC) will be the agency to review debt classification and assign the final credit rating of the debt and the institutions what own these debt.
  • Improve risk management and transparency at banks. Lending to related parties will be limited and loans valued above 50 billion VND to related parties will need independent evaluation.
  • Notwithstanding this, interbank and government bond repo transactions will be excluded from this process unless instructed by the State Bank of Vietnam.
  • Resolution of Bad Debt. Specific procedural steps to resolve the bad debt were also described.

The key to this circular is in its implementation, as always. In isolation, this circular has some issues which may make its full implementation more difficult.

Specifically, the circular requires commercial banks to make such large provisions for bad debts that would easily wipe out any profit or even make large losses for some weaker banks. This would make it quite unpalatable to most of the bank shareholders.

I believe that is where the Vietnam Asset Management Corporation (VAMC) comes in. VAMC is a new government financial institution modelled after the Resolution Trust Corporation (RTC) which was created to resolve bad debts. RTC was created after the Savings and Loan Crisis (S&L) in the USA. The S&L was a crisis which resulted primarily from unsound real estate lending — a situation not unlike what Vietnam finds itself in now.

Preliminary information suggests that VAMC would accept a bank’s debts at book value. This may incentivise banks to offload their bad debts to VAMC (especially those they have not provisioned for). Hence the key to Circular No. 2 will rest on the success of VAMC.

In the next post, I would discuss more on VAMC.

 
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Posted by on April 6, 2013 in News, Vietnam

 

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