Vietnamese banks' problem loan ratio to fall to 4.8% by 2020 as lenders wipe slate clean

Most banks are expected to fully write off bonds from VAMC.

The systemwide asset-weighted problem loan ratio of Vietnamese banks is set to fall further to around 4.8% from 5.1% in the previous year as lenders actively resolve their bad debt problems, according to a report from Moody's. 

After peaking at 9.8%, problem loan ratios have been on a steady decline since 2015 as banks actively recover problem assets and step up the pace of write-offs, effectively boosting credit expansion.  

Also read: Vietnamese banks' 2018 pre-tax profit surges 40% as bad debt crackdown pays off

"We expect most of the rated banks will completely write off Vietnam Asset Management Company (VAMC) bonds over the next 12-18 months amidst a government push to clean up balance sheets," Rebecca Tan, analyst at Moody's, said in a report. As of end-2018, five out of 18 rated banks in Vietnam have fully resolved their VAMC bonds.  

Also read: Vietnam hammers hard on bad loans as banks clear $6.42b in soured assets in 2018

Since 2013, banks received zero-coupon bonds from VAMC in exchange for non-performing loans (NPLs) which they have to write off or recover. However, the pace of bond write-offs is likely to be slower, according to Moody's, as the bulk of stressed assets are concentrated amongst financially weaker banks like Sacombank. 

"The formation of new NPLs will be steady. Banks' loan portfolios have become more granular because new loans are mainly in the retail and SME segments, and their performance have been stable, thanks to healthy macroeconomic conditions," added Tan.

The country's banks have been actively setting up dedicated consumer finance units as they jostle for greater market share of a market which could hit $44b in value by 2020. In 2018, it was reported that Orient Commercial Bank is mulling the establishment of a wholly-owned subsidiary with $22m (VND500b) charter capital or acquire at least 70% in an existing finance company and Southeast Asia Commercial Bank earlier acquired Posts and Telecommunications Finance Company for nearly $31.3m (VND710b).

The consumer finance market is expected to maintain a healthy growth trajectory in Vietnam as consumer lending continues to climb after rising 65% in 2017 from 50.2% in 2016.

Problem asset coverage, as measured by credit provisions as a proportion of problem assets, is also expected to improve as volumes of problem assets decrease and stronger profitability enables banks to boost provisions.