Cutting Bad Debts to Raise Profit

In spite of pressures on attaining profit not lower than 2009, many banks are developing stably and safely. However, rates of returns may be not high when the growth of authorised share capital is taken into account. Many banks have to control nonperforming loans to raise the rate of returns.

With its high growth rate, An Binh Commercial Joint Stock Bank (ABBank) made a profit of VND204.44 billion in the year to end-April, up 180 percent over the same period of 2009. Other financial indicators are also impressive. Specifically, its total assets valued VND27,318 billion, up 173 percent year on year; outstanding loans reached VND15,523 billion, up 196 percent; and deposits totalled VND17,339 billion, up 195 percent. Mr. Nguyen Hung Manh, General Director of ABBANK, reaffirmed that his bank would strive to maintain growth rate at 30-40 percent in 2010 and to ensure two important targets: Fast and effective growth and safety.

 

This year, the lender plans to increase its service revenues to 25 percent on the total turnover. It will promote non-credit services such as international settlement, bank transfer, cash management, financial advisory, electricity bill collection, internet banking, dividend e-payment, and many other services.

Orient Commercial Joint Stock Bank (OCB) has announced to make a pre-tax profit of VND112 billion in the first four months of 2010, up 116 percent over the same period of 2009. Its total assets valued VND11,636 billion, outstanding loans totalled 9,135 billion, equal to 69 percent of the full-year plan, total deposits reached VND8,765 billion, or 67 percent of the full-year target. The lender, with a chartered capital of VND2,000 billion, plans to expand its network to 70 transaction points nationwide.

 

In 2010, the bank hopes to bag VND400 billion of profit, hike the registered capital to at least VND3,100 billion and allow foreign strategic partner, BNP Paribas, to increase its holding 15 percent to 20 percent of the stake at the approval of the Vietnamese government. Credit growth is expected at 30 percent, deposit growth is forecast at 40 percent and total shareholder return is predicted to reach 15 percent, with at least 10 percent coming from dividends.

 

Mr Nguyen Phuoc Thanh, General Director of the Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), estimated the profit before tax of the largest listed bank reached VND2,000 billion in the first four months of 2010. The Hanoi-based lender expects to earn VND4,500 billion of profit before tax in 2010, compared with roughly VND5,000 billion in 2009. The drop in profit in 2019 is attributed to a downsize of credit activities, which are forecast to give up VND1,000 billion, compared with the previous year.

 

Vietnam Export Import Commercial Joint Stock Bank (Eximbank) announced a pre-tax profit of over VND520 billion in the first four months of 2010. Western Bank reported its before-tax profit at nearly VND20.4 billion in the January-April period. The lender expects at VND240 billion of profit before tax in 2010, compared with just VND160 billion in 2009. Profit in the first four months mainly came from credit activities.

According to Vietcombank, the banking sector will encounter many opportunities and challenges in 2010.

 

In fact, although the difference between borrowing and lending rates have been gradually trimmed down as banks want to attract more borrowers, Meanwhile, in the current context, banks mainly take revenues and profit from credit activities. Thus, banks expect credit growth will be better in the following months.

 

Mr Tran Xuan Huy, General Director of Sacombank, said: "Banks’ profits are expected to jump in the subsequent quarters as the credit demand of companies may surge. However, as the good rise in credit operations is unlikely, Sacombank will promote added-value services to increase revenues."

 

Indeed, for small and medium-scale banks, revenues are mainly sourced from lending activities, not services, because their services are weakly competitive. In reality, the margin of lending and borrowing continues to narrow because banks have to slash lending rates attract customers and to stimulate credit growth.

 

Importantly, many banks take provision funds for nonperforming loans and reimbursement of provisions set aside in 2009 to raise the profitability ratio. Nevertheless, this is not a simple task.

 

For example, Vietcombank, or VCB, targets at a credit growth of 20-22 percent in 2010. But, according to Mr Thanh, despite outstanding loan growth is maintained at lower levels than previous years, if the credit quality is not controlled and bad debts are not reduced, profit targets may be missed because they have to set aside more for credit risks. In 2010, VCB estimated to put aside VND1,500 billion for credit risk provisions the provisions for credit risks amounted to VND350 billion in the first quarter.

 

Hence, according to Mr Thanh, Vietcombank will have to control credit quality as well as nonperforming loans to avoid adding more money to credit risk provisions. Then, the lender expects at a profit of VND4,500 billion in 2010.

 

In 2010, VCB will start applying international standards to categorise nonperforming loans. However, according to Mr Thanh, this will lead to higher rates of provisions, which shrink profits. In 2009, its bad debt ratio stood at 2.47 percent and the lender set aside VND800 billion for credit risks.

 

This year, Eximbank still targeted at a credit growth of 50 percent, higher than the previous year, to achieve VND58 trillion at the end of the year. Nonetheless, Mr Truong Van Phuoc, General Director of Eximbank, said: The bank will continue with tight controlling policies over credit quality to minimise nonperforming loans and trim provisions for credit risks. In 2009, Eximbank allocated VND136 billions for credit risk provisions, lower than the initial target of VND378 billion.

 

Sacombank reported its NPL ratio was 0.28 percent higher than the target, leading higher provisions which will deteriorate profit in 2009 as well as 2010. The bank is restructuring projects and services to serve more clients. At the same time, the lender gives supports for key economic sectors and funds exporters and importers. The nonperforming loan ratio in 2010 is controlled at 2 percent.

 

Orient Commercial Joint Stock Bank (OCB) reportedly reviewed loans and reduced bad debt ratio to 2.64 percent from more than 3 percent in 2009. Hence, provisions for credit risks at OCB were only VND100 billion in 2009. With credit growth targeted at 30 percent or higher than in 2010, OCB will double its effort to control bad debt ratio to the lowest.

 

According to many experts, banks are now tightening control over credit quality to minimise risks and provisions for bad debt. In fact, provisions in two years have sunk the rate of returns and banks expect to reimburse their provisions when the nonperforming loan ratio drops. Under current regulations, the percentage of provisions for general credit risks is 0.75 percent.