The Downside of OCB's Investment Strategy
According to OCB's financial report for the first quarter of 2024, the bank's total outstanding credit debt reached VND 151,805 billion, marking a 4.37% increase. Within this, customer loans accounted for VND 148,649 billion (a 4.46% increase), and outstanding corporate bond debt was VND 3,155 billion, maintaining the same level as at the end of 2023. In contrast, customer deposits and valuable papers saw a slight decrease of 2.83%, amounting to VND 159,123 billion.
In the same period, OCB's net interest margin (NIM) decreased from 3.51% in the previous quarter to 3.4%. This decline was attributed to a drop in the profitability ratio by 94.6 percentage points to 7.66%, and a reduction in capital costs by 95.1 percentage points to 4.87%. Despite this decrease, OCB's business performance in the first quarter was impressive, with total operating income reaching VND 2,287 billion (up 9.4%) and pre-tax profit rising to VND 1,214 billion (up 23.5%).
However, these positive figures are overshadowed by the increasing bad debt ratio, which climbed from 2.75% in the fourth quarter of 2023 to 2.87%. The debt ratio of group 2 loans also increased from 2.08% to 2.62%. Analysts attribute this rise in bad debt to OCB's focus on higher-risk customer segments compared to the industry average.
For instance, since the fourth quarter of 2023, OCB has introduced specialized products targeting specific customer groups, offering higher-than-average loan interest rates. These products include financing for road construction and repairs, international money transfers, online foreign currency purchases for businesses, and super-fast credit for small and medium-sized enterprises (SMEs).
In the retail segment, OCB's target market includes mass, young, and basic income customers. While this focus could be beneficial in favorable economic conditions, the current sluggish economy means that the incomes of these customer groups are slow to recover. This situation poses ongoing risks for OCB in terms of promoting credit growth and managing bad debts.
Historical Challenges with Bad Debt
OCB’s bad debt issues are not new. In 2023, the bank’s pre-tax profit after audit was VND 4,139 billion, a significant decrease of VND 1,088 billion from the pre-audit figures. The difference was primarily due to additional provision costs set aside to strengthen the credit risk reserve fund.
OCB had to adjust several income items collected from customers in 2023, deferring them to the first quarter of 2024. Additionally, the bank reclassified a substantial portion of "pending foreclosed assets" to "other pending debts with foreclosed assets, debt assignment," which led to a 44.4% increase in credit risk provision costs, totaling over VND 1,627 billion.
A representative from OCB explained that this adjustment was necessary due to inconsistencies and lack of synchronization between local authorities and relevant agencies during the registration and update of changes on land use rights and assets attached to land. This issue arose when implementing the collateral replacement method for debt repayment obligations, which is legally permissible. Consequently, the accounting of related loans faced conflicting views, despite the customer's debt obligations being deemed settled once collateral handover was completed. To address these discrepancies and adhere to prudent operational principles, OCB proactively set up additional provisions for these debts.
This situation resulted in OCB experiencing its second consecutive year of declining profits in 2023, achieving only 69% of its annual plan. The significant drop in profits, amounting to thousands of billions of dong, caused considerable frustration among shareholders, leading to numerous questions during OCB's 2024 Annual General Meeting.
In 2024, OCB aims for a pre-tax profit of VND 6,885 billion, a 66% increase compared to 2023 results. Addressing shareholder concerns, OCB General Director Nguyễn Đình Tùng acknowledged the responsibility for the declining profits in 2023 and indicated that changes within the Board of Directors would be necessary to steer the bank towards a new direction.
True to his word, following the 2024 Annual General Meeting, OCB saw the resignation of the General Director, along with a series of other personnel changes, including the dismissal of Deputy General Director Bùi Thành Trung and the resignation of Chief Financial Officer Nguyễn Xuân Cường.
These changes come in response to the bank's ongoing challenges with bad debt and the need to restore investor confidence. The new leadership team will be tasked with navigating the complexities of a recovering economy and ensuring that the bank’s strategies align with sustainable growth.
Several factors contribute to the bad debt situation at OCB, some of which are industry-wide, while others are specific to the bank’s strategic choices.
OCB’s strategy of focusing on niche, high-risk customer segments has undeniably contributed to its rising bad debt levels. While the bank has demonstrated resilience and adaptability in its business operations, the challenges posed by bad debt remain significant. As OCB navigates through these hurdles, the effectiveness of its strategic adjustments and management changes will be critical in determining its future performance and stability. By diversifying its portfolio, enhancing risk management, and fostering transparent communication, OCB can work towards a more balanced and sustainable growth path.
