An Alarming Rise in Bad Debt
The bad debt situation in the first half of 2024 has not unfolded as optimistically as many banks had anticipated at the beginning of the year. Out of the 29 banks that have released their financial reports thus far, only two—Saigon-Hanoi Bank (SHB) and PGBank—have managed to reduce their bad debt balances. The remaining 27 banks have recorded increases in bad debt, with the total bad debt balance across these institutions reaching VND 271,461 billion as of June 30, 2024. This represents a staggering increase of VND 46,719 billion, or 20.8%, compared to the end of 2023.
Among state-owned commercial banks, the bad debt ratio has risen noticeably. Vietcombank’s bad debt ratio to total outstanding loans climbed from 1.05% at the start of the year to 1.2% by the end of the second quarter of 2024. Notably, the proportion of debt classified as Group 5, which carries the highest risk of loss, surged nearly 28%, reaching VND 10,017 billion. Substandard (Group 3) and doubtful debts (Group 4) also saw significant increases of 75% and 17.4%, respectively.
Similarly, VietinBank’s total bad debt soared to VND 24,646 billion by the end of the second quarter, a 48% rise from VND 16,608 billion at the beginning of the year. This increase pushed the bank’s bad debt ratio from 1.13% to 1.57%. BIDV, another major state-owned bank, experienced a 28% increase in bad debt, bringing the total to VND 28,687 billion and raising the bad debt ratio from 1.26% to 1.52%.
Private commercial banks are not immune to this trend, with nine banks now reporting bad debt ratios exceeding 3%. BaoVietBank’s loan quality has continued to deteriorate, with bad debt rising 31% to VND 2,165 billion, and the bad debt ratio climbing from 4% to 4.79%. Meanwhile, VIB’s bad debt reached VND 10,201 billion, pushing its ratio to 3.67%, with Group 5 debt alone increasing by 91.3% compared to the end of 2023. Other banks, such as ABBank, OCB, and MSB, have also seen their bad debt ratios jump past the 3% threshold in just six months.
An alarming trend is the sharp increase in Group 5 debt across various banks. According to a recent report by Rong Viet Securities Company (VDSC), the bad debt situation remains a significant negative factor for the banking industry. The State Bank of Vietnam (SBV) estimates that as of May 2024, the on-balance-sheet bad debt ratio stood at 4.94%, up from 4.55% at the end of 2023. When including potential and restructured debts, the overall bad debt ratio remains high at 6.9%.
Moreover, restructured debts and debt group retention under Circular 06/2024/TT-NHNN and Circular 02/2023/TT-NHNN have increased sharply, with the total value of principal and interest rising by 25.5% compared to the end of 2023, reaching VND 230,400 billion. The number of customers benefiting from debt restructuring and group retention also surged, from 188,000 to 282,000 by the end of June 2024.
The Struggle to Manage Bad Debt
In the first six months of 2024, the entire banking system managed to handle VND 96,700 billion worth of bad debt, marking a 28.9% increase over the same period last year. A significant portion of this, 48.9%, was managed through risk provisions. The escalating bad debt situation has forced many banks to bolster their provisions to mitigate risks.
For instance, VietinBank increased its credit risk provisions by 21%, totaling VND 7,817 billion in the first half of the year. This substantial provisioning limited the bank’s pre-tax profit to VND 6,750 billion, a modest 3% increase compared to the same period last year. Similarly, BIDV set aside VND 5,358 billion for credit risk provisions, a 36% year-on-year increase, while Techcombank’s provisioning costs rose sharply by 112.8% to VND 2,855 billion by the end of June.
Standing Deputy Governor of the SBV, Đào Minh Tú, acknowledged the severity of the bad debt issue, expressing deep concern. He emphasized that the challenges faced by businesses post-pandemic, coupled with ongoing economic difficulties, have led to an increase in bad debt. While some loans have turned bad due to banks’ inadequate risk assessment, the primary cause is the broader economic struggles that have eroded customers' ability to repay.
Deputy Governor Tú underscored that while the responsibility for handling bad debt primarily lies with the lending banks, borrowers must also fulfill their obligations, as the loans are sourced from public funds. The SBV plans to implement more proactive measures to manage bad debt, aiming to maintain credit quality and ensure that bad debt remains under control.
Despite these efforts, experts warn that bad debt is likely to remain elevated in the coming quarters. The real estate market, a significant driver of bad debt, continues to face unresolved challenges, which could cause bad debt to peak in the third quarter or persist into the fourth quarter.
Additionally, the pace of bad debt resolution may slow due to legal complexities. The revised Law on Credit Institutions no longer inherits the provisions of Resolution 42, which granted banks the right to seize collateral from overdue borrowers. This legal bottleneck could hinder banks' ability to swiftly resolve bad debt, further complicating the situation.
Vietnam’s banking sector is grappling with an escalating bad debt crisis, exacerbated by broader economic difficulties and legal challenges. While banks have managed to maintain some level of profitability, the rising tide of bad debt threatens to undermine the stability of the industry. As the year progresses, the sector will need to navigate these challenges carefully, balancing the need for profitability with the imperative to manage and reduce bad debt. The coming quarters will be crucial in determining whether the sector can regain its footing or whether bad debt will continue to weigh it down.
