However, the outcome of this divestment deal is contingent on several factors, including the handling of bad debts.
Past success in managing bad debts
In a recently released strategic report, DSC Securities Company revealed that Sacombank intends to divest 32.5% of its capital used as collateral for VAMC-held debt. This offering is projected to occur in the fourth quarter, with a minimum asking price ranging from VND 32,000 to 34,000 per share. DSC's assessment of the offering price closely aligns with the forecast made by KB Securities Vietnam (KBSV) at the end of 2022. KBSV proposed a selling price within the range of VND 32,000 to 34,000 per share in order to address all outstanding loans at VAMC.
It can be argued that Sacombank's sale of capital at a price exceeding the market value of STB shares traded on the HoSE has contributed to the recent positive performance of this stock. Notably, the STB stock price has displayed numerous impressive sessions, including August 9, when STB stood out as one of the few banking stocks that maintained gains during a market decline. However, DSC suggests that Sacombank might not be able to divest in 2023 due to an unfavorable macroeconomic environment. Presently, weak credit demand and elevated bad debt levels are posing challenges for lending activities, a shared predicament within the banking sector. Furthermore, Sacombank continues to grapple with the issue of bad debt.
In 2015, Sacombank's balance sheet revealed a significant rise in bad debt resulting from the merger with Southern Bank. This merger caused the bad debt balance to surge sevenfold compared to the same period in 2014, reaching VND 10,778 billion. Additionally, approximately VND 34,000 billion of debt required resolution (categorized as group 1). At that time, Sacombank needed to sell around VND 43,000 billion to VAMC and retain a portion of bad debt for resolution. By the second quarter, Sacombank had nearly entirely resolved the outstanding bad debt stemming from the Southern Bank merger.
Indeed, Sacombank has achieved commendable progress in addressing bad debts as part of its restructuring initiative. By the end of 2021, bad debt under the scheme had significantly decreased to around VND 1,689 billion (group 5), and the outstanding VAMC bond debt was approximately VND 17,000 billion, eventually reducing to only VND 4,400 billion by the end of the second quarter this year. In line with the plan, Sacombank is set to sell Phong Phu Industrial Park (HCMC) for VND 7,000 billion to offset this debt. In the latest update from Sacombank, the bank anticipates full resolution of the VND 4,400 billion bad debt in 2023.
Resurfacing bad debt concerns
Speaking at the recent 2023 Annual General Meeting of Shareholders, Mr. Nguyễn Văn Dũng, Deputy Director of the State Bank of Vietnam branch, noted: "The 2016-2025 restructuring project of Sacombank has essentially achieved its set objectives, resolving key issues such as outstanding assets or accrued interest. Currently, only the auction of Mr. Trầm Bê's and related parties' shares remains. Upon completing the project ahead of schedule, the bank will have a basis to enhance its financial capacity and distribute dividends."
At the same AGM, Mr. Trần Công Minh, Chairman of the Board of Directors, stated: "We anticipate 2023 to mark the conclusion of Sacombank's restructuring efforts." Moreover, with confidence in their ability to manage bad debts, Ms. Nguyễn Đức Thạch Diễm, General Director, affirmed that Sacombank will relieve its "debt burden" to VAMC upon fully provisioning the bond value. Furthermore, the bank is in the process of auctioning off debt associated with Phong Phu Industrial Park, which encompasses all outstanding obligations and assets. Nonetheless, Sacombank's Board of Directors has resolved not to sell below cost. While current interested investors are being considered, the bank anticipates resolving this matter in 2023.
Nevertheless, the concern arises from the fact that despite the substantial resolution of VAMC bonds, Sacombank's bad debt is on the rise. By the end of the second quarter, bad loans at Sacombank reached VND 8,225 billion, marking a sudden 91% increase compared to the beginning of 2023. Within this figure, substandard debt (group 3) surged by 5.2 times to VND 2,394 billion, while doubtful debt (group 4) experienced a significant 158% surge to VND 1,893 billion. Most notably, potentially nonperforming debt (group 5) constitutes the majority, totaling VND 3,938 billion (up 30%), causing the bad debt-to-loan balance ratio to increase from 0.98% to 1.79%. Accompanying the rise in bad debt, the ratio of bad assets marginally increased from 2.7% at the start of the year to 2.9% by the close of the second quarter.
Nonetheless, analysts remain optimistic about the bank's near-future business results. Under effective credit management, Sacombank's profits could potentially surge in 2024 for two reasons: the cessation of VAMC bond provisioning and an extraordinary profit from the higher-than-expected sale of Phong Phu Industrial Park. However, these prospects hinge on the resolution of bad debt issues. According to DSC, the sharp increase in Sacombank's bad debt during the second quarter coincided with the issuance of Circular 02, which permitted credit extensions. With the expiration of this debt relaxation circular in mid-2024, an inevitable increase in STB's bad debt risk is anticipated. Therefore, the realization of a profit boom relies heavily on Sacombank's rigorous credit quality management.
