Vietnam’s handling of its banking system’s non-performing loans has not followed any textbook plan of action and is unlikely to improve the credit-risk capabilities of its banks. But in terms of helping the economy to recover its mojo, it might just work.
Foreign portfolio investment into Vietnam has picked up recently, with $416 million of inflows for the year to August 15, according to Dragon Capital. That’s a lot for a country with a stock-market capitalisation of about $55 billion, and an increase from 2013’s net foreign buy of $326 million.
To be sure, investors have reason to be concerned about the country’s non-performing loans. According to the State Bank of Vietnam, NPLs stood at 4.8% of total loans as of the end of last year but on some estimates is at least three times higher.
“We are not yet investing into financial institutions because NPLs and the knock-on effect on credit growth remain a problem,” Louis Nguyen, CIO at Saigon Asset Management, told FinanceAsia.
Ensuring banks up their lending is important if Vietnam’s economy is to generate the kind of growth needed to keep a booming young population in work; the official credit growth rate target is 12% but, according to bankers, is currently less than 5%.
But with property prices edging higher, perhaps things are beginning to look up in Vietnam.
The country’s NPLs are a hangover from a leveraged property boom that went bust in 2011, sending inflation out of control.
The government and new central bank governor, Nguyen Van Binh, responded by throttling credit. Domestic private-sector growth has been slow to recover; only a flood of Korean and Japanese manufacturing investment has kept Vietnam’s economy growing at a 5% annual clip.
“The banking sector is a drag on growth,” said Sanjay Kalra, the IMF’s Hanoi-based representative, who like many others believes the number of NPLs in the Vietnamese banking system is underreported.
The central bank in 2013 established the Vietnam Asset Management Company to encourage banks to sell their bad loans to the VAMC and recognise those losses on their balance sheets.
The plan is for the VAMC to buy the loans with its own zero-coupon bonds minus the value of the collateral against the loan, before creating a secondary market to trade the NPLs.
The VAMC announced that it bought $2.5 billion of bad debt and that it plans to buy another $5 billion by the end of this year.
Some financial executives on the ground dispute this.
Saigon Securities, for example, reckons only $500,000 worth of loans have actually been transferred to VAMC.
A tangeled NPL web
Nguyen Duc Huy, head of institutional sales at Saigon Securities, told FinanceAsia that the VAMC lacks the firepower to solve what is a highly complex and multi-layered NPL problem.
State-owned banks, which are at the heart of Vietnam’s NPL problem, operate under opaque conditions and their loans may represent cross-shareholdings. Some loans to state-owned enterprises may have been used to repay loans to other entities. So untangling how many actors are to be paid back by what has become difficult to follow.
Then there is the collateral that backstops the NPLs, for which there is no public data. Most of the collateral is widely believed to comprise real estate. According to Fiachra Mac Cana, head of research at HSC Securities in Ho Chi Minh City, 40% to 50% of typical bank loan books are collateralised by land (70% in the case of the VAMC’s portfolio). But what this land consists of – commercial buildings, residences, half-built buildings, agricultural land – is unknown.
Mac Cana suspects that the most difficult collateral is agricultural land that SOEs bought at high prices in the mistaken belief it would be re-zoned for manufacturing.
Some of this land is also for projects of a social nature such as schools and hospitals, which SOEs may have been compelled to finance and which would be hard to sell.
Most of the land is in and around Hanoi, Chris Freund, a partner at private equity firm Mekong Capital, told FinanceAsia. The city is awash with abandoned real-estate projects, he said, that were the result of politically directed lending in which corruption or a sense of obligation within Hanoi’s patronage machine trumped any notion of credit control.
The issue was thrown into stark relief on July 28 when police arrested three senior officials at the Vietnam Bank for Construction, including its chairman, Pham Cong Danh. They are accused of using a corporate client’s savings account to deposit $311 million at other financial institutions. Some investors in Vietnam speculate that those deposits were used as collateral to borrow from other banks to finance real estate investments.
“This is why banks don’t want to report NPLs,” said one local investor who declined to be named.
“There’s a lot under the carpet and if it goes public, you’ll go to jail or be executed.” (The government has stepped up lethal injection in bribery cases, as part of an anti-corruption campaign: last November, a court sentenced to death Vu Quoc Hao, the former CFO of state-owned Vietnam Agribank, for taking part in embezzling $25 million by falsifying financial contracts.)
Finally, there is Vietnam’s tricky legal framework. With no foreclosure law, there’s little legal recourse for anyone holding the loans to get their hands on the underlying collateral. In addition, Vietnamese law forbids foreigners from owning real estate. So if the collateral is land, then foreigners can’t buy the loans.
Better than it sounds
Despite all of these problems, however, Vietnam’s bad-loan problem may eventually solve itself. Perhaps the VAMC is there simply to hold these assets until the real estate market recovers enough to bolster the value of the collateral; then perhaps the original borrowers will end up buying it back – on the cheap.
“NPLs are hard to solve but Vietnam can inflate its way out of this,” said VinaCapital’s chief investment officer Andy Ho.
Some parts of the real estate market, such as affordable housing, are already seeing a recovery in prices. According to investment bankers, global private-equity funds are also sniffing around, although the government will be wary of selling assets cheaply to outsiders, who in any case are currently barred from owning land in Vietnam.
Several people compared the VAMC to quantitative easing, the ultra-loose monetary policy being pursued by the US Federal Reserve. It is a form of capital injection into the banks to enable them to write down their assets to the point that other people are willing to acquire them.
The government has also tried to boost VAMC’s capabilities. The prime minister, Nguyen Tan Dung, pushed through rules in early July giving banks more power to seize assets. That should help support the creation of a secondary market by making it easier for banks to get their hands on deadbeat SOEs’ land assets, said Saigon Securities’ Huy.
That is a short-term fix to address the lack of a proper bankruptcy law – but such a law is finally under discussion at the top levels of government, now that its utility is so obvious.
Overstated
In some respects, the extent of unofficial NPLs may also be overstated, or at least it is contained: just two banks account for a majority of bank NPLs, the Bank for Investment and Development of Vietnam (BIVD) and Agribank, the Vietnam Bank for Agriculture and Rural Development.
“BIVD and Agribank face many years of NPL problems but the other banks should be able to write off most of theirs in the next two or three years,” said Mac Cana.
An improved real-estate market won’t address all of the banking sector’s shortcomings, particularly for the two banks with the most severe NPL problem, but it will enable plenty of other lenders to boost credit and spur growth.
Indeed, the pendulum has probably already swung. What keeps Vietnam’s growth too ho-hum is the lack of demand to borrow by private companies and consumers. Banks are willing to lend except to certain problematic SOEs. Frauds such as that alleged at the Construction Bank impair confidence, but only foreigners and some companies have the luxury of depositing funds abroad.
Pham Hong Hai, head of global banking and markets at HSBC in Ho Chi Minh City, agreed that weak credit growth for the past two years has been more about poor consumer confidence rather than about the reluctance of banks to extend credit.
He said this is more about sentiment than a real problem. Vietnamese property and equity prices are still down from their 2007 highs but wages have grown steadily on the back of foreign direct investment. “People want to see government action before they borrow,” he said, such as privatisation, bank reform and legal reform. In turn that should lead to consolidation among banks.
That is potentially good news for investors – enough, at least, to persuade portfolio managers at local fund houses such as Dragon Capital and PXP Asset Management, to begin buying shares in some local banks in anticipation of higher net interest margins next year.
And it is good news for Vietnam also, where GDP growth this year is likely to hit 5.5%, which isn’t bad but isn’t enough. The country needs to see GDP growth rates closer to 7%, and the most likely way to achieve that is via a healthy rate of credit expansion.
