Vietnam has given banks new powers to deal with bad loans in a move seen as a precursor to a recapitalisation of the sector. Resolution 42, introduced on August 15, makes it easier for lenders to seize assets to cover unpaid debts - an option that state-run bad debt manager Vietnam Asset Management (VAMC) immediately grasped last month to seize its first collateral under the new code.
"Changes to the Vietnam government debt resolution regime may lead to quicker resolution of bad loans," said Wee Siang Ng, senior director of financial institutions at Fitch. "Previously in Vietnam a debtor had to give consent for a lender to foreclose the collateralised asset."
Vietnamese banks are under growing pressure to deal with their non-performing loans ahead of a long-delayed transition to tougher capital adequacy requirements. The country has yet to adopt the Basel II regime. "Vietnamese banks' capital buffers are low and Basel II implementation has been pushed to January 2020 after a couple of deferments," said Ng. "It's logical to assume the banks are not ready for it."
Moody's estimated as of the end of 2016 that the country's banking system needed to raise US$9.5bn of capital for banks to restore their Basel I Tier 1 ratios to 8% after accounting for the true scale of bad loans. The rating agency warned that T1 ratios could drop to 6.1% as at the end of this year. Officially, the average NPL ratio is less than 3%, but official figures mask the true extent of the problem.
The 3% threshold is the central bank's target, but one of the ways it has tried to fulfill it had very little impact in improving asset quality. A scheme launched in July 2013 allowed banks with NPL ratios of over 3% to transfer some bad loans to the state bad bank in exchange for VAMC bonds. Those bad loans disappeared from banks' balance sheets, but they still retained responsibility for them.
VAMC bonds do not pay interest, but can be placed with the central bank in a repo transaction of 70% of the value of the paper to provide liquidity at 200bp below the central bank refinancing rate. The VAMC bonds amortise over five to 10 years.
If the VAMC manages to raise any cash from the assets, the originating bank will receive the proceeds, but progress has been slow so far. Moody's wrote in August that the VAMC's cumulative recovery rate was around 20%. The new resolution regime is expected to improve that figure. In addition, some banks are now buying back NPLs from VAMC as part of efforts to clean up their bad loans more quickly and, perhaps, in the hope of achieving a better recovery rate, according to local media reports.
A brighter outlook for the sector has already caught the attention of equity investors. The VN All Shares Index is up 25% year to date, according to Thomson Reuters data. Financials account for about a fifth of the market's capitalisation, according to stock exchange figures.
"International investors are starting to realise that the Vietnamese market is turning. So, people are happy to take equity stakes in banks," said a banker. "Sovereign wealth funds and private-equity investors are trying to get into the good banks."
Rather than issue expensive equity or dilute existing shareholders, however, bankers expect some institutions to turn to the offshore bond markets to lift their capital ratios. "In the domestic market, they are not able to raise the kind of amounts they need, and it's too expensive to raise equity. So, the dollar market may help. We will likely see some Tier 2 issuance in dollars," the banker said.
State-owned banks, such as Joint Stock Commercial Bank for Foreign Trade of Vietnam (VietcomBank) and Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank), are seen as more likely than private sector lenders to receive state support, with the three major rating agencies generally seeing the biggest Vietnamese banks as Single B credits.
Some banks have sold T2 bonds onshore, but the dong market is unlikely to be deep enough for all of them to get the capital they need. A subordinated rating of low Single B or even Triple C would narrow the potential investor base in the offshore markets, although Vietnamese investors that do not receive interest on dollars kept onshore may participate.
International investors have been keen to take Vietnam risk, but the sovereign's non-deal roadshow in March 2016 did not lead to an issuance and, although bankers talked to potential issuers like JSC Bank for Investment and Development of Vietnam about dollar bonds, nothing transpired. VietinBank sold US$250m of five-year senior bonds in 2012, the last public offshore deal from a Vietnamese bank.
Vietnam's 2024 US dollar sovereign bonds have tightened more than 100bp this year and currently yield just 3.7%, according to Tradeweb. "None of them have offshore senior bonds and international investors are confused about how to price the risk," said a banker. He estimated that good quality banks might need to pay yields of 6%-7% for five-year offshore senior bonds and perhaps north of 8%-9% for T2 paper, which could deter them from issuing.
The opportunity cost from failing to keep pace with high credit growth, however, could be far higher. "The banks' capital generation capacity is weak, because of the system's modest net interest margins, low fee income contribution, and still substantial provision charges," said Moody's analyst Daphne Cheng in a note in May. "Under these circumstances, it will take several years to replenish the system's capital shortfall through internal capital generation."