Most banks saw their first-quarter profits soar year-on-year, but a more thorough analysis suggests those rosy figures may not be so positive. Notably, bank profits were ascribable mainly from surging credit liabilities, which come with huge risks.

Credit expansion fueled profit

The eight listed banks clocked up revenue and profit growth of more than 80% and almost 20% respectively. Eximbank (EIB) led the race with revenue growth of 196%, followed by Saigon-Hanoi Bank (SHB) with 110%. The figures for Vietcombank (VCB) and Vietinbank (CTG) were 72% and 98% respectively.

This trend was attributable chiefly to rapid credit expansion in the first quarter and sky-high interest rates. EIB and SHB, which boasted the sharpest revenue growth, also posted the most significant loan expansion.

With the exception of CTG, which suffered from a 12% fall in after-tax profit owing to a bigger hedge against credit risks, the remaining listed banks all reaped robust profit growth.

EIB’s first-quarter post-tax profit doubled year-on-year to reach VND640 billion, thanks primarily to credit and service activities. Its forex bank, however, was in the red.

ACB fared well, too, with a post-tax profit growth rate of 45% as its loans ballooned by 56%. Just like EIB, ACB incurred a loss in forex activities (-VND94.6 billion) in the first quarter.

Behind big profit

It must be stressed that bank efficacy hinges not only on profit and revenue, but also on some other factors.
The first-quarter net interest margin (NIM – the difference between interest income and interest paid to lenders relative to interest-earning assets) rose briskly year-on-year for most banks (0.94% against 0.74% in the case of listed banks), reflecting how the gap between deposit and lending rates increased to compensate for higher economic risks. This indicates enterprises engaged more in credit activities.

Meanwhile, the first-quarter returns on assets (ROA) of the eight listed banks hit 0.33%, down from 0.38% in the same period last year. Meanwhile, returns on equity (ROE) were merely 4.58% (against 4.81% in the first quarter of 2010). Only ACB and EIB had a higher ROE year-on-year in the first three months.

In short, higher bank profits arose from credit expansion, but efficiency dropped in the sector as ROE in the first quarter of 2011 trailed behind the average figure for 2010 and was comparable only to that of listed firms. In fact, listed banks’ ROE paled substantially in comparison with current lending interest rates.

Challenges ahead

Thus seen, banks’ operations were not so efficient in the first quarter. In fact, even the enticing profits seen in the first three months may not be sustainable for several reasons.

• Restricted credit expansion: The State Bank of Vietnam (SBV) has capped credit growth in 2011 at 20% for all banks. Statistics show that the first-quarter figure for listed banks was 5.75%, leaving little room for expansion in subsequent months. Consequently, profit prospects in the remaining quarters can be quite limited. SBV’s decision to hike discount rates considerably also makes it harder to harvest profit from government bond trading.

• Debt restructuring: SBV restricts the share of non-production loans at 22% in late June and 16% at the end of 2011. In early May, about 24 banks overshot the 22% threshold (sometimes by a wide margin of 40%). This must change soon and, as a result, will adversely affect some banks.

By banning gold mobilization and lending since May 1, 2011, SBV has also pushed several banks with a significant share of gold-based credit into trouble.

• Bad debt risk: Bank buffers against credit risks in the first quarter jumped from 17.57%, far more drastically than loans did. Notably, CTG’s buffer increased by over 50%; the figures for ACB and STB were more than 9%.

Fitch Ratings says that the share of bad debt in Vietnam’s banking system was a staggering 13%, much higher than Vietnam’s official statistics, due to different criteria for bad debt identification. Recently, the Economic Intelligence Unit rated Vietnam’s banking system CCC (stable). However, the risk rating kept inching up, from 66 in September 2010 to 69 in March 2011, equivalent to that in early 2009.

The macroeconomic climate in 2011 bears strong resemblance to that of 2008, when exorbitant interest rates and sluggish growth pushed many enterprises to the edge of bankruptcy. Besides, as the stock and realty markets plummet, credit quality in these two sectors will be hampered. To aggravate matters, credit institutions, especially State-owned commercial banks, do not usually exercise transparency in handling bad debt.

Therefore, bad debt may escalate in the banking system in the future, inflicting damage on banks. The failure of bank shares to flourish recently is perhaps emblematic of this gloomy prospect.

(*) Vietstock Research Division

Source: SGT