Bad debt and problem debt stable but pressure remains high
According to data released by the State Bank of Vietnam (SBV) up to June 2024, total problem debt in the banking sector, including on-balance sheet bad debt, restructured debt and VAMC bonds, reached 6.9% of total outstanding credit. This figure is stable compared to the previous year, but still reflects the lingering effects from the 2022-2023 period, when this ratio increased sharply by 2.7 percentage points.
In the first three quarters of 2024, the rate of overdue debt formation at banks has decreased significantly thanks to improved customer repayment capacity. Some large banks such as Vietnam Joint Stock Commercial Bank for Foreign Trade (Vietcombank) and Asia Commercial Joint Stock Bank (ACB) have shown the ability to effectively reduce the ratio of restructured debt.
In a newly published report by Dragon Capital Securities (VDSC), by the end of August 2024, the outstanding debt restructured under Circular 02 was about VND126,000 billion and potential bad debt accounted for about 70% of the bad debt on the balance sheet of the entire system. However, when Circular 02 expires, banks will face the requirement to record all credit costs for restructured debts. This could be a big challenge for some small banks and banks with large restructured debt scale such as Vietnam Prosperity Joint Stock Commercial Bank (VPBank).
“Small banks will be under more pressure as net interest margins continue to narrow due to rising funding costs and limited ability to improve profitability,” said senior analyst Phan Thi Van Anh from VIS Rating.
Advantages and challenges
According to VIS Rating, among state-owned banks, the Bank for Investment and Development of Vietnam (BIDV) and Vietcombank stand out for their ability to control bad debt ratios well and have high debt coverage ratios. This helps to reduce the impact of higher credit costs after Circular 02 expires. Meanwhile, some large private banks such as the Military Commercial Joint Stock Bank (MBBank) have stepped up measures to reduce problem debt, especially in the real estate sector.
However, there are still banks facing difficulties due to their heavy dependence on customers in the real estate sector - an industry that is still facing low demand and unresolved legal issues. VPBank, with a high proportion of restructured debt and a low debt coverage ratio, is expected to be one of the banks most affected when Circular 02 ends.
VIS Rating's analysis team also said that for small-scale banks such as An Binh Commercial Joint Stock Bank (ABB) or Bac A Commercial Joint Stock Bank (BAB), reducing lending risks has been included in the long-term strategy to control asset quality. However, this inevitably puts pressure on net interest margins.
The average return on assets for small banks is expected to decline by 2025 due to rising credit costs and limited credit growth, the report said. In addition, these banks face fierce competition for funding, which increases the cost of capital.
Opportunities in 2025
Although the banking sector will face many challenges, there are also outstanding opportunities thanks to improved macroeconomic conditions. The government has been promoting economic support programs, especially for the manufacturing and export sectors. This is expected by experts to enhance the ability of enterprises to repay debts, helping to reduce the ratio of bad debts and restructured debts in the long term.
In addition, banks are also increasing investment in technology and digitizing processes to reduce operating costs and improve efficiency. Banks that are pioneering this trend, such as Techcombank (TCB) and ACB, will have a great advantage in maintaining stable growth.
The end of Circular 02 at the end of 2024 marks an important turning point for the Vietnamese banking industry. While many large banks with good risk management capabilities will remain stable, small banks with high restructured debt ratios need to prepare to deal with many challenges in 2025. How banks adjust their strategies to adapt to the new environment will be a decisive factor in their ability to maintain growth and control risks in the coming time.
