Some Vietnamese banks have made meaningful progress in the resolution of legacy problem assets, a positive credit for the sector, Moody’s said on Monday.

This is because the disposal of problem assets improves the banks’ asset quality and removes a drag on their profitability.

Asia Commercial Bank (ACB) has been the latest local lender to have fully written down bonds issued by the Việt Nam Asset Management Company (VAMC). Before it, Vietcombank, Techcombank and Military Bank, successfully wrote down their VAMC bond exposures from their balance sheets in the fourth quarter of 2017.

According to Moody’s, asset quality at most Vietnamese banks stabilised in 2017, helped by healthy macroeconomic conditions. The banks’ profitability also improved as higher-yielding retail loans increased, enabling them to allocate higher provisioning expenses to write off their VAMC bonds ahead of schedule.

Additionally, enhanced legal frameworks, such as Resolution 42, which allows banks and VAMC to rapidly repossess collateral in the event of a borrower defaulting, allowed banks to be more active in managing bad debts. As a result, the total stock of VAMC bonds at rated banks decreased in 2017, the first decline since VAMC began operating.

With this being said, banks are on track towards resolving bad debts, according to Moody’s, although asset risks remain elevated for some banks owing to their large exposure to problematic legacy assets.

Given a favourable macroeconomic environment and the help of new laws such as Resolution 42, other rated banks are also likely to make progress in resolving legacy problem assets over the next 12 months to 18 months. Generally, with improved profitability, banks are now capable of increasing credit provisions and building up buffers against problem assets.

At this pace, more banks are likely to fully write down their VAMC bond holdings by the end of 2018, Moody’s concluded.

The State Bank of Việt Nam (SBV) established VAMC in July 2013, with a policy mandate to take over bad debts that had plagued Vietnamese banks in prior years and to manage recovery work. The company takes non-performing loans (NPLs) off banks’ balance sheets in exchange for special bonds it issues.

VAMC bonds do not pay interest and banks have to effectively recognise losses related to the NPLs, as they provision for the VAMC bonds over either five or 10 years, so these assets add to credit costs and hurt profitability.

Alternatively, if the VAMC succeeds in recovering a bank’s transferred NPLs, any recovered value can be transferred back to the bank. However, the cumulative NPL recovery rate by VAMC has been low at approximately 20 per cent. Through this mechanism, banks have been able to lower their reported NPL ratios, but they can only truly resolve bad debts through a full write-down or cash recovery of VAMC bonds. — VNS