Vietnam bank fix starts with $476 mln debt

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New asset management firm to buy bad debts worth VND10 trillion in the next two months

The headquarters of the Vietnam Central Bank in Hanoi: Photo: DAAÉ

Vietnam's state asset management company, tasked with cleaning up bad loans, said it will acquire as much as VND10 trillion (US$476 million) of spoiled debt over the next two months as it considers possible foreign funding.

Vietnam Asset Management Co. will issue special bonds to about 10 banks in exchange for as much as VND10 trillion of non-performing loans in the next two months, Chief Executive Officer Nguyen Huu Thuy said in an interview in Hanoi on August 6. The lenders will be able to use the bonds to secure funding from the central bank, he said.

"We can start buying the first batch of bad debt in the next two weeks," Thuy said. "This will send a positive signal to the market and investors so they can see how quickly we can move forward and how determined we are in resolving bad debt."

Prime Minister Nguyen Tan Dung is seeking to overhaul almost $5 billion in bad debt at banks that has crimped lending, and revive an economy that last year grew at the slowest pace since at least 2005. Vietnam is emulating a model tested by neighbors from Malaysia to China in forming an entity to acquire loans from banks, as it seeks to revive investor confidence.

"This is a brand new development and it's long overdue," Alan Pham, chief economist at VinaCapital Group in Ho Chi Minh City, said in a telephone interview August 6. "Any concrete action or step by the VAMC will be welcomed by the market. The purchase of debt is a new step on this long road to resolving bad debt."

Lenders lag

Shares in the country's top lenders have underperformed the benchmark stock index this year. Of the five banks traded on the Ho Chi Minh Stock Exchange, three have dropped in 2013. Joint-Stock Commercial Bank for Foreign Trade of Vietnam, or Vietcombank, the country's biggest listed bank by market capitalization, rose 0.7 percent compared with a 20 percent increase in the benchmark VN-Index.

The VN-Index rose 0.7 percent at the close on August 7. The dong strengthened 0.1 percent to 21,095 per dollar.

The asset company will "prioritize" buying debt from banks that have the highest non-performing loan levels and will require these to be backed by property and other assets, Thuy said. Asked whether these are real-estate loans, state-owned company debt or other borrowings, he said there is a variety. The majority of Vietnam's bad debt is in local currency, he said.

The central bank estimates bad debt at 7.8 percent of outstanding loans at the end of last year. About 35 percent of property loans were non-performing as of the end of 2012, according to the National Financial Supervisory Commission. The country's outstanding property loans stood at VND230 trillion as of March 31, according to the central bank.

Vinashin debt

State-owned enterprises account for about 53 percent of the banking system's bad debt, according to the Finance Ministry. Vietnam Shipbuilding Industry Group, the state-run company known as Vinashin, almost collapsed in 2010 because it over-diversified and failed to manage cash flow and debt, according to the country's transport ministry. Vinashin was on the brink of bankruptcy with about $4 billion of debt, the government said that year.

Lenders with bad-debt ratios of 3 percent and above will be required to sell their non-performing loans to the asset management company, according to a May government statement.

The VAMC will purchase banks' debt at book value and will sell it at market value, and plans to propose the central bank allows it to buy bad debt at market value after 2013, Thuy said. The company has spoken to international banks with clients who have expressed interest in buying Vietnam's bad debt, and wants to encourage foreign investors to participate in buying the assets, he said.

Sharing loss

"We will auction the debt at a discount and someone will have to take a loss," he said. "The banks and their borrowers will have to share the loss."

The company may also tap overseas funding for its operating capital, the CEO said. "International organizations have expressed a lot of interest in giving loans, or providing funding to VAMC," he said.

The asset company, which is overseen by the State Bank of Vietnam, began operations on July 26, and will have an initial registered capital of VND500 billion. It will resolve as much as VND70 trillion of non-performing loans this year, central bank Governor Nguyen Van Binh has said.

The "very small" level of capital assigned to the asset company, its lack of independence and its plan to acquire debt at book value, are "not good practices," Deepak Mishra, the World Bank's lead economist in Vietnam, said last month.

The central bank in July lowered the repurchase rate to 5.5 percent from 6 percent, and asked banks to accelerate lending to help achieve its target of 12 percent loan growth by the end of the year. Credit grew 5.02 percent as of July 25 from end-2012, according to official data.

The central bank said last week it will direct lenders it qualifies as healthy to buy stakes in weaker banks.

"I do believe that the VAMC will meet expectations in terms of helping to resolve bad debt," Thuy said. "It's not easy at all to resolve bad debt. With the determination of the government and the central bank as well as the VAMC's utmost efforts, we will make positive progress and attract foreign investors to participate."

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