Debt-to-equity swaps too risky for Vietnamese banks

As Vietnam’s neighbour, China, is drafting rules to make way for lenders to convert bank loans into equity  stakes of debtor companies in a bid to help financial institutions tackle their mounting non-performing loans (NPL), the question has been raised as to whether Vietnam could or should adopt the same technique.

In fact, several local banks sought debt-to-equity swaps at their debtor companies in the past. This was the case with VietinBank and Vietnam National Shipping Lines (Vinalines), Saigon-Hanoi Bank and Bianfishco, and VietABank and Dat Xanh Group.

VietinBank, for instance, proposed a debt/equity swap of VND5 trillion (US$229.3 million) worth of loans with Vinalines’ port members, back in 2014, to the State Bank of Vietnam (SBV)-a move which would have made the bank a strategic shareholder at Vinalines.

Although the SBV initially agreed in principle to VietinBank’s tender, it subsequently turned it down, explaining that existing regulations did not support the scheme.

According to BIDV acting deputy general director Can Van Luc, debt/equity swaps may not be suitable in Vietnam, as local commercial banks do not have the function of an investment bank, “thus investing in any non-core business lines often involves greater risks for banks to handle.”

“Debt-to-equity swaps, as such, should only be employed by banks in unavoidable situations, and such cases should only be treated as temporary solutions,” stressed Luc, adding that “should banks desire to swap debt for equity at troubled firms, they must build a feasible plan to divest from the debtor companies once the firms get back on track to profitability.”

Echoing Luc’s view, economist Nguyen Tri Hieu noted that when converting loans into equity, banks basically make an investment in damaged companies. As a result, they would either have to inject more capital into the firms to prop them up, or put themselves in the troubled businesses’ shoes, to manage and operate them effectively, in order to squeeze out the debt that banks wish to recover.

“In either case, it would cost banks both financial resources and great effort to build up the businesses from trash, particularly when banks may not have specialized in the business line of their debtors,” said Hieu.

“Swapping debts to equity may dress up banks’ financial statements, but risk associated with the soured debts remains the same for banks,” he added.

Typically, in Vietnam, banks sell their NPLs to the Vietnam Asset Management Company (VAMC), which helps banks recover their assets by selling off the NPLs. Banks must make provisions for such NPLs, thereby taking a sizeable chuck out of their annual profits.

The VAMC, however, has been struggling to handle a rising pile of NPLs in recent years. According to the National Financial Supervisory Commission (NFSC), Vietnam’s NPL in 2015 was VND119.66 trillion (US$5.48 billion), equivalent to an NPL ratio of 2.9%, compared to the 3.7% ratio in 2014. The figure, however, does not include the VND243 trillion (US$11.14 billion) worth of NPLs currently stored at VAMC, which has yet to be disposed of.

NFSC chairman Vu Viet Ngoan noted that NPLs continue to be a burden on the country’s financial system, and if there is no other solution besides what VAMC has been doing to date, such as selling debts at market price or issuing special bonds, NPLs will remain a major bottleneck within the banking system in 2016.

VAMC chairman Nguyen Quoc Hung meanwhile stated that the debt agency bought some VND107 trillion (US$4.9 billion) worth of NPLs in 2015 and issued VND99.18 trillion (US$4.5 billion) worth of special bonds in exchange for the NPLs bought from banks. The nation’s NPL ratio dropped to 2.7%, as at December 31, 2015, from the 17.2% ratio in 2012.

While the 2.7% figure may seem pleasant to glance at-as it is below the 3% target set by the central bank-actual NPLs are still resting in the VAMC, awaiting some as yet unforeseen solution to getting rid of them.