Though providing a theoretical fillip to local assets, which most fund managers still deem undervalued across a host of metrics, a recent string of both fiscal and monetary accommodation in Vietnam may be indicative of a more fundamental and structural storm developing.  As alluded to recently the number of non-performing loans (NPL) reported across Vietnamese banks still falls woefully short of more widely accepted, objective measures (another upwards revision this week by State Bank of Vietnam (SBV) central governor Nguyen Van Binh puts the number at around 6 percent of total loans), a fact not lost on officials so much as it remains an irritant and moreover a roadblock impeding the industry’s consolidation.  The latest alarm bell comes not from Fitch (which earlier this year gave an NPL estimation of 13 percent) but from the Hanoi National University’s Vietnam Centre for Economics and Policy Research (VEPR), whose latest annual report will show that the entire banking sector’s bad debts amount to roughly 14 percent of total outstanding loans, “six-fold more than the central bank’s regulated 2.3 percent.”

To this end while much has been made historically in Vietnam about taming often rampant inflation, supporting the dong and moderating credit growth, the SBV now most fervently frets over a lack of lubrication in the system as deposit rate cuts (now 9 percent) so far have only padded net interest margins (rather than grow balance sheets) and GDP forecasts look ever-shaky.  Though interbank lending rates hover at historical lows, loan extension remains muted such that the SBV’s supposed plan of replacing ‘bad’ money with ‘good’ looks premature at best and grossly naïve at worst; small banks cannot post adequate collateral in the eyes of their larger peers, according to some observers, while more draconian requirements keep SME borrowing costs sticky (around 18 percent) and the economy, by extension, stagnant (since M2 annual growth lags that of nominal GDP).  Analysts with Hanoi-based HSC point to a defacto two-tiered banking system (state-owned commercial banks and larger private sector banks on one hand, whose NPL levels are considered worse, versus the rest) whose liquidity “resembles an African river in drought season with a couple of large stagnant pools surrounded by dry river beds.”  The opaque nature of bad loans, how they’re provisioned for, and ultimately how many can be siphoned off to entities such as the Ministry of Finance’s Debts and Assets Trading Company (DATC) only hinders the process.  “Forbearance with the current problems in the banking system will only lead to an accumulation of problems,” warns Sanjay Kalra, the International Monetary Fund’s country representative.

Finally, the desire to ease funding mechanisms contrasts with the natural maturation of the country’s credit cycle (deleveraging balance sheets is desirable to reverse the credit-money supply gap that has so far subsidized growth but also fueled inflation).  Price-cooling measures introduced last year such as Resolution 11/NQ-CP hypothetically help accelerate this dynamic—Vietcombank Securities notes credit outpaced deposit growth by ~300bp/annum over the past decade—while tiered growth and rate caps, it is hoped, will strangle the sector’s more risk-loving players and encourage mergers.  In practice, however, the whole system may be grinding to a halt, and an opaque accounting of bad loans isn’t exactly conducive to deal-making as many banks struggle with still inadequate capital adequacy ratios (CAR).  This ratio computes capital over risk weighted assets and measures the financial strength of a bank to protect depositors. Deteriorating asset quality leads to higher impairment charge that erodes profit, reduces equity and by extension the financial strength.  Vietnam banking industry income, noted one sector analyst, has been heavily depend[ant] on lending activities with the interest income/total income ratio of some banks reaching above 90 percent.”  That crutch is now a liability.