Banking System Restructure Program 2011-2015 and ongoing challenges for the Stage 2 of the Restructure Scheme 2016-2020

Having applied various measures to evaluate the bank system restructure program 2011-2015, no one would deny that SBV has achieved valuable successes, especially under the context of macroeconomic uncertainty resulted from both internal and external problems.

CHÍNH SÁCH & THỊ TRƯỜNG TÀI CHÍNH- TIỀN TỆ Chương trình Tái cấu hệ thống ngân hàng Việt Nam giai đoạn 2011- 2015 thách thức cho giai đoạn tái cấu 2016- 2020 Tô Kim Ngọc Nguyễn Khương Duy Ngày nhận: 19/04/2017 Ngày nhận sửa: 10/05/2017 Ngày duyệt đăng: 22/05/2017 Khi đánh giá kết trình tái cấu hệ thống Ngân hàng Việt Nam giai đoạn 2011-2015, khơng phủ nhận thành cơng nó, đặc biệt đặt q trình bối cảnh bất ổn vĩ mơ xuất phát từ vấn đề nội kinh tế ảnh hưởng từ khủng hoảng tài tồn cầu Tuy vậy, kết xa so với mục tiêu thiết kế Quyết định 254/QĐ-TTG Điều tạo thêm áp lực cho giai đoạn 2016-2020, Giai đoạn chương trình Tái cấu hệ thống ngân hàng Những áp lực liên quan đến ý tưởng điều hành, tầm nhìn sách lực thực thi Bài viết tập trung phân tích thách thức giải pháp cần thiết cho trình tái cấu năm Mơ hình DEA truyền thống sử dụng để đo lường hiệu hoạt động hệ thống ngân hàng giai đoạn 1990-2015 kết sử dụng cho mơ hình Tobit để khảo sát tác động biến số vĩ mô tới mức độ hiệu hệ thống Ảnh hưởng trình tái cấu giai đoạn 2011-2015 xem xét mô hình Kết định lượng sử dụng làm đưa khuyến nghị sách cho giai đoạn II trình tái cấu ( 2016-2020) Từ khóa: Tái cấu hệ thống ngân hàng, Hiệu hoạt động hệ thống ngân hàng, Mơ hình DEA Achievements of the Bank System Restructure Program 2011-2015 The macroeconomic stability is maintained and enhanced © Học viện Ngân hàng ISSN 1859 - 011X he macroeconomic risk as well as risks related to the monetary and financial conditions all are mitigated in com- parison with the status in 2008 (Figure 1) To specify, the 2008 episode was dominated by very expanding monetary and financial conditions and resulted in high domestic macroeconomic, Tạp chí Khoa học & Đào tạo Ngân hàng Số 180- Tháng 2017 CHÍNH SÁCH & THỊ TRƯỜNG TÀI CHÍNH - TIỀN TỆ Table Vietnam government bond’s creditability and outlook evaluation by international credit rating agencies Year 2010 2011 2012 2013 2014 2015 2016 Ascending order of credit ratings Standard & Poor Rating Outlook BB Stable BBNegative BBStable BBStable BBStable BBStable BBStable Moody’s Rating Outlook Ba3 Stable B1 Negative B2 Stable B2 Stable B1 Stable B1 Stable B1 Stable Fitch Ratings Rating Outlook B+ Stable B Stable B+ Stable B+ Stable BBStable BBStable BBStable in 2011 with the negative prospective, Vietnam’s credit rating has gradually improved and maintained its stable outlook in the following years (Table 1) Credit institution system is protected from systematic risk and ‘domino’ effect It is true that the Restructure Scheme 2011-2015 Source: Summarized by authors has fundamentally solved credit and banking risk The weak credit institutions, financial conditions, constituted 2011 status followed domestic which contributed significantly a normalization of a number of stimulus that led to a rapid credit to mitigate the spill-over efrisk expansion against a backdrop of fects and consolidate the liquidThe improvements in the already depleted policy buffers ity condition and eventually macroeconomic prospective and a weak external environare also evident in the moveprevented the system from the domino collapse As shown in ment In subsequent years, the ment of credit rating of Vietnam the Figure 1, the inward spillgovernment’s efforts to achieve government’s bonds rated by over risks based on the IMF macroeconomic stability, includinternational organizations estimation have declined from ing through tighter monetary and After having been downgraded 6.5/10 at end-2008 to about Figure 5/10 at end-2014 Financial Stability Map1 in Vietnam for 2008, 2011 and 2014 NPL information is disclosed in more transparent manner The disclosure of information on bad debt of each credit institution as well as the whole bank system was more transparent To specify, there are always a large gap between the non-performing loan to total loan ratio published by the commercial banks and by the Supervisory Agency of the State Bank of Vietnam It is also true for the difference between the estimation of the international credit rating Sources: IMF, 2016 agency such as Fitch, Moody’s The Financial Stability Assessment provides a framework under which four broad risks (macroeconomic, inward spillovers, credit, and market and funding and the SBV’s statistic The liquidity) and two conditions (monetary and financial conditions, and risk appetite) more transparent information are analyzed Indicator values ranked relative to their own past values from to 10 for every quarter, with representing the lowest risk and 10 representing about the bank’s asset qualthe 99th percentile of risk A ranking of broadly corresponds to the long-term ity gives stakeholders a more average (IMF, 2016) BB-, BB, BB+ Tạp chí Khoa học & Đào tạo Ngân hàng B3, B2, B1 B, BB, BBB Số 180- Tháng 2017 CHÍNH SÁCH & THỊ TRƯỜNG TÀI CHÍNH - TIỀN TỆ realistic view about the banks’ profitability and as the results, the investors will place less pressure on the bank’ targeted profit and less expectation on the unbacked increase in the share price This provided credit institutions a more favorable condition to focus on dealing with bad debts and consolidate the bank’s operation rather than making up the financial statements for the shortsighted benefits Cross-ownership in banking system has been identified One of considerable achievement of the Restructure Scheme 2011-2015 is to identify the magnitude of the cross-ownership in banking system and a variety of type of cross-ownership (primarily between banks, banks and financial companies and banks and enterprises) Three main trends employed to mitigate the complexity of cross-ownership picture are: i/ The banks owned by the same dominant shareholder are merged with each other1; ii/ The weak banks have been placed under the self-restructure process or merged into stronger banks such as PG Bank with Vietinbank, Mekong Housing Bank with BIDV2; and iii/ Ficombank, Tin Nghia Bank and Saigon Commercial Bank were merged into the Saigon Commercial Bank in 2011; Mekong Development Bank was merged into Martime Bank; Dai A Bank was merged into HD Bank PG Bank (40% vote belonging to Petrolimex) has been merged into Vietinbank (a State-owned bank with the ownership of 64.5%) in the context that other shareholders are unable to contribute more capital into bank while Petrolimex has been in the progress to divestment non- 10 Số 180- Tháng 2017 The application of the Circular 36/2014/TT-NHNN required that a credit institution is no longer permitted to hold shares of more than credit institutions with more than 5% of charter capital However, there are large commercial banks3 which still hold the shares of more than two other banks despite the fact that the due date for divestment required by Cir 36 was over Obstacles of the Bank System Restructure Scheme 2011-2015 The shortage of real money (powerful resources) led to the delay in solving the huge amount of bad debts The establishment of Vietnam Asset Management Company - VAMC is considered as a merely technical method to reduce the officially-announced NPL rather than truly solving the NPL in the effective manner By the way of selling bad debts in exchange for the special bond issued by VAMC, the bank can amortize the impaired loan over the period from 5-10 years into profit and loss, instead of making full provision at the present The late recognition of expenses core companies Mekong Housing Bank (with the accumulated loss at the merge date of more than VND 642 billion) is merged at the existing condition into BIDV since May 2015 with the share swap rate 1:1 based on the fact that both banks are the State-owned Bank with the state ownership of more than 90% As at end-2016, VCB has been currently holding shares issued by other commercial banks (7.16% of MBB; 8.19% of Eximbank; 5.07% of OCB and 4.3% of SCB) and financial company (10.91% of Cement Finance JSC) on credit losses in the financial statement of banks temporarily helps the bank system buy time and at the same time, give the government the chance to collect the corporate income tax (because making fully provision leads to negative profit before tax and no corporate income tax would have been obligated) The statistics showed that the mainstream resources that banks use to deal with bad debts come internally from retained earnings and provision funds It is so rare that there is only one case in which there is real money (equity capital) pumped into the troubled bank - TP Bank is a telling and rare example of a successful self-restructure with more capital contributed by the DOJI Corporation, while the rest of restructure cases relied mainly on the combining method or netting-off liabilities with equity of the existing shareholders In addition, theoretically speaking, credit institutions can discount the VAMC bond (up to 40% of face value of the special bond) to the SBV at a lower interest rate (about 2%) than the normal borrowing from the SBV However, in the early stage, there are very little banks which want to employ this refinancing method because of the fear that this discount transaction can imply that the bank has been confronting with the liquidity difficulties and subjected to the potential inspection of the supervisory authority For the rationale mentioned above, despite the fact that the NPL rate officially announced by the commercial bank system has declined from 3.3% at end2011 to 2.5% at end-2015, it is Tạp chí Khoa học & Đào tạo Ngân hàng CHÍNH SÁCH & THỊ TRƯỜNG TÀI CHÍNH - TIỀN TỆ Figure Impaired loan in comparison with regulatory capital (*) Joint stock banks, joint venture banks, fully foreign-owned banks and branches Source: IMF, 2016 more pessimistic view when the calculation takes the impaired loans such as those sold to VAMC and those restructured under Decision 780 and Circular 09 (being kept at the same credit risk as pre-restructure and without adequate credit risk provision) into account To illustrate, estimation of the IMF 2016 showed that the impaired loan to total loan balance of the whole bank system in Vietnam can reach even 12.7% at end-2015 (IMF, 2016) As shown in the Figure 2, the proportion of impaired loans at the State-owned Banks (SOBs) was about 13.7%, higher than the level of 11.7% at private sector banks Most importantly, the amount of impaired loans at the SOBs has exceeded the regulatory capital This suggests that in the longer term, when the buying-time technique expires (VAMC Tạp chí Khoa học & Đào tạo Ngân hàng bonds go maturity within 5-10 years and the borrowers have to commit the restructured repayment schedule), the pressure on making credit loss provision will be significantly burdensome, leading to erosion of the profit and even retained earnings Accordingly, how to maintain the whole bank system’s sustainability is really a big question After dramatically increasing in 2013, the bad debt ratio has followed a declining trend during the period 2014-2015 The technical support from the SBV’s policy such as Decision 780 and Circular 09 as well as the endless efforts of the bank system is the two key contributors to this movement of bad debts However, this trend is not Figure NPL ration of some commercial banks, 2012-2016Q1 Source: Authors’ summary Số 180- Tháng 2017 11 CHÍNH SÁCH & THỊ TRƯỜNG TÀI CHÍNH - TIỀN TỆ sustainable To illustrate, the NPL ration started to increase in the first half of the year 2016 with the most significant jump up to 5.3% of EIB (Figure 3) It is consistent with the fact that it is about one year since the last minute when banks would be able to restructure loans to customers without making further provision (April 2015) and a considerable component of restructured loans have been past due and reclassified into non-performing loans in 2016 It is necessary to note that many commercial banks have restructured the impaired loans in the manner that allocated more financial obligation at maturity or even capitalized interest into principals Clearly, credit risks may impose more challenges in the following years The analysis above is in line with the evaluation of IMF in Figure While macroeconomic, inward spillover, and market/ liquidity risks had fallen close to historical averages and monetary/financial conditions were close to the neutral levels; the credit risk stood at a high level reflecting sovereign factorsrapidly rising public debt and publicly guaranteed debt and high fiscal deficits- and banking sector issues- legacy NPLs and capital shortfalls in the banking sector stemming from instability in 2008 and 2011, and a relatively weak domestic corporate sectors, in particular SOEs Replacement of the existing complex cross-ownership with the new complicated one and the lack of resolution mechanism that allows the orderly exits of weak banks without domino effect It is not uncommon to find that shareholders come and go during the process of the restructure program in some commercial banks In other words, the complexity in the new crossownership is built up on the background of the exit of the preceding dominant shareholders such as Navibank (renamed as NCB) and Trustbank (renamed as Construction Bank before being acquired at zero dong by the SBV) The case of Construction Bank also proved that the lack of resolution mechanism that permits weak banks to go bankrupt in the orderly condition has led to serious consequence To specify, if the SBV took over Trust Bank in 2012 or allowed it to go bankrupt, the damage would be approximately the accumulated loss of this Bank with the amount of deposits from customers of over VND 11 trillion While, at end-2015, VNCB has made further loss of VND 18 trillion with a bigger volume of deposits than the figure in 2012 Furthermore, the idea that did not allow any bank collapse will eventually result in the excessive risk-taking behaviors and the ‘too big to fail’ situation of credit institutions In addition, depositors who have been receive the state’s guarantee over their deposits would certainly become less responsible in selecting the healthy banks to invest their savings- as they usually choose the weak banks that have offered higher interest rate This created ineffective allocation of resource It is also evident in the practice that deposit insurance agency has not applied the mark-to-risk pricing policy in transactions with each bank and this has impeded the resource that can be available for the restructure program (Read in next issue) Tài liệu tham khảo ASEAN Corporate Governance Scorecard Country Reports and Assessments 2014; Financial statement reports and prospectus of commercial banks published in their official websites; International Monetary Fund, 2016, “Vietnam 2016 Article IV Consultation”, IMF Country Report No 16/240; Ngo Dang Thanh and Mai Thi Thanh Xuan, 2012, “Effects of macroeconomic policy on the efficiency of the Vietnamese banking system 1990-2010” Nguyen Xuan Thanh, 2016, “The commercial bank system in Vietnam: from changes of regulation and policy in the 2006-2010 period to the events of Restructure Program 2011-2015”; The Draft on the Economy Restructure Plan 2016-2020 proposed by the Ministry of Planning and Investment; Tô Kim Ngọc, 2016 Evaluation of Banking System Restructuring in the period of 2011-2015- BIDV Project incorporation with Banking Academy Thông tin tác giả 12 Số 180- Tháng 2017 Tạp chí Khoa học & Đào tạo Ngân hàng CHÍNH SÁCH & THỊ TRƯỜNG TÀI CHÍNH - TIỀN TỆ Tơ Kim Ngọc, Phó Giáo sư, Tiến sĩ Học viện Ngân hàng Email: ngoctk@hvnh.edu.vn Nguyễn Khương Duy Cơng ty Kiểm tốn Deloitte Việt Nam Summary Banking System Restructure Program 2011-2015 and ongoing challenges for the Stage of the Restructure Scheme 2016-2020 Having applied various measures to evaluate the bank system restructure program 2011-2015, no one would deny that SBV has achieved valuable successes, especially under the context of macroeconomic uncertainty resulted from both internal and external problems However, this is quite far from the targets designed in the Bank System Restructure Program 2011- 2015 (issued with Decision 254/QD-TTg) that certainly poses ongoing challenges to the Stage of the Restructure Scheme 2016-2020 in terms of regulatory ideas, policy visions and fulfilling capacity The paper focuses on the obstacles on the way to achieve the objectives of the next five year banking reform and overcoming these calls for more decisive remedies Traditional DEA model is also used to measure the efficiency level of banking system’s operations during the period 1990-2015 The efficiency score is then incorporated into the Tobit model to further investigate the impact of macroeconomic conditions (fiscal strain, monetary condition, foreign exchange policy and financial stability) on the level of efficiency Our paper also verifies whether the Restructure Scheme has generated positive effects on the efficiency level of banks’ operation Highlighted findings are the solid basis on which policy recommendations are given to contribute to the success of the Restructure Program 2016-2020 Key words: Banking System Restructuring, Banking Operation Efficency, DEA model Ngoc Kim To, Assoc.Prof PhD Banking Academy Duy Khuong Nguyen, Deloitte Vietnam Company Limited Tạp chí Khoa học & Đào tạo Ngân hàng Số 180- Tháng 2017 13 ... Banking System Restructure Program 20 11 -20 15 and ongoing challenges for the Stage of the Restructure Scheme 20 16 -20 20 Having applied various measures to evaluate the bank system restructure program. .. events of Restructure Program 20 11 -20 15? ??; The Draft on the Economy Restructure Plan 20 16 -20 20 proposed by the Ministry of Planning and Investment; Tô Kim Ngọc, 20 16 Evaluation of Banking System. .. from the targets designed in the Bank System Restructure Program 20 11- 20 15 (issued with Decision 25 4/QD-TTg) that certainly poses ongoing challenges to the Stage of the Restructure Scheme 20 16 -20 20