Public asset management, a study of asset management companies and policy suggestions for vietnam

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS, HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM PHAN THỊ MINH KHOA PUBLIC ASSET MANAGEMENT: A STUDY OF ASSET MANAGEMENT COMPANIES AND POLICY SUGGESTIONS FOR VIETNAM MASTER IN PUBLIC POLICY THESIS HO CHI MINH CITY - 2013 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS, HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM PHAN THỊ MINH KHOA PUBLIC ASSET MANAGEMENT: A STUDY OF ASSET MANAGEMENT COMPANIES AND POLICY SUGGESTIONS FOR VIETNAM MAJOR: PUBLIC POLICY CODE: 60340402 MASTER IN PUBLIC POLICY THESIS SUPERVISOR Dr JONATHAN R PINCUS HO CHI MINH CITY - 2013 I CERTIFICATION I certify that the thesis is all done by my efforts To the best of my knowledge, all resources used have been acknowledged in the thesis The thesis does not reflect the views of Ho Chi Minh City Economics University or Fulbright Economics Teaching Program Author PHAN THI MINH KHOA II ACKNOWLEDGEMENTS I would like to express my appreciation to my supervisor, Dr Jonathan R Pincus for helping me with this thesis I would like to thank Mr Truong Minh Hoa for his help on the layout of this thesis And finally, I would like to thank all my professors and classmates for their contribution to the experience and knowledge that I have gained during the two year studying at Fulbright Economic Teaching Program Phan Thi Minh Khoa Ho Chi Minh City – June, 2013 III ABSTRACT The Vietnamese banking sector is facing difficulties with high levels of non-performing loans (NPLs) caused by rapid credit growth, weak risk management, connected lending, crossownership, high amount of loans to state owned enterprises (SOEs), and loose supervision from the State Bank of Vietnam (SBV) High NPLs cause banks to hesitate to grant new loans to borrowers At the same time, good borrowers are repaying their debts, reducing credit growth and economic growth in 2012 In order to resolve these problems, some observers have suggested establishing an Assets Management Company in Vietnam According to past experience, AMCs are frequently used in financial restructuring Some studies have shown that using AMCs as a rapid disposition tool would achieve better results than corporate restructuring tools (Klingebiel, 2011) However, another study from the World Bank has shown that countries using AMCs as both an asset disposition and a corporate restructuring tool have a better chance to succeed (Rose, 2005) Given the economic and legal conditions in Vietnam, establishing the AMC in Vietnam as both an asset disposition and corporate restructuring tool may not yield positive outcomes Following an example of the Indonesian Bank Restructuring Authority (IBRA), the AMC should be structured as a banking restructuring agency However, in order for the AMC to achieve its objectives, it requires corporation between SBV and other government agencies as well as some adjustment in the current laws and regulations Abbreviation AMC BI EBCI FI FS JSBs IBRA MOF NPLs SBV SOE SOCBs VAMC V LIST OF BANKS No Abbreviation ABBank ACB Agribank BAC BIDV Bao Viet Dong A Exim GPBank 10 Habubank 11 HDBank 12 Kien Long 13 Lien Viet 14 Maritime 15 MB 16 MDB 17 MHB 18 Nam A 19 Navibank 20 OceanBank 21 OCB 22 PG Bank 23 Sacombank VI Abbreviation 24 SaigonBank 25 SCB 26 SeABank 27 SHB 28 Southern Bank 29 Techcombank 30 Tien Phong 31 Trust Bank 32 VIB 33 VietA 34 Viet Capital 35 VietBank 36 VCB 37 VietinBank 38 VPBank 39 Western Bank 51 APPENDIX I - USING AMC AS A RESOLUTION TOOL I Advantages of using an AMC As stated above, one of the objectives of asset management policy is to maximize the returns to these distressed assets in order to minimize the fiscal cost of restructuring Therefore, in some cases, it is necessary to separate good assets from bad assets of distressed financial institutions There are several advantages of using AMCs as a “bad bank” Labor specialization When distressed assets are removed completely from banks‟ balance sheets, banks can focus all of their people and resources on managing their regular assets and on running their normal business operations Because the skill sets needed to perform loan recovery are very different from regular banking operations, with this separation, AMCs can focus solely on these skill sets to maximize loan recovery Therefore, each institution can utilize their specialized experiences most efficiently Support of bank valuation With distressed assets removed from banks‟ balance sheets, the true value of banks can be determined more correctly and transparently If banks have their private AMCs, they can use these private AMCs to transfer distressed assets out of banks‟ balance sheets into AMCs‟ at book value or above market value Therefore, banks can increase their capital adequacy ratio and hide their losses at AMCs‟ balance sheets Credit discipline improvement AMC can help increase credit discipline by breaking the link between banks and corporations If NPLs are left for banks to resolve, they tend to use one popular tool of partially writing off the loans and rescheduling payments This option, appropriate in some cases, may cause moral hazard for banks, especially when banks have relationships with these borrowers (connected lending) AMCs, as an outsider to that relationship, can be more objective when it comes to collecting loans or seizing underlying collateral Economies of scale 52 In some countries, people with the knowledge and experience of asset management are scarce Therefore, if one AMC is established, that AMC can gather these experienced personnel working for it instead of having these people scatter all over the banking industry In addition, by gathering loans from banks, AMC can also create bigger asset portfolios to attract bigger investors AMCs can also divide them into tranches according to their characteristics and apply different tools of recovery for different types of tranches Centralized AMCs can also establish securitization market as one tool of asset resolution Increase negotiating power When dealing with debtors, AMCs can have more power of negotiation for holding multiple loans than banks with single claims This is an especially important power when dealing with a big corporation that is liable for several NPLs in several different banks or when dealing with a big asset pledged as underlying collateral for several NPL claims Maximization of recoveries AMCs can help maximize recoveries by comparing costs and benefit by identifying loans that have a low probability of recovery and put them aside Banks‟ loan officers, who were responsible for making those loans in the first place, may reluctant to admit these loses and continue to pursue these recoveries; even when the returns on those NPLs, if any, may not be able to cover for the recovery cost In countries where the legal and judicial systems are not adequate, AMCs sometimes can be given special powers in order to recover loans and seize and sell collateral faster than traditional processes II Disadvantages of using an AMC Along with the advantages of having an AMC, there come along many disadvantages as well Lack of specific loan knowledge Centralized AMCs generally have a more distant relationship with corporations than banks Therefore, sometimes, banks have certain inside information that AMCs cannot have In the process of restructuring, banks may have to make new loans to corporations That cannot be done by AMCs which are not banks and should not perform the functions of a bank This may reduce the recovery rate 53 In addition, if bank personnel are in charge of collecting NPLs, they can gain more experience from that process and improve their skills and knowledge to prevent future losses Collateral valuation problems In some countries, such as emerging economies, loan collateral is primarily real estate or real estate related These countries usually not have reliable official data on asset prices both on commercial and residential properties In addition, NPLs tend to increase after an economic downturn, sometimes after the bursting of a real estate bubble when the real estate market becomes very inactive At that time, there are not many real estate transactions to use as a benchmark Therefore, valuation of collateral becomes very difficult and not transparent There will be a price gap between banks and investors‟ points of view Banks tend to be overly optimistic about loan recovery Sometimes banks want to sell assets at prices prevailing before the crisis, counting losses from face value without regard to \market conditions and the effect of the crisis on these assets Therefore, banks seldom want to sell these assets at market value At the same time, buyers tend to be pessimistic about economic conditions, especially just after a crisis That, in turn, will increase the gap between buyers and sellers‟ prices (EIBC, 2012) Harming credit discipline Establishing an AMC can both improve and damage credit discipline Borrowers, in general, not have any business relationship with an AMC; thus, they may refuse to repay the loans If distressed assets are left within banks, borrowers may have more incentive to repay them since they have an ongoing relationship with the banks and probably want to borrow in the future Political meddling Centralized, government owned AMCs are still government agencies; therefore, there will to be some interference from government officers, politicians and interest groups Hence, if the AMC‟s policies and structures are not designed carefully to avoid political interference, AMC may become a tool to distribute wealth from the whole population (taxpayers) to some specific group of rich and powerful people Absence of competition 54 Government owned AMCs, as newly established government agencies, may not have enough experience when dealing with NPLs In addition, because there is no real competition in this market, the AMC may have excessive bargaining power In some cases, it may be more effective to create bank-owned AMCs than central controlled AMCs Obstacles to effective NPLs resolutions Legal frameworks in some countries, such as developing countries, are not efficient enough to facilitate NPL resolutions They tend to lack an effective insolvency system, including the process of settling outside of court Furthermore, judgesin those countries tend to lack experience in dealing with liquidation process and framework All of these factors make the foreclosure process very complicated, time consuming and costly Therefore, in order to speed up NPL resolution, the regulatory framework for foreclosure should be predictable, transparent, and reliable (EIBC, 2012) Delaying the process of restructuring Sometimes AMCs tend to be warehouses for distressed assets, not pursuing loan recovery aggressively when some connected corporations or shareholders are involved AMCa can become passive, not use enough force to implement operational restructuring, and just reschedule loans In some countries such as Mexico and other transition economies, centralized AMCs were one of the elements that delayed corporate restructuring schemes (Claessens, 1999) 55 APPENDIX II - EXPERIENCES OF AMCS IN OTHER COUNTRIES Table Ghana Mexico The Philippines Spain USA Sweden Finland Source: cited in Klingebiel (2001), pg 20 Note: a This index show how much the legal framework can protect creditors with secured loans This ranges from to 24, with is the lowest score and 24 is the highest score b Private sectors claims shows the level of loans to private sector as a percent of GDP, with the higher number means that the economy is led by private sector and lower number means that the economy is led by public sector c This index show the depth of bond market, with higher number means that the bond market is developed From the table above, it can concludes that countries with success or partial success in their objectives are the ones that have relatively high level of creditor protection under legal framework, have a market where private sector is the lead player, and have a sufficient capital 56 market Moreover, out of seven cases, successful AMCs were the ones that have small amount of assets transferred to them Table Ch Ghana Mexico The Philippines Spain USA Sweden Finland Source: cited in Klingebiel (2001), pg 20 This table shows that successful AMCs were independent agencies, were funded sufficiently, and received non-political connected assets from financial institutions In summary, from the seven cases above, there are some similarities in characteristics for those failed AMCs and for the successful ones For the failed AMCs, they all have those points in common:  They all lacked of independent and were set up as subsidiaries of other government agencies (central banks or department of finance) 57  Because of their independence, they all had weak governance, had to face a lot of political pressure from other agencies, politicians as well as interest groups, and lack of transparency  The assets transferred to them were mostly political, connected, or SOE related loans Some of the loans were also fraudulent  The legal frameworks in those countries were weak and unsupported to liquidating process from banks Some countries still required debtors‟ approvals before banks or AMC can liquidate collaterals of non-performing assets (Ghana) Other country forbids banks from foreclosing on those assets (Mexico) In case of The Philippines and Ghana, the government gave them special powers; however, this could not help to improve the legal environment in those countries In Ghana, the court tended to be siding with debtors; and in The Philippines, the court system was insufficient and did not improve after the creation of AMC  Another common characteristic for all the failed AMC was that they were not funded sufficiently Some AMCs had to ask for their budget from other agency This would cause budgetary pressure and restrict some activities of AMCs  All of them had large amount of non-performing assets (as percentage of total financial assets) transferred to them (Mexico: 17%, The Philippines: 21.7%, and Ghana: 51 %)  All the successful AMCs had a small amount of NPL (as percentage of total financial assets) transferred to them (Spain: 1%, USA: 8%, Finland: 5.2%, and Sweden: 7.4%)  All of them had sufficient funding to cover for their purchase and everyday expenses  They all had skilled staff and good governance  Most assets transferred to AMCs were real estate or real estate related assets, which was easy to liquidate and free out political pressure They all had developed capital market and private sector led economies 58 APPENDIX III - BANK AND NPLS ANALYSIS Table Reported loans (2012) Current loans Special mentioned loans Sub-standard loans Doubtful loans Loss NPLs (%) Reported loans (2012) Current loans Special mentioned loans Sub-standard loans Doubtful loans Loss NPLs (%) Source: FS for 2011, 2012 of the above banks and CafeF.com 59 Reported loans (2011) Current loans Special mentioned loans Sub-standard loans Doubtful loans Loss NPLs (%) Reported loans (2011) Current loans Special mentioned loans Sub-standard loans Doubtful loans Loss NPLs (%) Source: Data from banks’ FS 2011 and 2012 Note: * Use data for quarter 3/2012 In billions of VND Some banks did not provide their loans classification: ABBank, Maritime, OCB, SeABank, VIB, Southern Bank Loan classification from Bao Viet was got from CafeF.com The bank does not provide Note to Financial Statement 60 Other banks have not published their FS in 2012: Agribank, Dong A, GPBank, Kien Long, MDB, MHB, Navibank, Saigon Bank, SCB, SeABank, Tien Phong, Trust Bank, VietA, Vietbank Table Some of the selected financial data from the 18 banks, with amount of NPLs are adjusted according to Note to financial statement Adjusted NPLs NPLs (%) Total loans to customer Loans to other FI Cash & Gold at other FI Debt securities from FI and economic entities Other asset Receivables Interest, fees receivables Provision, except other asset Total Provision Total Assets Equity & reserve 61 Adjusted NPLs NPLs (%) Total loans to customer Loans to other FI Cash & Gold at other FI Debt securities from FI and economic entities Other asset Receivables Interest, fees receivables Provision, except other asset Total Provision Total Assets Equity & reserve Source: Data from banks’ FS 2012 Table Case - Adjusted NPLs - NPL (Adjusted) - (NPL - Provision) / Equity Case - percent of debt securities and loans to other FI are NPLs - NPL - (NPL - Provision) / Equity Case - addition percent of debt securities and loans to other FI are NPLs + percent of Cash & Gold are not returnable - NPL - (NPL - Provision) / Equity Case - addition 10 percent of debt securities and loans to other FI are NPLs + percent of Cash & Gold are not returnable - NPL - (NPL - Provision) / Equity Case - NPL ratio in each bank is 15 percent (include debt securities) - NPL - (NPL - Provision) / Equity 63 Case - Adjusted NPLs - NPL (Adjusted) - (NPL - Provision) / Equity Case - percent of debt securities and loans to other FI are NPLs - NPL - (NPL - Provision) / Equity Case - addition percent of debt securities and loans to other FI are NPLs + percent of Cash & Gold are not returnable - NPL - (NPL - Provision) / Equity Case - addition 10 percent of debt securities and loans to other FI are NPLs + percent of Cash & Gold are not returnable - NPL - (NPL - Provision) / Equity Case - NPL ratio in each bank is 15 percent (include debt securities) - NPL - (NPL - Provision) / Equity ... MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS, HO CHI MINH CITY FULBRIGHT ECONOMICS TEACHING PROGRAM PHAN THỊ MINH KHOA PUBLIC ASSET MANAGEMENT: A STUDY OF ASSET MANAGEMENT COMPANIES AND. .. of management, realization and disposal of distressed assets A good framework can provide a good loan categorization system that can help the authorities know the exact amount of distressed assets... circular 02/2013/TT-NHNN For more information about difference in loan classification, read Vu Thi Mai Tram (2012), pp 57 - 60 11 CHAPTER ASSET MANAGEMENT COMPANIES 3.1 Asset management companies