Will Vietnam's bad bank offer distressed opportunities?

Dragon Capital says Vietnam Asset Management Co could open up distressed bank debt opportunities in the country, but Fitch Ratings is less convinced.
Will Vietnam's bad bank offer distressed opportunities?

Vietnam Asset Management Company (VAMC) – a central bank-backed vehicle created to deal with the country’s long-standing non-performing loan (NPL) problem – could open up attractive opportunities in terms of distressed bank debt assets. But not all are convinced of the scheme’s potential for investors.

VAMC, set up on July 9 with 500 billion Vietnamese dong ($23 billion) of seed capital, will issue bonds and use the funds to buy bad debt from local financial institutions.

This ‘bad bank’ could be just what the debt-laden banking sector needs. While the country’s central bank reported non-performing loans comprising 8.8% of Vietnamese banks’ total lending at the end of September, Fitch Ratings estimates that this number may actually be twice as high.

The NPL sector, now overseen by VAMC, may present a unique set of opportunities for distressed investors, says Tuan Le Anh, head of research at Ho Chi Minh City-based fund house Dragon Capital.

Le estimates that 50-60% of the banking sector’s NPLs are collateralised by real estate assets, with banks taking in roughly 1.35 times the loan value as collateral to mitigate credit risk. As such, if these NPL assets are sold at steep discounts, he argues, they will “present lucrative distressed investment opportunities for institutional investors”.

He declined to comment on whether Dragon Capital, which manages an Ireland-listed closed-end fund focused on Vietnamese property, is mulling these opportunities.

Vietnam’s government created the NPL conduit in an effort to soak up the country’s bad debt. Through this scheme, banks will be able to exchange their collateralised NPLs for zero-coupon, five-year special bonds issued by VAMC.

Lenders with NPL ratios of 3% or more will be required to sell bad debt to VAMC, notes Fitch. Banks in turn will have to make a 20% provision for each of the five-year terms to write-off the losses associated with their NPLs.

Meanwhile, banks can obtain preferential funding from the State Bank of Vietnam using VAMC-issued special bonds as collateral at the central bank’s open-market auctions. The banks can then use this funding to make new loans to customers. 

The scheme is in some ways similar to the US Federal Reserve’s quantitative easing programme, says Le: VAMC is buying commercial bad debt to improve the quality of Vietnamese banks’ balance sheets, while simultaneously injecting liquidity into banks, with the eventual aim of boosting credit growth.

However, Le argues that Vietnam’s programme is “better” than the US QE, “because the unwind is already designed and announced upfront, now that banks will have to make 20% provisions for each of the five years to write-off the government-guaranteed bond value”.

But the VAMC programme is not without its challenges. The implementing of tighter rules on classifying debt has been pushed back until June 2014. Without proper classification and reporting in place first, there could be a delay in transferring impaired loans, says Alfred Chan, director of financial institutions at Fitch.

Moreover, he argues that investors will likely not be able to buy distressed assets unless the banks would receive profits were the VAMC to sell the assets.

“The only condition whereby selling the bank debts and collaterals to other investors might be considered is if such sales would have an positive impact on the bank’s capital – for example, if there are some recoveries and the banks can get a write-back of the amount they had written off,” says Chan.

Furthermore, distressed-debt sales are not yet a priority for the banks, as key operational details such as how the NPL transfer will be executed between banks and VAMC remain unresolved.

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