Other views on bad debt analysis and contingency costs

Along with the growth of business, credit quality is the issue most interested in bank stocks in each reporting season. High or low bad de...

Along with the growth of business, credit quality is the issue most interested in bank stocks in each reporting season. High or low bad debt rates, rising or falling, more or less risky hedges directly affect earnings, ie, dividends and stock prices.

 Are high cost backups really negative?
BIDV is the name most mentioned in the financial statement for the first quarter of 2018 with a record cost of over VND 6,000 billion, up 155% over the same period in 2017 and equal to 70% of the pre-tax profit. room). However, the bank's overdue debts fell sharply by VND2,402 billion, while NPLs only slightly increased by VND145 billion in the first quarter of 2018, so much of the provisioning expenses were reserved for VAMC bonds.


Remember that by the end of 2017, BIDV is still one of the banks with the most outstanding VAMC bonds and VAMC bonds have a provision of VND9,767 billion. For VAMC bonds, the State Bank of Vietnam (SBV) only stipulates the minimum provision level, not the maximum level. As a result, the pre-provision profit is usually balanced by the bank, ensuring pre-tax profit growth rate and completion of the plan assigned, the remaining how much will set aside VAMC bonds. The favorable point of BIDV is the net profit from business activities in the first quarter of 2018 to 85% growth over the same period in 2017. According to current business growth and provisioning, BIDV may Final settlement of VAMC bonds right in 2018. Then, for each bad debt is recovered, the bank will record all the profits. The majority of NPLs sold to VAMC are debts with clear legal documents and adequate collateral, so the recovery is probably only a matter of time. That is the "save", promising the bank's sudden profits in the future. From this point of view, the cost of rising reserves is a good thing, not a negative point, "corrode profit" as many analysts.
In the opposite direction, the cost of some banks in the first quarter of 2018 is quite low. Some argue that these banks set up low provisioning to "hide holes". However, as the information in the Q1 financial statement is rather negligible, caution should be exercised when making the above statement. In fact, the "Provision for credit losses" in the bank's statement of income is the difference between the provision expense made during the period (increase in expenses) and the income from repayment Entry in the period (reduce costs). Therefore, it is quite possible that the cost of provisioning will be low as a result of the reversal of provision (due to overdue debt recovery), while provisions are still in place.


High bad debt rate is good or bad for investors?
High NPLs affect profitability and reflect weaknesses in credit activity, which is undesirable for the bank. But for investors intending to buy bank shares, it may have implications.
Recall the years 2011-2012, the health of many banks worsen. Up to nine banks are listed as weak, forced restructuring. It is worth mentioning that the weak banks previously announced profitable business, bad debt ratio is lower than the regulation (3%). After the inspection, the real bad debt ratio was discovered, mostly to double digits. Many banks have negative capital charter, even negative equity. Currently, thanks to the inspection and inspection of the management, the classification of banks has been more standard than before. However, there are still bad debts lurking in other assets (such as investments, receivables and receivables). When assessing asset quality of a bank, only the high or low bad debt ratio is insufficient. Investors should study and evaluate other information.
On the contrary, some banks have reported a bad debt ratio of more than 3%, which is accompanied by large contingencies. A high rate of bad debt is considered negative, but it can also contain the message of transparency, the pressure on the reserve costs are not much (because it was fully set up). Looking at the financial statements, NPLs are not as scary as bad NPLs (in essence bad debt but not classified as NPLs).
In addition, some new banks that have been expanding their consumer loans through financial companies (such as VPBank and HDBank) have reported overdue loans and bad debts tend to increase. However, due to the nature of unsecured consumer loans, the ratio of non-performing loans is considered to be high (about 5%). At the same time, the bad debt risk of consumer loans is also offset by a 3-5 times higher lending rate than conventional loans.
Is coverage of bad debt significant?
Analysts often use a coverage ratio of NPLs to assess the Bank's ability to defend against NPLs. Vietcombank has the highest NPL coverage ratio (123% at the end of the first quarter of 2018). But this rate is higher than 100%, Vietcombank provision is more than the bad debt you have? Actually not. The reason for this ratio to exceed 100% is that the reserve balance is used as a death penalty not only for bad debt (groups 3, 4, 5) but also: (1) Group 1, Group 2 and (2) Specific provision for Group 2 debts.
General provisions (equal to 0.75% of outstanding loans) are provisions that banks must deduct from any credit (excluding Group 5 debt). With a loan of VND1, the bank has to make a general provision of VND0.75, although the loan is still considered good. General provision usually accounts for a large proportion of the total provision (in the case of Vietcombank at the end of the first quarter of this year, 42.7%). With the addition of specific provisions for group 2 debts, the more the numerator and denominator of the formula (Bad Balance / Bad Debt), the less the uniformity, resulting in reduced analysis.
In fact, the formula for calculating bad debt coverage ratios is more appropriate: the provision balance of bad debt / bad debt. However, financial statements of Vietnamese banks do not have information on the provision balance of bad loans, instead, the provision is only divided into general provisions and specific provisions. Investors may refer to an alternative rate, referred to as "Overdue Debt Overdraft Rate", calculated as (Specific Balance + 0.75% Group 2, 3, 4) Total debt overdue. This ratio of Vietcombank at the end of the first quarter of the year is 39.9%, implying that in the amount of 13.978 billion of overdue debt, the bank has made provisions of 5,583 billion (39.9%). If the worst case occurs (all overdue debt can not be recovered and the security assets lose value completely), the maximum reserve must be added is 8.395 billion.
Bad debt analysis is not complicated, but it requires investors to understand accounting principles, the most important of which is the principle of debt classification and provision / reversal. In addition, recognizing tricks to cover bad debt also helps investors avoid the trap when buying bank shares, or do not miss the opportunity to invest in a bank with high non-performing loans. transparent.

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High Tech Brain: Other views on bad debt analysis and contingency costs
Other views on bad debt analysis and contingency costs
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