VAMC Improves Liquidity at Vietnamese Banks, But Does Not Provide Capital, Says Moody's

Vietnamese banks can improve their liquidity by transferring problem loans to the Vietnam Asset Management Company (VAMC, unrated), the newly-launched government-owned entity with a mandate to take over bad debts from the banking sector and manage the recovery process, according to Moody's Investors Service.

 

"The VAMC takes problem loans off banks' balance sheets and in exchange provides the banks with special VAMC bonds, which do not pay interest, but can be temporarily placed with the State Bank of Vietnam for liquidity" says Gene Fang, a Moody's Vice President and Senior Analyst.

 

"However, banks still retain the economic risks related to the problem loans," adds Fang. These views were outlined in Moody's just-released special comment titled, "Vietnam Asset Management Company: Answers to Frequently Asked Questions."

 

The State Bank of Vietnam (unrated) launched the VAMC in July 2013. The report answers questions on how the VAMC operates, and what it can and cannot do to address current problems in the Vietnamese banking system.

 

The report also compares the VAMC with the Slovenia's Bank Asset Management Company (unrated), an entity set up in the European country last year to deal with similar issues of bad loans and related undercapitalization. However, unlike the approach in Slovenia, the VAMC's role has not included recapitalization of banks.

 

Though Moody's expects banks to report lower problem loans after transferring assets to the VAMC in exchange for VAMC bonds, banks would still retain the economic risk of the problem loans. Regulations require banks to make full provisions for VAMC bonds over five years, which effectively writes down the value for transferred assets, thus shifting the economic cost of potential losses to the bank. At the same time, if the VAMC successfully sells the assets to a third party, any recovered value can be retained by the bank.

 

Banks may repurchase (repo) 70% of the net value of the VAMC bonds with the State Bank of Vietnam for liquidity at a cost set at 2.0% below the current refinancing rate of the SBV.

 

However, in practice, no repo transactions have occurred, partly because repo facilities have not been established, and partly because banks' liquidity requirements are low.

 

Liquidity has improved significantly in the banking system compared with when the VAMC was first established, as a stable inflation rate has restored some confidence in the local currency.

 

At the same time, loan demand remains extremely weak and one-month interbank rates had fallen to 2.98% as of March from 5.66% in early September 2013. As a result, the potential yield on incremental liquidity may be limited.

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