Hanoi (VNA) -Some Vietnamese banks have made meaningful progress in the resolution of legacyproblem assets, a positive credit for the sector, Moody’s said onFebruary 5.

This is because the disposal of problem assetsimproves the banks’ asset quality and removes a drag on theirprofitability.

Asia Commercial Bank (ACB) has been the latest local lender to have fullywritten down bonds issued by the Vietnam Asset Management Company (VAMC).Before it, Vietcombank, Techcombank and Military Bank, successfully wrote downtheir VAMC bond exposures from their balance sheets in the fourth quarter of2017.

According to Moody’s, asset quality at most Vietnamese banks stabilised in2017, helped by healthy macroeconomic conditions. The banks’ profitabilityalso improved as higher-yielding retail loans increased, enabling them toallocate higher provisioning expenses to write off their VAMC bonds ahead ofschedule.

Additionally, enhanced legal frameworks, such as Resolution 42, which allowsbanks and VAMC to rapidly repossess collateral in the event of a borrowerdefaulting, allowed banks to be more active in managing bad debts. As a result,the total stock of VAMC bonds at rated banks decreased in 2017, the firstdecline since VAMC began operating.

With this being said, banks are on track towards resolving bad debts, accordingto Moody’s, although asset risks remain elevated for some banks owing to theirlarge exposure to problematic legacy assets.

Given a favourable macroeconomic environment and the help of new laws such asResolution 42, other rated banks are also likely to make progress in resolvinglegacy problem assets over the next 12 months to 18 months.Generally, with improved profitability, banks are now capable of increasingcredit provisions and building up buffers against problem assets.

At this pace, more banks are likely to fully write down their VAMC bondholdings by the end of 2018, Moody’s concluded.

The State Bank of Vietnam (SBV) established VAMC in July 2013, with a policymandate to take over bad debts that had plagued Vietnamese banks in prior yearsand to manage recovery work. The company takes non-performing loans (NPLs) offbanks’ balance sheets in exchange for special bonds it issues.

VAMC bonds do not pay interest and banks have to effectively recognise lossesrelated to the NPLs, as they provision for the VAMC bonds overeither five or 10 years, so these assets add to credit costs and hurtprofitability.

Alternatively, if the VAMC succeeds in recovering a bank’s transferred NPLs,any recovered value can be transferred back to the bank. However, thecumulative NPL recovery rate by VAMC has been low at approximately 20 percent.Through this mechanism, banks have been able to lower their reported NPLratios, but they can only truly resolve bad debts through a full write-down orcash recovery of VAMC bonds.-VNA