Non-performing loan management and provisions at Military commercial joint stock bank for the period of 2010-2021 = Quản lý nợ xấu và trích lập dự phòng tại ngân hàng thương mại cổ phần quân đội giai đoạn 2010-2021
INTRODUCTTION
Research background
Vietnam's financial history has been marked by two significant non-performing loan crises, the first occurring in the late 1990s and early 2000s The Asian financial crisis's adverse effects, combined with the overextension of state-owned enterprises beyond their primary operations, led to a substantial increase in non-performing loans within the Vietnamese banking system.
The 2012-2013 non-performing loan (NPL) crisis, triggered by a real estate bubble, resulted in a significant accumulation of NPLs, which has had lasting negative impacts on the banking system.
Since 2013, to settle with the NPL increment, the Government and the State bank of Vietnam gave out many solutions, including:
Resolution No 42/2017/QH14, effective from August 15, 2017, was implemented for five years to pilot the settlement of non-performing loans (NPLs) by credit institutions This resolution introduced amendments to policies regarding the handling of NPLs and their collaterals As a result of its application between 2016 and 2020, the ratio of NPLs on the balance sheets of financial institutions consistently decreased, remaining below 3%.
Figure 1 NPL ratio of the banking sector in Vietnam from 2016 to the third quarter of 2021
(Source: Statistical report of the State Bank of Vietnam)
Since early 2020, the State Bank of Vietnam (SBV) has implemented new regulations to alleviate the financial strain on businesses caused by the COVID-19 pandemic These measures include a revised timeline for loan forbearance and an expanded range of loans eligible for debt rescheduling, aimed at facilitating the management of non-performing loans (NPLs) within banks.
Under Circular 03/2021, effective May 17, 2021, loans allocated before June 10, 2020, are eligible for rescheduled payments of principal and/or interest, with repayment obligations due by December 31, 2021 According to the State Bank's report, the non-performing loan (NPL) ratio rose from 1.7% at the end of 2020 to 1.76% by the end of September 2021.
On July 30, The State Bank of Vietnam (SBV) officially issued Circular No.11/2021/TT-NHNN, replacing a previous circular from 2013 on asset classifications, risk provisioning, and utilization of provisioning by credit
The State Bank of Vietnam (SBV) is intensifying efforts to manage non-performing loans (NPLs) in response to the COVID-19 pandemic's delayed impact on the banking sector, projecting that the NPL ratio could rise to between 7.1% and 7.7% by the end of 2021, nearly double that of 2020 To address this issue, the SBV is collaborating with relevant stakeholders to establish a comprehensive legal framework for managing NPLs in credit institutions and foreign bank branches, while also seeking to amend existing laws related to debt restructuring.
The State Bank of Vietnam (SBV) is actively implementing targeted policies to assist banks and businesses in managing non-performing loans (NPLs) amid the ongoing economic challenges posed by the epidemic.
Research motivation
In a market economy, banks are crucial financial institutions that significantly contribute to economic stability and growth They engage in a variety of transactions and activities essential for supporting their operations and facilitating overall economic activity.
Since early 2020, the Covid-19 pandemic has significantly impacted Vietnam's social and economic landscape, leading to a record high of 101,700 business closures in 2021, a 13.9% increase from the previous year, according to the General Statistics Office The resurgence of the Delta variant in late April 2021, particularly in areas with low vaccination rates, has exacerbated the situation, leaving many businesses unable to fulfill their financial obligations As a result, non-performing loans (NPLs) are emerging as a critical consequence of the pandemic's economic fallout.
In recent years, banks have faced a notable increase in non-performing loans (NPLs) while implementing stringent provisioning measures to mitigate these challenges during the pandemic At Military Commercial Joint Stock Bank, the NPL ratio has seen significant fluctuations, with a 41% rise in accumulated provisions in 2020 compared to 2019 According to Circular No 03/2021/TT-NHNN, provisions for impaired loans are projected to reach 74% of 2020 levels in the first half of 2021, with expectations of a sharp increase by year-end The bank's leadership recognizes NPL management as a critical focus moving forward, aiming to enhance credit quality and effectively address NPLs through improved asset classification and risk provisioning methods Consequently, the author, after pursuing a master's program at HSB, has chosen to explore the topic of non-performing loan management and loan loss provisions at Military Commercial Joint Stock Bank for the period of 2010-2021, intending to apply theoretical insights to analyze the current landscape and propose solutions for the bank's credit operations.
Research objectives
This study aims at making less severe the problem of NPLs in commercial banks The objectives are specifically:
- Evaluate NPL indicators, and review general principle of provisioning for NPLs
- Assessing the current situation of NPL management and provisioning at Military Commercial Joint Stock Bank in the period of 2010-
Research scope
- Space: NPL management and loan loss provisioning at MB bank
- Time: Data is collected for research from 2010 to September 2021 The proposed solutions are expected valuable from 2022
Research structure
The thesis includes five chapters:
- Chapter 2: Literature review of NPL management and loan loss provision
- Chapter 3: Research design and methodology
LITERATURE REVIEW OF NPL MANAGEMENT AND
Literature review in NPL management
In recent decades, high non-performing loan (NPL) ratios have garnered significant attention in research, particularly as they relate to banking crises A 2019 meta-analysis led by Professor Shihadeh, Gamage, and Hannon established a clear correlation between rising NPL ratios in various countries and their detrimental economic impacts Numerous studies from universities worldwide further emphasize that elevated NPL ratios serve as a key indicator of potential bank failures The management of ex-post credit risk is crucial for supervisory bodies overseeing banks and financial stability, as NPLs are recognized in literature as a primary cause of bank failures, which can adversely affect the broader economy Additionally, recent research explores the implications of the COVID-19 pandemic on NPL ratios, highlighting the ongoing relevance of this issue.
Inefficiencies in debt settlement processes and insolvency have significantly impeded the resolution of non-performing loans (NPLs) in the post-crisis period NPLs can be addressed through various methods, including direct market sales, transfers to Asset Management Companies, collection efforts, restructuring, or write-offs While collection is the only approach that depends on formal debt enforcement or insolvency procedures, it is crucial to recognize that the effectiveness of these methods is interconnected and affects the overall resolution process.
The motivations behind acquisition and restructuring efforts are significantly influenced by the prospects for debt collection and the subsequent tax implications Existing literature highlights the critical economic importance of managing non-performing loans (NPLs), indicating that elevated levels of NPLs can lead to severe adverse macroeconomic effects.
Research on loan loss provisions (LLP) has garnered attention from various authors, with studies exploring LLP practices across different countries I.W Pelealua and F.G Worang (2018) found that while loan loss provisions do influence bank profitability, their effects are not statistically significant This indicates that although banks may profit from loan loss provisions, there remains a potential for losses.
According to Makri (2015), credit risk in Greece is influenced by both accounting and macroeconomic indicators Key macroeconomic factors such as unemployment, public debt, GDP, and inflation significantly affect credit risk Additionally, from an accounting standpoint, factors like past loan performance, capital ratio, liquidity, and profitability play a crucial role in determining loan defaults.
Ahmed and associates (2021) depict that credit growth; loan loss provision and bank diversification are positive and significant determinants NPLs in Pakistan
In Vietnam, the resolution of non-performing loans (NPLs) has become a pressing concern for both the government and commercial banks, particularly for small and medium-sized enterprises (SMEs) The COVID-19 pandemic has exacerbated this issue, causing interruptions and instability in cash flows that have led many SMEs to face insolvency Numerous articles addressing this critical topic have been published in specialized magazines.
In her 2015 article on the State Bank of Vietnam's website, Master Dao Thi Ho Huong highlights that managing non-performing loans (NPLs) through Asset Management Companies (AMCs) is a prevalent practice in market economies This approach ensures that the state, private sector, and other economic entities are treated equally under the law Notably, the assets and resources of owners are valued and ranked according to current market prices, regardless of any deviations from these prices by the state budget or central bank.
In his 2020 article published in The Baking Review, author Pham Phu Thai examines the state management of non-performing loans (NPLs) within the global commercial banking system He analyzes various international experiences and, based on the specific conditions in Vietnam, proposes eight strategic solutions to enhance the management of NPLs in the country.
A study by Nguyen Thi Nhu Quynh and colleagues from Banking University of Ho Chi Minh City (June 2020) found that economic growth, bank credit growth, and unemployment rate significantly influence the non-performing loan (NPL) ratio Specifically, a 1% increase in economic growth and credit growth negatively impacts the NPL ratio, while higher inflation and previous year's NPL ratio are positively correlated with the current NPL ratio.
A study by Master Ngo Thanh Xuan, published in the 2020 scientific conference yearbook, examines the concept and economic impact of non-performing loans (NPLs) It evaluates the status of NPLs in Vietnamese commercial banks from 2008 to 2020, particularly during the COVID-19 pandemic The article also analyzes successful NPL management strategies from developed Asian countries, proposing solutions to mitigate NPLs in Vietnam's financial system.
A study by Vo Minh Long, Nguyen Thi Yen, and Pham Dinh Long from Ho Chi Minh City Open University in Vietnam (October 2020) found that non-performing loans (NPLs) are positively influenced by their lagged values.
In the previous year, the capital structure and interest rates, along with returns on assets, inflation rates, and credit growth, negatively influenced non-performing loans (NPLs) However, firm size and gross domestic product did not show significant effects across the models Consequently, this research offers several policy recommendations for effectively managing NPLs in commercial banks.
To provide a better understanding of NPLs is it essential to find out the definition and classification of NPLs used worldwide
2.1.2.1 The definition and classification of NPLs
In March 2017, the European Central Bank (ECB) defined non-performing loans (NPLs) as loans that are not held for trading and meet at least one of the following criteria.
- Material loans, which are more than 90 days past due,
The debtor is evaluated as unlikely to fulfill its credit obligations in full without the liquidation of collateral, irrespective of any overdue amounts or the duration of the delinquency.
A loan is classified as nonperforming when interest and/or principal payments are overdue by 90 days or more, or if payments have been capitalized, refinanced, or delayed by agreement for the same duration Additionally, loans can be deemed nonperforming if they are less than 90 days overdue but there are valid concerns, such as a bankruptcy filing, that full payment may not occur Once a loan is categorized as nonperforming, it must retain this classification until it is written off or until payments are received on the original or any replacement loans.
10 is commonly-but not universally used The second part of the definition ensures that NPLs cannot be reclassified as ―performing‖ simply by replacing them with new loans
According to the International Monetary Fund (IMF), a loan can become non-performing in the following ways:
Loan loss provision
The move towards consistent practices in the management of NPLs is exemplified by regulatory measures concerning loan loss provisions (LLP)
The process of strategically estimating future non-performing loans (NPLs) that may need to be written off is known as Loan Loss Provisions (LLP) Various methods exist for making these estimates, referred to as provisions, with some being legally mandated and others preferred for strategic reasons.
To effectively prepare for potential bad debt, it's crucial to analyze the historical performance of loans within specific demographics This approach allows you to make informed estimates grounded in past trends and supports decision-making with solid data.
2.2.2.1 LLP to prepare for crisis
In today's post-pandemic world, characterized by natural disasters and economic crises, it is crucial for business professionals to grasp the concept of bad debt provision Understanding this topic is more relevant than ever as organizations navigate the challenges of financial uncertainty.
External factors beyond an individual's control can lead to loan or credit defaults, necessitating that businesses and banks prepare for the potential financial repercussions on their bad debt expenses.
In times of crisis, bad debt provision serves as a crucial financial buffer, safeguarding businesses from the adverse effects of customer hardships By adopting a conservative approach and anticipating a higher rate of doubtful debts that may need to be written off, companies can better prepare for potential crises that could lead to increased defaults on loans.
When considering a bad debt provision strategy, one might wonder why organizations don't simply set provisions at the maximum level Estimating provisions too low can lead to significant bad debt expenses, while setting them excessively high may help prepare the organization for potential financial crises.
A bad debt provision strategy involves finding the right balance between conservative estimates and overestimating unlikely potential crises Starting with historical data as a foundation is a prudent approach to ensure accurate forecasting and effective financial planning.
2.2.2.3 LLP to develop organizational provisioning standards
Establishing an organization-wide standard for bad debt provisions is crucial for balancing adequate coverage without overestimating losses By implementing a clear strategy for accounting for bad debt, similar to practices used by Indian credit providers, businesses can enhance operational efficiency and ensure compliance with local provisioning standards.
Hypothesis development/Relationships among research variables
This section formulates the hypotheses to be tested in this study, following an extensive literature review To mitigate credit risk, banks typically set aside a specific amount known as Loan Loss Provisions (LLPs) to absorb unexpected losses in their loan portfolios LLPs serve as a crucial risk management tool for banks The literature indicates that the factors influencing Non-Performing Loans (NPLs) arise from both external and internal sources within banks This thesis will conduct an in-depth analysis of bank-specific variables, as illustrated in the accompanying figure.
2.3.1 Hypothesis 1: High NPL ratio has a positive influence on LLP ratio in
A high non-performing loan (NPL) ratio indicates an increased risk of loss for banks if they fail to recover owed amounts, while a low ratio suggests a lower risk associated with outstanding loans Research by Ahmed and associates (2021) highlights a significant positive correlation between loan loss provisions (LLP) and NPLs within Pakistan's banking sector Furthermore, Bouvatier and Lepetit (2012) demonstrate that the NPL ratio significantly impacts LLPs across various estimations.
2.3.2 Hypothesis 2: Bank size has a positive influence on LLPs in MB bank
The relationship between bank size and non-performing loans (NPLs) shows mixed evidence in the literature Stern and Feldman (2004) suggest that larger banks tend to adopt more liberal credit policies, resulting in a higher likelihood of NPLs compared to smaller banks Conversely, Ahmed et al (2021) identify a negative association between bank size and loan loss provisions (LLPs), indicating that larger banks are more efficient in managing their loans and possess better control mechanisms.
Research indicates that larger banks possess superior management capabilities in recovering loans from borrowers, which suggests a negative correlation between bank size and non-performing loans (NPLs) (Ozili 2019).
2.3.3 Hypothesis 3: There is significant effect of Return on Assets (ROA) on LLPs in MB bank
Research indicates varying impacts of Loan Loss Provisions (LLP) on bank profitability Mustafa (2012) highlights that LLP is crucial for banks operating in Pakistan, significantly affecting their profitability In contrast, W Pelealu and F G Worang (2018) find that while LLP influences the profitability of commercial banks, its effects are not statistically significant These studies underscore the complex relationship between LLP and banking profitability, suggesting that while LLP plays a role, its overall impact may vary across different contexts.
A multiple regression analysis indicates a positive influence of Loan Loss Provisions (LLP) on return on assets (ROA), suggesting that an increase in LLP correlates with a rise in ROA While the primary variable in this research is anticipated to positively affect profitability, its impact is not statistically significant.
2.3.4 Hypothesis 4: Bank solvency has a negative influence on LLPs in MB bank
The banking solvency ratio, defined as total common shareholders' equity relative to total bank assets, highlights a negative correlation between the capital to assets ratio and loan loss provisions, supporting the capital management hypothesis This hypothesis suggests that banks with lower regulatory capital are more likely to increase general loan loss provisions to maintain adequate capital ratios The author anticipates a negative relationship between these two variables.
2.3.5 Hypothesis 5: interactive relationship between time and LLPs in MB banks
Current research on the correlation between LLP and time is limited This study aims to investigate the validity of this hypothesis across different time periods at MB Bank.
Proposed research model
2.4.1 NPL management based on indicators
After classifying of debts, the bank shall calculate the following indexes:
An increasing Non-Performing Loan (NPL) ratio over the years indicates potential issues in a bank's credit risk management, signaling the need for a thorough review Consequently, NPL ratios serve as a fundamental criterion for assessing the credit quality of a bank's assets.
Non-performing loans (NPLs) indicate a bank's deteriorating ability to recover capital, shifting from a normal risk level to a heightened risk of capital loss and irrecoverable debts among 25 credit institutions.
The total outstanding balance reflects overdue debt (OD), which includes any principal or interest that is past due, encompassing OD groups 2, 3, 4, and 5 Overdue debt serves as a crucial indicator for assessing the financial health of an institution and impacts all aspects of banking operations.
Total credit risk reserve fund
Total bad outstanding balance Loss debts are debts of group 5 It reflects the lost credit and must use the provision fund to offset
According to Circular No 02/2013/TT-NHNN, credit institutions are required to establish credit risk provisions based on specific ratios for different debt groups: Group 1 at 0%, Group 2 at 5%, Group 3 at 20%, Group 4 at 50%, and Group 5 at 100%.
Amount of specific provision required to set up for each customer shall be calculated under the following formula:
- R: total amount of specific provisions required to set up of each customer
- : Being total amount of specific provisions required to set up of each customer from debt balance first to n
Ri: Being amount of specific provision required to set up for each customer respect to original balance of debt It shall be calculated under the following formula:
The term "Ci" refers to the deducted value of security assets, including financial leasing assets, associated with debt "i." Meanwhile, "r" denotes the rate of specific provisions that must be established under the guidelines outlined in clause 2 of this Article.
If Ci > Ai, Ri shall be calculated equal to 0
The total outstanding balance and the non-performing loan (NPL) coverage ratio are crucial metrics for assessing a bank's ability to absorb potential future losses Banks recognize that not all loans will be repaid in full, so they predict NPL rates to ensure they are equipped to manage these losses effectively A higher coverage ratio indicates that banks are better prepared to handle the impact of defaulted loans, enhancing their financial stability.
This paper evaluates the effectiveness of Non-Performing Loan (NPL) management, provisions, and Loan Loss Provisions (LLP) by analyzing the ratio of impaired loans to total gross loans as the dependent variable It highlights that reported impaired loans may differ from the official NPL classification, as impaired loans represent cases where full repayment is uncertain The author treats impaired loans as NPLs for the analysis, focusing on bank-specific factors influencing LLPs at MB Bank The study employs a model to assess LLP changes based on bank size, NPLs, Return on Assets (ROA), Equity to Total Assets (ETA), and year.
The study utilizes the model LLPt = β0 + β1(SIZE)t + β2(ETA)t + β3(ROA)t + β4(NPL)t + β5(YEAR)t + εt, based on the research conducted by Nguyen Van Thuan and Duong Hong Ngoc (2015) This model incorporates key variables such as size, equity to total assets ratio, return on assets, non-performing loans, and year, to analyze their impact on loan loss provisions.
LLP is the dependent variable measured by total LLPs to total outstanding balance β0 is the constant β1, β2, β3, β4, β5 are the regression coefficient
SIZE refers to the total assets of an organization, encompassing the monetary and non-monetary economic resources it owns, manages, and controls This includes all resources that hold current economic value or have the potential to generate future economic benefits for the organization.
28 period of time or in long run Depending on the availability of information, total assets can be derived as follows:
Total Assets = Liability + Owners Equity
Total Assets = Liabilities + Owners Equity + Net Profit – Drawings
Total Assets = Non-Current Assets + current assets
Current assets are assets that can be transformed into cash or cash equivalents within one year of acquisition Examples of current assets include cash, cash equivalents, accounts receivable, marketable securities, inventories, and prepaid expenses.
Non-current assets are long-term resources that provide economic benefits for more than one year from their acquisition or the balance sheet date Examples of non-current assets include fixed assets such as plant and machinery, furniture, land and buildings, as well as intangible assets like goodwill.
The equity to asset ratio (ETA) is calculated by dividing total equity by total assets, represented as Total Equity/Total Assets Total equity is determined by subtracting total liabilities from total assets, reflecting the financial health of a company.
Return on Assets (ROA) is a key financial metric that evaluates a company's profitability in relation to its total assets It reflects the efficiency of a company's management in generating profits from its economic resources The formula for calculating ROA is straightforward and essential for assessing a firm's financial performance.
ROA = Net Income / Average Assets
Or: ROA = Net Income / End of Period Assets
Where: Net Income is equal to net earnings or net income in the year (annual period)
NPL is NPL ratios, which is measured by Total bad outstanding balance to Total outstanding balance
In YEAR, dummy variables are incorporated into a regression model for analysis The error term, ε, represents the residuals, which are assumed to be independently and identically distributed with a mean of zero and constant variance.
RESEARCH DESIGN AND METHODOLOGY
Research design
This research employed descriptive analysis and multiple regression analysis to examine data, ensuring compliance with analysis methods by testing for normality and linearity, with no significant violations detected The descriptive research aimed to gather information regarding the status and analyze the level of non-performing loans (NPLs) at MB Bank from 2010 to 2021, along with the internal impacts on loan loss provisions (LLP).
Data collection
This study utilizes both primary and secondary research data, with primary sources including internal financial and administrative reports from MB Bank Secondary data is sourced from published materials and electronic resources provided by The State Bank and various commercial banks The primary data aids in analyzing and assessing MB Bank's status, while the secondary data supports the theoretical framework and evaluation of the overall banking sector The research predominantly relies on historical data, specifically aggregate financial information from MB Bank covering the period from 2010 to 2021.
Status of NPL management and provision at MB bank
This article analyzes the status of non-performing loans (NPLs) and provisions at MB Bank from 2019 through the third quarter of 2021, incorporating the latest updates and forecasts for the end of 2021 and the upcoming year of 2022.
3.3.1 The process of formation and development of MB bank
Military Commercial Joint Stock Bank (MB Bank) was established on November 4, 1994, by the Hanoi People's Committee and received its operational license from the State Bank of Vietnam Initially created to support military enterprises during the pre-integration period, MB Bank started with a capital of nearly VND 20 billion and 25 employees at a single location in Hanoi The first decade focused on shaping the bank's operational motto, business strategy, and brand identity With a commitment to long-term goals, MB Bank implemented effective solutions to enhance its financial capacity and contribute to the economy while fulfilling the Army's economic-defense responsibilities Notably, MB Bank weathered the 1997 Asian financial crisis as the only profitable bank, and by its tenth anniversary in 2004, it had grown its total mobilized capital over 500 times, reaching more than VND 7,000 billion in assets and exceeding VND 500 billion in profits.
The years 2005 to 2009 were pivotal for MB, laying the groundwork for robust growth in the following years During this time, MB implemented comprehensive reforms, including expanding operational scale, enhancing its network, investing in technology, strengthening personnel, and focusing on customer orientation This period also saw a clear distinction between the management functions of the Head Office and the business functions of branches, alongside the reorganization of business units tailored to individual clients, SMEs, and treasury services.
2009 laid a solid foundation for MB to accelerate implementation of its strategic
32 initiatives, enabling itself to become one of the current Vietnamese leading financial institutions
Between 2011 and 2015, MB aimed to secure a position among the top three joint stock commercial banks in Vietnam that are not primarily state-owned, despite facing challenging economic conditions The bank's listing on the Ho Chi Minh Stock Exchange (HOSE) in 2011 marked a significant milestone in its growth, establishing it as one of the four largest listed banks in the country by market capitalization.
The global economic crisis prompted significant restructuring in the banking sector, leading to profit declines for many banks, with some merging or exiting the market entirely.
MB has consistently adhered to its sustainable and safe development strategy, achieving a leading position in various financial indicators Notably, the company reached its goal of ranking in the top three two years ahead of schedule, accomplishing this milestone in 2013.
In recent years, digitalization has transformed the Vietnamese banking sector, with MB Bank at the forefront of this revolution The bank has made significant strides by launching its independent beta digital bank and introducing the versatile MB Bank App for diverse user needs Additionally, MB Bank offers banking infrastructure and licensing as part of its services, solidifying its reputation as a technology-driven financial institution.
The bank provides a comprehensive range of personal banking solutions, including savings accounts, personal lending, money transfers, and foreign exchange services For corporate clients, it offers account management, corporate lending, and cash collection services, alongside foreign exchange products and guarantee services Additionally, the bank specializes in correspondent banking and financial market services, ensuring a broad spectrum of financial solutions tailored to meet diverse client needs.
33 include e-banking services such as the internet, mobile, and home banking services, and bill payment services to meet all demands of clients
With continuous development efforts, MB bank has always been ranked
The State Bank of Vietnam has recognized MB for its excellence, as evidenced by numerous prestigious awards, including Vietnam Strong Brand, Vietnam Prestigious Brand, and Top 100 Vietnam Strong Brands Additionally, MB has been honored with the Vietnam Gold Star Award and ranked among the VNR500, which lists the 500 largest enterprises in Vietnam The bank has also received accolades such as Prestigious Securities and the Best Payment Reward from renowned international financial institutions like Citi Group and Standard Chartered Group Furthermore, MB was awarded the Third-Class Labor Medal by the President of Vietnam and celebrated with the First-Class Labor Medal for its outstanding contributions.
Labor Medal Subsequently in 2015, MB was honored to be conferred the title
After 27 years of formation and development, MB currently has a team of more than 10,000 employees at six member companies in the fields of banking, life and non-life insurance, securities, asset management and main consumption They are MB securities, MB capital, MB AMC, MB credit, MIC and MB Ageas
3.3.2 NPL management apparatus at MB bank
The bad management is a function of the risk management apparatus at
MB bank The apparatus is well built with many levels of vertical management and structured as follows:
Risk council led by the Vice Chairman of the Board of Directors and the
CEO The functions of the council include:
As an advisor to the Board of Directors and the Board of Members, I facilitate the adoption of processes and policies related to risk management, ensuring compliance with legal provisions and the Charter of non-bank credit institutions.
- Conduct analysis and give warnings about potential risks and measures faced by non-bank credit institutions, long-term and short-term measures of prevention against such risks
Evaluate the effectiveness and compliance of existing risk management processes and policies within non-bank credit institutions Based on this assessment, provide recommendations to the Board of Directors and Board of Members regarding the need for updates to current procedures and operational strategies.
As an advisor to the Board of Directors and the Board of Members, I provide strategic guidance on investment decisions, relevant transactions, management policies, and risk management strategies, ensuring alignment with the responsibilities assigned by the Board.
The Risk Management Department, led by the Chief Risk Officer (CRO), plays a crucial role in supporting the Board-level Risk Management Committee This department is responsible for risk oversight, developing frameworks, formulating policies and methodologies, and independently monitoring and reporting on key risk issues Together, they form the second line of defense for the bank.
Credit risk management division is a division of Risk management
Department, with functions of advice for Director to supervise and manage credit risk The responsibility of this division
- To formulate, submit to General Director (Director) to submit to Board of Directors, Members' Council (for credit institutions) for promulgation of:
The internal credit ranking system is essential for evaluating customer creditworthiness, requiring regular amendments and updates to ensure its effectiveness Proper management and operation of this system involve the systematic collection and integration of customer data and information, which are crucial for maintaining accurate credit assessments.
+ Policy on risk provisions, amendments, supplementations to policy on risk provisions
- Management and operation of the internal credit ranking system
RESEARCH RESULTS
Observational results
MB has solidified its esteemed position, receiving recognition and prestigious titles from the Party, Government, Ministry of Defense, and State Bank Looking ahead, MB remains committed to its vision and strategic goals, facing challenges with unwavering dedication to fostering a civilized and happy society, while actively contributing to the development of the nation.
As of December 31, 2021, the Group's total assets reached VND 607,140 billion (~ 6 times compared to 2010); Charter capital reached ~ VND 37,783 billion (~
In 2023, the Group's profit before tax surged to VND 16,527 billion, with the Bank contributing VND 14,398 billion, marking a remarkable increase of approximately 6.6 times since 2010 Member companies added VND 2,326 billion, accounting for around 14% of the Group's total Risk management remains robust, evidenced by a low bad debt ratio of about 0.89%, with the Bank's ratio even lower at 0.68% and a non-performing loan (NPL) coverage ratio of approximately 349% All performance indicators align with the safety limits set by the State Bank of Vietnam, showcasing a strong Group return on equity (ROE).
~ 23.5% (Banking alone ~ 22.2%), CIR ~ 29% (down 5.5% compared to 2020) With breakthroughs in digital transformation, providing a variety of products
46 and services to reach many customers, MB is in the top 300 most valuable and strongest banking brands in the world (according to a report by Brand Finance)
In the wake of the COVID-19 pandemic, non-performing loans (NPLs) surged across the banking sector; however, MB Bank achieved a remarkable NPL ratio of just 0.58% in the first half of 2021, the lowest in the industry The bank proactively managed NPLs and enhanced its risk provisions during this period, with the credit risk reserve fund significantly increased compared to previous periods By the third quarter of 2021, the ratio of the credit risk reserve fund to NPLs soared to 287%, more than double the level at the end of 2020, demonstrating MB Bank's robust defensive capacity against NPLs As a result, MB Bank stands out as one of the two banks with the highest NPL provision ratio in the entire banking industry, reflecting its commitment to maintaining strong credit quality and safety.
In the end of September, NPLs group five decreases sharply by 40% to
The non-performing loans (NPLs) in group three have risen by 8%, while group four debts have increased by 5%, amounting to a total of 830 billion dong Furthermore, the NPL rate is anticipated to rise in both the short and medium term, which will have ongoing implications for MB's provisioning strategy.
MB Bank's NPL management system functions autonomously, empowered to make decisions regarding provisioning, NPL resolution, and reserve fund utilization Senior management's perspective on NPL management is clear and precise, consistently demonstrating a cautious approach that maintains the NPL ratio at a low level, well within regulatory limits.
By the end of the third quarter of 2021, MB's debt restructuring portfolio represented only 1.9% of the total customer loan balance This low percentage is primarily due to the fact that the restructured debt consists mainly of short-term and medium-term loans, with long-term debt being less prevalent.
The newly issued circular has excluded 47 debts with principal payment periods from restructuring considerations, leading to an unpredictable rise in debt-restructuring portfolios by the end of 2021 and into 2022 as related conditions expand Consequently, the non-performing loan (NPL) ratio is expected to surge significantly, with provisioning continuing to represent a substantial portion of banks' total costs.
The targets established for the bank are straightforward, focusing on overall ratios like credit growth and limitations on non-performing loans (NPL) or overdue debt ratios However, the bank does not define its risk appetite in terms of credit loss for specific industries, market areas, or credit products This absence of tailored strategies for managing NPLs across various industry sectors and credit products results in a lack of effective risk management.
In the third quarter briefing of 2021, the board chair emphasized the importance of ensuring that the Non-Performing Loan (NPL) reserve fund adequately covers the total NPL balance, as bank Loan Loss Provisions (LLPs) are essential for maintaining stability and soundness while fulfilling lending functions The board requires banks to maintain sufficient LLPs to mitigate expected losses, despite a lack of consensus on what constitutes 'adequate' provisions The increase in risk provisions, while necessary due to the economic impact of the Covid-19 pandemic, directly affects profits and creates pressure on branches with high NPL ratios This pressure is exacerbated by the fact that salary and bonus allocations for divisions are based on operating income minus provisions, leading to lower salary funds when provisions are high Consequently, this can negatively impact employee morale and may increase the risk of potential fraud in the future.
The author has found some reasons for restriction at MB bank They are:
Despite the focus on officer training, it remains inconsistent and unstructured Additionally, the ongoing rise in Key Performance Indicators (KPIs) negatively impacts the credit approval process for customers This situation increases the risk of fraud during appraisal and approval, potentially leading to future Non-Performing Loans (NPLs).
The COVID-19 pandemic has significantly impacted businesses, making it increasingly challenging for MB Bank to sell high-value assets such as land, factories, and cars to recover non-performing loans (NPLs) As companies focus on minimizing investments and expenses during the economic slowdown, the real estate market has also slowed, resulting in a limited number of buyers with the necessary capital and interest Additionally, banks face complications in resolving legal issues related to taxation and real estate conveyance, further hindering the transfer of mortgaged properties.
Despite the presence of various legal documents regulating the settlement of non-performing loans (NPLs) in credit institutions, significant challenges persist in implementation, particularly regarding borrower cooperation and public perception The introduction of a new law focused on NPL management is essential to ensure the continued resolution of NPLs following the expiration of Resolution 42 This legislative action will enable credit institutions to expedite NPL handling, thereby mitigating potential economic risks.
Empirical results
4.2.1 Trend analysis of LLP in MB bank
The analysis of MB Bank's Loan Loss Provisions (LLPs) from 2014 to 2021 indicates a consistently high LLP ratio, averaging around 2.2% Notably, the years 2016 and 2017 experienced significantly lower LLP ratios compared to other years, with a minimum of 1.14% in 2016 and a peak of 2.23% in 2021.
The Non-Performing Loan (NPL) ratio at credit institutions in Vietnam has significantly decreased from 3.61% in 2013 to 1.63% in 2019, marking the lowest level in twelve years This improvement is attributed not only to the government's initiatives but also to the efforts of MB Bank in managing NPLs and the crucial role played by the Vietnam Asset Management Company (VAMC) since its establishment in 2013 However, the COVID-19 pandemic has negatively impacted the restructuring and settlement of NPLs among credit institutions during the 2016-2019 period.
During the pandemic years of 2020-2021, economic growth faced significant challenges as production and business activities stalled This stagnation led to an increase in credit risk and heightened pressure on non-performing loans (NPLs) Consequently, the loan loss provision (LLP) ratio began to trend upward from 2020.
Figure 4 Trend analysis of LLP in MB bank
(Source: Administration reports of MB bank in 2019-2021)
This ratio is expected to rise to nearly 2.8% from the end of 2021 to 2022
4.2.2 Analysis of factors affecting LLP
50 The results present in the table below represent the coefficients and other descriptive statistics that have been done
Table 3 Coefficients – Descriptive statistic Variables N Estimate Std Error t value Pr (>|t|)
Note: **, * represent significant at 5% and 10%, respectively
The analysis reveals that at a 5% significance level, bank size and time are key factors influencing the level of loan loss provisions (LLP) at MB Bank Specifically, the positive correlation between total assets and the LLP ratio over the past twelve years indicates that an increase in bank size leads to higher LLPs, thereby supporting our second hypothesis that bank size positively impacts LLPs at MB Bank This finding aligns with previous research by Stern and Feldman (2004) and Ahmed (2021).
The analysis reveals a negative coefficient of -0.33 for time, with a statistical significance of 0.0412, indicating that MB Bank will experience a decrease in loan loss provisions (LLPs) over time This finding supports Hypothesis 5, which posits an interactive relationship between time and LLPs in MB Bank.
The model indicates a significant positive relationship between the NPL ratio (63.47) and LLP (0.0601), aligning with the findings of Ahmed et al (2021) This suggests that MB Bank, which has a higher NPL level, is likely to face increased challenges.
52 higher LLPs Likewise, in an attempt to reduce high level of NPL, the bank usually tightens its credit policy to prevent NPL from the first step
The coefficient of the total equity to total assets (ETA) variable is not significant for MB bank, indicating that loan loss provisions (LLPs) are unaffected by this measure in the sample Consequently, hypothesis 4 is not supported, suggesting that bank solvency does not influence LLPs at MB bank This finding is consistent with the results for the return on assets (ROA) variable, which also does not support hypothesis 3.
CONCLUSION AND SUGGESTIONS
Conclusion and implication
This study examines the management of non-performing loans (NPLs) and loan loss provisions (LLPs) at MB Bank, highlighting the interplay between these factors and their impact on bank-specific variables MB Bank's cautious approach to NPL management is evident in its declining NPL ratio and rising NPL coverage ratio, which positions the bank to mitigate potential future operational shocks.
A panel dataset is utilized to test five hypotheses, revealing that MB bank is positively influenced by higher levels of non-performing loans (NPLs) and bank size To enhance loan loss provisions (LLPs) and improve overall bank efficiency, MB bank should focus on optimizing its equity and payables within the total asset structure.
Moreover, computer correlation statistics revealed that there existed significant negative relationship between time and LLPs This implied that, in the long term, LLP ratio will continue to trend down
Contrary to findings from other studies, our model indicates that, at MB, neither the return on total assets nor solvency has an impact on LLPs.
Limitation and directions for future research
The study examines the impact of only some bank specific on NPLs in
MB bank Within the scope of this paper, the author does not research on the existence of strong relationships between macroeconomic factors with LLP in
MB bank Especially during a pandemic, socio-economic factors will have a profound impact on the NPL situation of all industries
A significant limitation of the study is the restricted data availability, as the author could only gather detailed information from 2010 onwards Consequently, the sample size is relatively small compared to other studies, covering just 12 years, which may not adequately represent the bank's overall development history.
For the study the following recommendation can be made
Some other bank specific factors like profitability, size of liquidity, and macroeconomic factors—such as unemployment and inflation—should be included in future research
Further studies should be done on possible use of provisions for losses on NPLs for profit smoothening in MB bank
The study should be done on other commercial banks in Vietnam to found out if the same results would be achieved at MB
1 Vincent Bouvatier, Lổtitia Lepetit (2012) Effects of LLPs on growth in bank lending: Some international comparisons International Economics;
2 Mulyanto Nugroho, Donny Arif, Abdul Halik (2021) The effect of loan- loss provision, NPLs and third-party fund on capital adequacy ratio
Quarterly Publication; Volume 7 Issue 4 pp 943-950
3 Peterson K., Ozilia, Erick Outab (2017) Bank LLPs research: A review
Borsa Istanbul Review; Volume 17, Issue 3, Pages 144-163
4 Raymond Masavu (2013) Effect of NPLs on interest income of commercial banks in Kenya (Master‘s thesis, School of Business, University of
5 Muhammad Asif Khan (2020) Determinants of NPLs in the banking sector in developing state Asian Journal of Accounting Research
6 Isaac Adu Larbi (2018) Determinants and Performance of NPLs of Selected Commercial Banks in Ghana
7 Bismark (2021) NPLs and Bank’s Profitability: Empirical Evidence from Ghana (Master‘s Thesis, Ritsumeikan Asia Pacific University, Ghana)
8 Binh Dao & Van Do (2013) NPLs in Vietnamese Banks - Quantitative Analysis and Recommendations DOI:10.2139/ssrn.2524222
9 Binh Dao & Van Do (2013) Proposed AMC Model in Resolving NPLs for
10 Chlel S van Benthem The relation among NPL, operating efficiency, and capitalization in commercial banking (Master‘s thesis, Faculty of Behavioural, Management and social sciances, Amsterdam)
11 Phung Le Son (2017) Credit risk management for personal banking at MB bank Son Tay branch (Master‘s thesis, international school, Hanoi)
12 Dung Nguyen Anh (2014) Non-performing loan Case study in Vietnam: causes, consequences, and effects (Degree thesis, International Business, Hanoi)
13 The State Bank of Vietnam (2017), Resolution No 42/2017/QH14 on piloting NPL settlement of credit institutions
14 The State Bank of Vietnam (2017), Circular No.03/2021/TT-NHNN
15 The State Bank of Vietnam (2020), Circular No.01/2020/TT-NHNN
16 The State Bank of Vietnam (2021), Circular No.11/2021/TT-NHNN
17 Professor Shihadeh, Gamage, and Hannon (2019) The causal relationship between SME sustainability and banks' risk The causal relationship between SME sustainability and banks' risk
18 Makri Vasiliki, Tsagkanos Athanasios and Bellas Athanasios (2014)
Determinants of non-performing loans: The case of Eurozone
BUSINESS PERFORMANCE OF MB BANK FROM 2019
Business scale
1.1.1 Capital mobilization Table 4 Capital mobilization of MB bank from 2019 to the third quarter of 2021
Deposit in VND 266,930 333,656 368,867 Deposit in foreign currency 26,981 25,658 25,339
(Source: The Administration reports of MB bank in 2019-2021)
In the first nine months of 2021, the parent bank's capital mobilization reached nearly VND 394 trillion, marking a 10% increase from the beginning of the year and a significant 31% rise compared to the same period in the previous year This impressive growth rate in capital mobilization during the first three quarters highlights the bank's robust performance.
In 2021, the growth rate significantly decreased, falling to less than half of what it was in 2020 While deposits from economic institutions experienced a slight increase in 2020, individual deposits saw a remarkable surge of 24% compared to 2019 during the first three quarters.
In 2021, while enterprise deposits remained stable, individual deposits surged by an impressive 23% since the year's start Demand deposits also saw a continuous increase of 10%, outpacing term deposits by 5% As a result, MB Bank has consistently ranked among the top three banks for Casa ratio since 2018, with demand deposits improving to 36% Despite the challenges posed by the Covid-19 pandemic, MB Bank maintained a strong position, securing the second-highest Casa ratio in the industry.
1.1.2 The loans to customers Table 5 Loans to customers of MB bank from 2019 to the third quarter of 2021
Deposit in VND 216,750 259,528 290,850 Deposit in foreign currency 22,290 24,472 26,431
(Source: The Administration reports of MB bank in 2019-2021)
In the third quarter of 2021, loans to customers exceeded VND 317 trillion, reflecting a 12% increase since the beginning of the year and a 23% rise year-over-year Data indicates that medium to long-term loans have maintained a consistent growth rate compared to 2020, while short-term loans have experienced slower growth The third quarter saw a 19% decline in credit growth from the previous quarter, largely due to the pandemic's impact Additionally, the foreign credit market has gradually decreased over the years, showing no signs of recovery by the end of 2021.
From 2019 to the third quarter of 2021, the share of loans to economic institutions decreased from 51% to 41%, while loans to individuals rose consistently, driven by digital transformation Despite this steady increase in individual loans, slow credit growth resulted in a non-performing loan (NPL) ratio of 1.02%, a decrease from 1.5% in the previous year.
The bank's risk reserve fund increased by 26.1% year-over-year, reaching nearly VND 4,800 billion Consequently, the non-performing loan (NPL) coverage ratio rose to 118.86%, up from 102.73% in the same period last year This positions MB as one of the banks with the highest NPL coverage ratios in the industry.
1.1.3 Customers Table 6 Number of customers of MB bank from 2020 to the third quarter of 2021
(Source: The Administration reports of MB bank in 2019-2021)
In 2021, MB experienced remarkable growth, with individual customers rising by 69% by the end of the third quarter, while corporate customers increased by 21% Notably, the total number of active customers more than doubled compared to 2020, and the active customer rate improved significantly from 29% to 39%.
The bank's impressive growth can be attributed to its ongoing digital transformation journey, aimed at scaling its operations and enhancing its retail banking franchise MB has introduced a range of exceptional digital products and services that have significantly driven its high growth during this period.
Smartbank and opening a bank account on MB app through electronic know-your-customer (eKYC)
Figure 5 The growth of App and user of MB Bank from 2020 to the third quarter of 2021
(Source: The Administration reports of MB bank in 2019-2021)
Since 2020, MB Bank has emerged as a leader in offering attractive digital accounts with high purchasing power As a standout commercial bank, MB Bank has addressed the limitations of digital products and services in export-import activities by pioneering innovative features like online international payment and trade finance The bank's online international payment feature, launched in July, significantly enhances the customer experience.
In 2020, our new feature was enthusiastically embraced by customers, effectively addressing diverse international payment needs such as fund transfers, foreign currency purchases, and transaction management, including amendments, tracing, cancellations, and document submissions This launch also coincided with a refreshed brand identity, enhancing our commitment to customer satisfaction.
Q4.2020 Q1.2021 Q2.2021 Q3.2021APP mới App mới có GDTC Active user App
In the first quarter of 2021, the bank successfully expanded its customer base by over 40% through the introduction of 62 innovative products By the end of this year, it is projected that MB will attract five million new users to its app, representing a threefold increase compared to 2020.
Business performance
Table 7 Business performance of MB bank from 2019 to the third quarter of 2021
Net interest and similar income 14,690 16,630 15,764
Net fee and commission income 1,701 1,843 1,456
Net gain from trading of FX 647 786 913 Net gain from investments 561 861 1,315 Net gain from other activities 2,100 1,456 2,216
Net gain from capital contribution, share acquisition 371 448 195
(Source: The Administration reports of MB bank in 2019-2021)
In the past two years, the State Bank of Vietnam (SBV) has issued official letters urging credit institutions to reduce interest rates and offer complimentary banking services to support customers impacted by the pandemic This initiative has significantly influenced the net interest income (NII) rate.
MB bank, which decreased modestly over years from 2020 to 2021
In 2020, the bank has the lowest cost-to-income ratio (CIR) attributing it to good revenue growth and effective cost management
Figure 2 Total asset of MB bank from 2019 to the third quarter of 2021
(Source: Consolidated financial statement of MB bank)
Total assets Total owners' equity