Vietnam’s non-performing loans (NPL) market has largely remained under the radar for investors, with some notable exceptions including the International Finance Corporation (IFC) and Saigon Asset Management, which has set up distressed funds.
However, the opportunity in the NPL market is huge, feels one investor.
“It is a very big market… All the banks report their NPLs under 3 per cent, but that does not include the loans they sold to VAMC [Vietnam Asset Management Corporation]. I would take 15 per cent of the total lending in the entire economy as the volume of NPLs in the country,” says Akira Kondoh, executive board member of IDS Argo Servicer.
IDS Argo is a joint venture between Vietnam-based investment firm IDS Equity Holdings and Japan’s NPL and realty investment specialist Argo Global Investment.
Kondoh, a former governor of the Japan Bank for International Cooperation, feels investors are waiting to see traction in the market. “We should build a track record in order to invite foreign investors to work together with us,” he said.
Samurai Power, the parent group of Argo, picked up a significant minority stake in IDS Equity Holdings in 2018 and Kondoh joined its board of management. IDS specialises in restructuring and value investment in potential family businesses as well as state-owned enterprises Vietnam. The firm is looking to increase its portfolio of NPLs.
What is the current state of the NPL market in Vietnam?
In Vietnam, non-performing loans are handled by the VAMC.
VAMC is purchasing the loans in two types of transactions: issuing bonds in exchange for the NPLs at book value and acquiring the NPLs at market prices. Even as VAMC holds the loans, the banks still take charge of recovering the loans and liquidating collaterals. Since its establishment, the company has taken in VND 340 trillion ($14.7 billion) NPLs through the special bond instrument and over VND 3.4 trillion through market price purchases. Also, during this period, VAMC has recovered more than VND 78 trillion.
The actual NPL ratio of the banking industry is much higher than the reported data by the central bank. In 2018, it was said to be 1.89 per cent compared to 2 per cent in 2017. However, the National Financial Supervisory Commission indicated that the actual rate in 2017 was 9.5 per cent.
If NPLs are quickly resolved, about 10 per cent of the total outstanding loans can be pushed out as capital for the economy. Capital should be raised from both the government sector and private forces to accelerate the process of liquidating NPLs.
An open NPL market should exist instead of the monopoly role of the asset management company. The participation from private, overseas investors will provide not only more capital but also more efficient management models to help businesses restructure and revive.
How do you see the NPL market in Vietnam, given that it is largely seen as an area for the government to intervene in to secure the country’s financial safety?
In Japan, banks sell the NPLs not just to government agencies but also to foreign investors. The market has attracted big global funds like Cargill and Goldman Sachs into the banking market. These investors have been making both NPL portfolio and purchases of banks. In some cases, the government bought the bankrupted organisations and sold them to foreign investors so that these investors would start the business again.
Japan had over $300 billion in distressed assets. Domestically, we have had over 20 years of experience investing in the distressed loan market. Our Japanese partner, Argo Holdings, has invested in 337 loans constituting $11 billion and representing 16,039 borrowers.
We have also set up operations in other regions of Asia. In Thailand, Argo has purchased $7 million NPLs and will soon obtain our NPL licence. We are also setting up base in the Philippines as well as Singapore as our hub for NPL business in Asia countries. In China, we plan to start a full asset management service with a focus on large-sized NPLs.
Can you describe the role of private investors in NPL investing?
NPL is a problem for the banks, borrowers and the economy. For banks, the loans are on the balance sheet but they cannot utilise the asset. Investors like us buy these loans, allowing their balance sheet to have cash, and banks can use the money to lend to new borrowers.
The borrowers of these bad loans are also a problem to be resolved. Through NPL purchases, we will become the lender to these borrowers and try to make them pay back. We work with them to find a mutual solution for an exit.
NPL investors, especially foreign investors with new cash, will help the overall economy.
We value the loans based on cash flow projection, evaluating the collaterals and estimating how much borrowers can pay in the future by reviewing their loan documents and financial statements. We put cash flow projection in our study, using a discount rate to read the present value.
Banks normally think that by selling the loans at discount, they are recording losses. But losses have already happened, and we’d better convert these bad debts on the balance sheet into cash.
Is it fair to say the distressed asset market is offering more sellers?
It’s not so easy, because the banks would not want to sell loans at a loss. But if we look at the big picture, it is efficient to sell bad loans to investors to receive cash. Sooner or later, banks will recognise that it is the way it should be. It is happening in many other countries in the world and Vietnam should adopt the practice. Otherwise, the country will be behind the competition in the global economy. In that sense, we want to be the front runner and fast runner to open the door of NPL investing to others.
What are the types of asset transactions and sectors that you are looking at?
Real estate collateral is one that we can add value to. After adding value to the asset, we will sell to independent investors. Meanwhile, we are open to anything if we can make a plan for the future of the collateral.
We mainly purchase loans from the banks with cash, although sometimes we do purchase collateral from borrowers.
What is the normal rate of returns for NPL investments?
We do not try to squeeze every asset we are interested in. Our investment approach is to support the borrowers to get out of trouble and recover their business, eventually making money, then we will recover our initial investments. Buying the NPLs is the same thing as betting our future on the borrower’s future. The return on investment will be similar to any other investments.
What is the connection between NPL investing and the M&A flow?
We don’t do passive investment, but active investment in which we restructure the business to make sure every investment we put in goes in the right direction. The same mechanism is applied to NPL.
NPL, in a nutshell, is as a distressed company and it is very much related to M&A activity. When we make an investment into the borrowers, we also consider converting our loans to equity, from there we can exit.
Can you give some examples of successful transactions?
There was a lending company in Japan which provided loans to consumers. In the beginning, we were buying these consumer loans as NPLs. Then its shareholders sold 100 per cent of the company to us. We kept all the employees and managed it better. After five years of operations, a bigger firm purchased our shares in the company, giving us a big profit as a result of increased value to the lending company which was led by our operational improvement actions.
We are doing one transaction in Vietnam which will be disclosed soon. In Vietnam, we look at companies that the business itself is still doing quite okay but the owners overspend on personal expenses. When we look at it, we feel comfortable as we understand the business and the asset still has value. What we can do is we negotiate with the bank to buy the loans and pump a little more money so that the business runs again.
All in all, how big is this market in Vietnam?
It is a very big market and we are trying to find out. All the banks report their NPLs under 3 per cent, but that does not include the loans they sold to VAMC. I would take 15 per cent of the total lending in the entire economy as the volume of NPLs in the country.
Vietnam is doing fine, but it is a small economy and cannot defend itself against global turmoil. We are actually sitting on a time bomb. If the US and China markets burst, we will go back to 2008. We cannot control the world economy but we should be able to fix and control that time bomb.
So what is your project for the sustainability of this market? How will it open up opportunities for other international investors?
We are the front runner in NPL purchasing in Vietnam. Sustainability of the economy is reflected by how healthy the banking system is. If a crisis happens, the Vietnamese economy will be vulnerable. It is necessary to establish a one-time solution but big enough to prepare for the future. NPLs will gradually expand but our capacity is limited. So we should build a track record in order to invite foreign investors to work together with us. It is a grand design for the future.
Track record is very important, especially for a front runner. That’s what we trying to do in the near future to prepare for another crash.
Capital is always available if the investors find a good target in Vietnam, which is an attractive market in Southeast Asia. It is the same thing for NPL. We are under great pressure being a front runner in the sector. There is no other foreign company trying to do NPLs in Vietnam probably because they don’t understand the system. If the legal framework is not completed, nobody is doing anything. Meanwhile, we are trying to do everything, educating the market and using our energy and resources to test the water. We might fail but we are willing to go ahead and do it. If other big investors come, NPLs will be solved and we will no longer sit on the time bomb. No investment is without risks, but we are determined to go through.