Banks are showing optimism about business prospects for 2019. However, experts warned that this year there would be many challenges for banks when the application period of Basel II was approaching.
The State Bank of Vietnam (SBV) has just announced the results of the investigation of the second quarter of 2019 on business trend of credit institutions, in which banks are showing optimistic outlook for the second quarter as well as the whole year 2019.
Accordingly, 80.6 percent of credit institutions expect the business situation to improve in quarter two of 2019, higher than the rate of 79.3 percent of the survey in 12/2018. Especially, up to 88 percent of credit institutions expect the overall business situation in 2019 to be better than 2018, of which 20-29 percent of credit institutions expect the significant improvement.
Notably, credit institutions expect capital mobilisation and credit growth to be higher than the actual growth rate of 2018. Specifically, capital mobilisation of the whole system is forecasted to increase by 3.73 percent on average in the second quarter and by 13.74 percent for the whole year 2019, while credit balance of the system is expected to grow by 3.97 percent in the second quarter and by 14.51 percent in 2019.
The optimism of banks is also reflected in the relatively high business targets set for 2019.
For example, Vietnam International Joint Stock Commercial Bank (VIB), by taking advantage of SBV’s recognition of meeting Basel II standards, at the end of 2018, set a credit growth target of 35 percent in 2019, nearly double the actual credit growth of 2018 (17%). The bank also expects a pre-tax profit of 3.4 trillion dong, increasing by 24 percent compared to 2018.
Military Joint Stock Commercial Bank (MB), immediately after being recognised by SBV to meet Basel II standards, announced a set of documents to prepare for the general Meeting of Shareholders expected to take place on April 27, in which this bank set pre-tax profit of 9.56 trillion dong in 2019, an increase of 23 percent compared to the performance of 2018. To achieve this goal, MB expects a credit growth of 15 percent in 2019, higher than the overall credit growth that SBV set for the whole system (14%).
The banks that have not been recognised to meet Basel II are also setting high targets for credit growth and profit in 2019. For example, Nam A Joint Stock Commercial Bank (Nam A Bank) set a credit growth target of 18 percent and pre-tax profit of 800 billion dong in 2019. Saigon Thuong Tin Joint Stock Commercial Bank (Sacombank) aims to increase credit by 16 percent to 298.1 trillion dong and its pre-tax profit is expected to grow by 18 percent to 2.65 trillion dong.
This optimistic sentiment of banks seems to be reinforced by the impressive business results of the first quarter of this year. A typical example is that VIB has closed the quarter 1/2019 with most of the financial indicators increasing sharply compared to the same period in 2018. Accordingly, as of the end of March 31, 2019, VIB’s total assets reached nearly 145 trillion dong; credit reached 104.632 trillion dong and capital mobilisation reached 99.123 trillion dong. Capital adequacy ratio (CAR) reached 10%, higher than the minimum level of 8 percent according to Basel II standard, NPL ratio was low at 2.2%. As a result, this bank realised 810 billion of pre-tax profit in the first quarter of this year, up 56 percent over the same period in 2018 and completed 23.8 percent of the 2019 target (3.4 trillion dong).
However, in contrast to the optimism of banks, experts are quite cautious when economic growth this year is expected to be lower, while inflation may rise higher than the previous year. That will greatly affect the business activities of banks.
“Growth slowed while the number of businesses dissolved and went bankrupt still increased not only making credit difficult to increase but also reducing the demand for using other banking products and services”, an analyst said. In addition, while inflationary pressures increased, the mobilising interest rates were pushed up quite high in the early months of the year; lending rates were unlikely to increase as the government and SBV were still advocating reducing lending rates to support businesses. That makes the profit margin (NIM) of banks tend to be narrowed. And yet, the ratio of short-term capital for medium and long-term loans has been reduced to 40 percent since the beginning of the year. Moreover, SBV requires tight control of credit on real estate and securitieswhich are profitable sectorsmaking banks’ NIMs shrink faster.
Meanwhile, SBV controls credit growth this year at 14%, the lowest rate in many years. Credit
In addition, banks are unlikely to repeat the achievement of 2018 due to the application of Basel II. The time limit for banks to apply Basel II is approaching, but only six accredited banks now meet this standard. This means that the majority of the remaining banks are still racing to raise capital to comply with the requirement of capital adequacy ratio of above 8%. In this race, there will certainly be many banks that cannot increase capital and the only solution for them is to narrow the scale of assets as the case of Vietnam Joint Stock Commercial Bank of Industry and Trade (Vietinbank) in late 2018.
Therefore, the advice of experts is that banks should be more cautious, should not set too high business targets this year. Instead, banks should focus on raising capital and improving asset quality to be able to reach Basel II on time.
