Each bank has a different lending structure, resulting in a different ability to cope with the Covid-19 pandemic. In particular, reviewing banks’ credit structure by maturity is very important in measuring the level of risks against negative economic fluctuations.
The “Covid-19″ outbreak is hitting banks when many economic activities are temporarily paralysed, seriously affecting the continuous operation of many businesses and reducing income of many individuals. The risk of sharp bad debt rise is imminent.
Many experts said that a recession has taken place. However, the level depends on government decisions and the actual situation of the pandemic. Nevertheless, it is certainly a difficult time for both businesses and individual borrowers.
Currently, banks are actively exempting and lowering interest, restructuring repayment term, etc. to support businesses and individuals. The immediate profit must be sacrificed, but in return, the scale of bad debt arising decreases, the ability to recover debts is higher, helping banks quickly recover to the previous profit level and continue to grow sustainably in the future.
Nevertheless, each bank has a different lending structure, resulting in a different ability to cope with the Covid-19 pandemic. In particular, reviewing banks’ credit structure by maturity is very important in measuring the level of risks against negative economic fluctuations.
In general, the longer the term, the higher the risk, in exchange for high lending interest rates. Basically, there are two types of risks worth noting at the present time. The first is the risk of term difference. Since this risk has been managed by the State Bank of Vietnam (SBV) through the ceiling rate of short-term funds used for medium and long-term lending, it is basically under control. However, if banks have higher proportion of medium and long-term loans, their medium and long-term mobilisation source is also large and the majority of it includes customer deposits, bonds, etc. with terms of more than one year. The problem is that this source mostly has a fixed interest rate that is significantly higher than short-term deposits. When the interest rate level decreases in the context of combating against recession due to the Covid-19, the interest rates of these types of deposits cannot be lowered because they are fixed, while the lending rates decline accordingly to the common ground.
This negatively affects the profit margin of the credit segment in particular and profit of banks in general. The more medium and long-term capital banks mobilise, the more they are affected, and those usually are banks which focus more on medium and long-term lending.
The second risk is term risk. The longer the term, the slower the collection of both principal and interest. in the context of economic recession, banks face more difficulties if the capital recovery is slower. The situation is even worse for the original loans approved to be gradually repaid towards the end of the borrowing term.
Particularly, if bad debts occur, the possibility to recover capital will be much worse than short-term loans’ due to the very high pressure of debt repayment considering both size and repayment time, because medium and long-term loans are often used to invest in fixed assets with large size (such as housing, cars, etc. for individuals or factories, machinery, etc. for businesses).
Among commercial banks, Vietnam International Commercial Joint Stock Bank(VIB), Tien Phong Commercial Joint Stock Bank (TPBank) and Orient Commercial Joint Stock Bank (OCB) are having the highest proportion of medium and long-term loans in the total outstanding credit in the banking system, reaching over 70%, and even more than 80 percent for the case of VIB. This is one of the very important reasons for these banks to make a breakthrough in profit in recent years.
Banks with high proportion of medium and long-term loans of more than 60 percent include Lien Viet Post Commercial Joint Stock Bank (LienVietPostBank), Vietnam Prosperity Commercial Joint Stock Bank (VPBank), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Saigon Hanoi Commercial Joint Stock Bank (SHB) and National Citizen Commercial Joint Stock Bank. Of which, VPBank and Techcombank recorded very impressive profit growth in recent years, among the few banks having around a trillion dong profit with the Big 4 state-owned banks.
In general, state-owned banks always keep this proportion low. Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank)’s proportion is the highest with 48%, which means that more than half of the bank’s outstanding credit is short term. Meanwhile, the proportion of medium and long-term loans in total outstanding credit of Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) and Commercial Joint Stock Bank for Agriculture and Rural Development of Vietnam (Agribank) is only 43%, and that of Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV) is only 37%, among the few banks with less than 40 percent of medium and long-term loans in the credit structure.
Nam A Commercial Joint Stock Bank (NamABank) and Saigon Commercial Joint Stock Bank for Industry and Trade (Saigonbank) are the two banks with very low proportion of medium and long-term loans of less than 30%.
It should be noted that despite being important, the lending term is only one of the factors affecting bank’s ability to cope with the Covid-19 pandemic. If the intensity is not too strong, the economic damage will not be too differentiated among banks and vice versa. There will be certain advantages from difficulties, especially in terms of liquidity. It is not just the move to support banks’ liquidity by the SBV, the temporary surplus of capital due to organisations and individuals withdrawing capital from assets or business activities to wait for the pandemic to pass which is deposited in banks will also help increase banks’ liquidity. This supports banks to focus on minimising the scale of bad debt arising due to the Covid-19 without having to worry too much about liquidity risks.
