The revenue from credit activities, from being considered as the core of banks’ income structure, seems to play a lesser role as the quarterly financial report of banks in the first quarter (Q1) of 2018 continued to show the strong decline of the proportion of net interest income in the total net profit.
Excluding banks which recorded unusual fluctuations in revenues, some typical names are Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Prosperity Commercial Joint Stock Bank (VPBank), Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), Vietnam Technological and Commercial Joint Stock Bank (Techcombank), and Military Commercial Joint Stock Bank (MB).
In Q1 2018, the net interest income of Vietcombank accounted for 62 percent of the net profit significantly down by 10 percent compared to the same period of 2017. Based on this calculation, the dependence of Vietcombank on credit activities is only higher than Techcombank’s. This ratio if currently 55 percent at Techcombank, down by 5 percentage point compared to the same period of 2017.
It is fairly impressive as in Q1 2018, the proportion of net interest income in net profit of BIDV fell by 5 percent to 81 percent. In the past few years, BIDV has strongly gathered resources to develop its income from credit with the highest net interest income in the system. With 81 percent, BIDV’s proportion of net interest income in net profit is 48 percent higher than Vietcombank’s and 27 percent higher than VietinBank’s.
VPBank which is intending to surpass BIDV in terms of profit, is recording even more impressive developments. The bank’s net interest income in Q1 2018 accounted for 79 percent of the total net profit, down by up to 11 percentage points compared to Q1 2017.
For MB, the bank’s net interest income accounted for 78 percent of the total net profit in Q1 2018, down by five percentage points. The reason leading to the decline in credit revenue in total profit structure, is clearly seen as the rise in non-credit revenue. However, it should be noted that the non-credit revenue does not only include revenue from services, and foreign exchange trading, but also from the reversal of provisions.
In essence, reversal of provisions is a source of credit revenue. If recording this item, the proportion of credit revenue in the income structure of banks will not fall sharply as seen.
Banks did not explain in detail how much they had reversed provisions in Q1 2018, but most of the “net income from other activities” recorded revenue from provision reversal.
If calculating this way, in Q1 2018, credit revenue of Vietcombank was 5.838 trillion dong, accounting for 80 percent of the total net profit, fell by only two percentage points compared to the same period of 2017 (10 percent according to previous calculation method). Similarly, BIDV would only see two percentage point decrease compared to the same period of 2017 (5 percent according to previous method). Techcombank’s case is the most respectable case, as the bank’s credit revenue in total net profit fell by 7 percent (5 percent if calculated by the previous method). This shows that the change in Techcombank is very substantial.
For VPBank’s case, the proportion of credit revenue in the income structure did not change, while it fell by up to 11 percent if calculated based on the previous method.
Banks clearly are still relying heavily on credit revenue. Lowering this reliance, despite being a general and positive trend for banks, is not an easy task. In fact, only Techcombank’s case is successful. Together with this difficult problem, many banks are still solving the easier problem, which is raising the profitability in credit activities (net interest margin).
Some banks have done this well, such as Vietcombank, VPBank, Techcombank, and MB. For MB, in Q1 2018, the bank continued to record five percentage points increase in net interest margin, reaching 59 percent. This number is only after VPBank’s (62 percent), significantly higher than Vietcombank’s (49 percent) and Techcombank’s (51 percent).
Other banks are also recording good movements in net interest margin, including BIDV (41 percent in Q1 2018, up by three percentage points compared to Q1 2017), Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank, 28 percent in Q1 2018, up by six percentage points compared to Q1 2017), Vietnam International Commercial Joint Stock Bank (VIB, 46 percent, up by 10 percentage points), and Bac A Commercial Joint Stock Bank (BacABank, 25 percent, up by four percentage points).
There are different ways to increase the net interest margin but the most popular one is to increase the size of retail credit and gradually lower the wholesale credit. Retail credit for individual customers always apply higher interest rates than wholesale credit for corporate customers.
The second way which is less common is to increase the low-cost capital which is mainly the demand deposits. Small banks, which are already having difficulties in mobilising term deposits, almost have no advantages in competing for demand deposits. This game, accordingly, is only for large banks.
The third way is only applied by some banks at some certain times, which is to increase the medium and long-term credit, because these loans have higher interest rates due to higher risks.
