Retail credit was the growth motivation of many banks in 2018. Thanks to high profit margin and risk dispersion, many banks said that they would continue to boost retail credit in the near future.
At the end of the first quarter of 2019, the profit of Vietnam Technological and Commercial Joint-Stock Bank (Techcombank) increased for 14 consecutive quarters and reached a record of 2.6 trillion dong. Techcombank’s general director Nguyen Le Quoc Anh said the results achieved by the bank were not accidental but from a process of preparation and transformation over the past three years. The bank’s loan portfolio was shifting when reducing the rate of lending from large businesses to small businesses and individual customers.
The CEO said shifting focus to the retail segment helped the bank reduce bad debt rates and increase profit margins when the loan portfolio was distributed among many customers along with larger margins of small loans compared to the big loans. The transformation also boosted the bank’s demand deposits (CASA) to 58.6 trillion at the end of the first quarter, keeping mobilisation costs low.
Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) is also mentioned as a successful example of boosting retail credit. The bank’s profit in 2018 reached more than 18 trillion dong, up 62 percent compared to 2017 and greater than the aggregate of profits of Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) and Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV).
According to Vietcombank’s leaders, the above result is due to the orientation of “buy wholesale and sell retail” with three pillars of retail, service, capital trading and banking investment carried out in 2018. By the end of 2018, the proportion of retail credit expanded from 39.6 percent in 2017 to 46.2%. According to general director Pham Quang Dung, five to six years ago, Vietcombank was a wholesale bank in the market but now its retail growth averaged 30 percent per year. Scale of retail assets accounted for 40%, contributing 46 percent of profit before provision.
In Military Commercial Joint Stock Bank (MB), retail credit has continuously grown in both outstanding loans and proportion since 2013 but only really surged from 2017 and is the most important motivation in the bank’s growth.
Particularly, personal loans as of the end of 2018 accounted for 37.7 percent of total bank loans (equivalent to 81.011 trillion dong), increasing continuously from 12.4 percent in 2012 and being a key focus growth of outstanding loans in recent years. Of which, about 50 percent are loans to buy houses, 20 percent to buy cars and about 7 percent are unsecured loans at MCredit.
Similarly, at Vietnam International Commercial Joint Stock Bank (VIB), shared in the 2019 Annual general Meeting, the bank’s leader said that thanks to the extensive transformation in the operation, the bank had achieved breakthrough results when profits increased nearly four times from 702 billion dong in 2016 to 2.743 trillion dong in 2018.
From a corporate bank, by 2018, the proportion of outstanding loans of retail banking has accounted for the majority. The transformation of this structure has brought retail banking credit growth of 83 percent in 2017 and 48 percent in 2018. Since the corporate segment has negligible profit, retail banking has become key contributor to the profit of VIB in 2018.
According to the experts, with the orientation of controlling credit growth at 14-15 percent of the State Bank of Vietnam (SBV), banks are expected to boost retail services to increase the profit margin of loans and development of non-interest revenues.
Besides, with the large population of Vietnam (nearly 96 million) and the increase in per capita income (GDP per capita in 2018 is estimated at $2,540, an increase of $440 compared to 2015), the demand for borrowing money for high-value and essential goods consumption tends to increase strongly, especially home loans and car loans.
The attractiveness of this market has been partly reflected in the strategic vision of bank leaders.
Talking about the process of changing to retail segment that Techcombank is pursuing, Nguyen Le Quoc Anh said that Vietnam currently had nearly 100 million people and each year there would be 700,000 to one million new married couples.
“These people need housing. That is the first point our bank focus on to meet the demand for home loans in the city,” he said.
In Vietcombank, general director Pham Quang Dung said that this bank had only exploited a part of retail potential in the market. In this potential, Vietcombank assessed that the field of car loans was likely to develop strongly in the near future due to the improvement of living standards of people. Therefore, Vietcombank would focus on developing this lending segment in 2019.
Besides, Dung also revealed that the bank’s central target in 2019 was retail growth with a growth rate of about 30%. Retail had the advantage that the majority of small loans have adequate and high security, low bad debts and decreasing capital requirements.
However, increasing retail development also comes with risks. According to Nguyen Tri Hieu, NCB senior advisor, in Vietnam, not only banks, financial companies also provide retail credit as small loans. The risk is then dispersed but this can create bad debts for banks. In typical retail credit, there are individual customers. Currently, Vietnam does not have a common personal credit scoring system, so each bank must build its own scoring system and this system often does not guarantee the comprehensiveness and accuracy.
In some countries, credit rating companies often offer a personal credit rating system. Everyone has a separate credit score based on information about income, work, and repayment history and is updated continuously and accurately. Banks can rely on these companies’ credit scoring systems to make loan decisions.
In Vietnam, although the CIC lookup system also has information about borrowers, it is still relatively limited, so it has not completed the personal credit ranking.
Besides, according to Hieu, borrowing activities of Vietnamese people are still new. Compliance with regulations on borrowing of customers is limited. On the other hand, many loans in consumer credit are implemented in the form of trust based on the income of the borrower while the income level of Vietnamese people is still low. This affects the borrower’s ability to repay and easily creates bad debts.
The same point of Hieu, another economic expert also said that Vietnamese banks were still relying heavily on mortgages while the risks of collateral depend much on the market.
According to this expert, an individual customer borrowing a bank can mortgage a huge asset but does not mean that they can guarantee the repayment. “Repayment must be based on income or other business sources, not on collateral,” the expert said.
