Attempts to increase non-interest income and reduce the proportion of net interest income in the total operating income of banks has not brought much results. Financial statements of the first nine months showed that banks still relied on credit.
Interest income accounts for over 70 percent
In order to absorb bad debts, in recent years, banks want to turn their income structure towards increasing the proportion of non-interest income, especially services, trading in securities and foreign exchange instead of relying on credit as before. However, this is not easy.
In the first nine months of this year, services, foreign exchange and securities business of many banks declined. The key activity that keeps banks on the rise is the lending.
Vietnam Technological and Commercial Joint-Stock Bank (Techcombank)’s credit growth in the first nine months of this year was 28.7 percent. Techcombank’s net interest income was 10.105 trillion dong, up by 23.7 percent y-o-y. The credit helped the bank maintain the profitability in this period, regardless of other non-interest income.
Particularly in the third quarter of 2019, Techcombank’s net interest income increased by 16 percent over the same period. Accrual net interest income still accounted for approximately 70 percent of the bank’s total operating income.
In some other banks, non-interest income from other services such as foreign exchange and trading of investment securities all dropped sharply in the first months of the year, making the contribution to the overall profit increase insignificantly.
For example, among banks that diversify revenue sources, some banks raise revenues from the service sector quite effectively. In the first nine months of 2019, the net profit of Vietnam Prosperity Joint-Stock Commercial Bank (VPBank) rose by 23 percent over the same period in 2018, but revenue from services reached 93.4 percent. At Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), net interest income increased by only three percent, but net interest income from services increased to 18.7 percent. However, VPBank suffered losses from foreign exchange trading activities while BIDV made losses from securities trading.
In general, in the structure of income of banks in the first nine months, net interest still contributed about 2/3 to total income.
Bad debt increased with credit.
According to the State Bank of Vietnam (SBV), the bad debts as of the end of August 2019 was 1.98 percent, up from 1.89 percent at the end of last year. From the beginning of the year until now, except for some banks that are restricted on credit growth limit due to not yet meeting Basel II standard or being restructured, most of the healthy banks are assigned high credit growth threshold by SBV, which is running at full speed to boost lending to maximise profits.
High demand for loans and good lending activities made profits in this period of many banks prosper. However, along with the credit growth, the nine-month financial statements also showed that the absolute bad debts of a series of banks were swollen, and the debts likely to lose capital increased sharply. In particular, accrued interest (virtual interest) of banks also showed signs of increase.
Talking to reporters of the Vietnam Investment Review, deputy general director of a joint stock commercial bank explained that increasing non-interest income to reduce the risk of bad debts is the goal of all banks. However, SBV tightened foreign currency credit, tightly controlling the foreign exchange market, making it difficult to make profit. Securities trading activities are also unstable. The segment that is most likely to generate non-interest income is services (especially insurance services), but the fierce competition toughens the operating income restructuring.
Although SBV has issued a policy of tightening credit in risk areas such as real estate, BOT, and securities, but from the beginning of the year, capital inflows into these areas have continued to increase sharply, especially in real estate segment. Lending structure of some banks currently also focuses on real estate (including consumer loans), so the risk of bad debt is still very high.
Bui Quang Tin, a banking expert, said that banks were trying to diversify their revenue sources in many ways such as: income from services, securities trading, debt collection, treasury stock sale, etc. But the main income is still credit. In order to operate safely and sustainably, banks need to continue speeding up the restructuring of revenue sources in the direction of gradually increasing interest income, and reducing the dependence on revenue sources on credit.
