In the updated banking industry report, VNDirect Securities forecast that the Covid-19 pandemic would reduce the net interest income (NIM) ratio due to lower asset yield than capital cost. Asset yields fell for two reasons, the bank lowered lending rates for new loans to boost credit in the context of low demand and the interest rate waivers for existing debts led to a divestment of interest income, thereby reducing income from this activity.
To support the economy, the government lowered the interest rate from 50 to 100 basis points and reduced the deposit ceiling rate by 25 to 30 basis points for deposits of less than six months. Consequently, deposit rates of banks have dropped by 30-40 basis points for deposits of less than six months and by 20-30 basis points for deposits of more than six months. However, according to VNDirect, mobilising interest rates are difficult to fall sharply because banks need to maintain long-term mobilised capital to ensure the ratio of short-term capital used for medium and long-term loans.
In terms of lending rates, the government has instructed banks to reduce by 50 basis points on short-term lending rates for priority areas. In addition, the banks are also encouraged to cut interest rates to support customers, based on the banks’ assessment of customer activity.
Some banks have reduced interest rates to two percent. However, preferential rates are often applied to customers affected by the disease and the level of interest rate reduction varies between customers. Securities market expects the interest rate to decrease by one percent on average for affected customers, but the interest rate will gradually increase again after the disease is well controlled. The disease is expected to end in mid-2020, so lending rates are estimated to fall by 50 basis points in 2020.
Because the decrease in the lending interest rate is larger than the mobilised rate, NIM is expected to go down in 2020. In addition, interest rate waivers will put more pressure on NIM. The divestment of interest income is likely to continue in 2021 as the banks are now allowed to extend the debt for up to 12 months, so there will be a delay in the formation of bad debts. After the pandemic ends, the trend of NIM will vary between banks.
Three groups will be under less pressure on NIM. The first is banks with low penetration rates in the retail segment. Continuing to expand the personal lending segment with higher interest rates will help improve asset yields, thereby reducing the pressure on NIMs caused by the disease.
Secondly, banks have low lending to deposit rates. These banks have better liquidity and this is an important factor in difficult times. They are also under less pressure to raise new capital to ensure liquidity when customers cannot pay their debts on time.
The third is banks with low risk appetite. This group’s bad debts will grow more slowly, thus reducing the risk of divesting interest income.
