Vietnam is at the top of countries with high leverage when having credit to Gross Domestic Product (GDP) ratio of more than 130 percent in 2019. This context puts Vietnam’s banking industry in a difficult position when the Covid-19 outbreak is leading to an economic recession. It is forecasted that in the second quarter (Q2) this year, banks will start to suffer the impacts of the epidemic.
In a recently released strategic report, experts of Viet Dragon Securities Company (VDSC) boldly warned of a risk to the banking industry: a credit crisis. VDSC mentioned that in the history, financial crisis often came along with recession. While there are many causes of financial crises such as massive bank withdrawals, currency devaluation, speculative bubbles and national defaults, the most important thing is the risk of a widespread economic crisis as what happened in the Great depression a period of economic stagnation where people’s expectations were distorted, along with policy mistakes.
According to VDSC, after two recent financial crises, the liquidity risks and currency devaluation are being well controlled as money is abundant in banks’ safes and emerging countries have reserved a large amount of foreign currencies. In Vietnam, the foreign exchange reserves have soared to 83 billion US dollars, equivalent to 3.7 months of imports.
However, VDSC’s experts emphasized that credit risk is still at risk of happening as the economic losses from the Covid-19 are seriously affecting the financial health of households and businesses.
The securities company believed that the epidemic has been changing people’s expectations and the economy’s self-recover mechanism is not really effective. The world economy, particularly developed countries, will be difficult to avoid recession after the epidemic.
More importantly, the recession can lead to irreparable economic losses due to the slow recovery process. The decline in aggregate demand will lead to a negative reaction from the supply side. The final consequence is a prolonged stagnation. The main feature of this period is associate with the chronic decline in demand while monetary policy becomes less effective after reaching the threshold of zero percent.
VDSC stated that Vietnam is Vietnam is among countries having high leverage in Asia with a high ratio of credit to GDP (130%) in 2019. Since the post-crisis period in 2008, Vietnam’s credit growth, especially consumer loans, have risen significantly. The real estate price bubble has been formed. “Although the credit growth has slowed down since 2018, we believe that the process of removing financial leverage has not been completed and the debt level is still too high,” said VDSC experts.
“We are living in an early stage of an economic recession, in which governments, including Vietnam’s, have decided to trade off economic growth to prevent the pandemic. At this time, less focus on the pandemic and credit crisis!”, VDSC experts warned.
From the beginning of the year to March 20th, according to the General Statistical Office (GSO), the credit growth of Vietnam’s banking system was modest at 0.68%, partly due to the impact of Covod-19 pandemic. This is the lowest level when comparing with the period from 2015 to 2019 (fluctuating from 1.25 percent to 2.81%).
In a recent report on the banking industry, Saigon Securities Incorporation (SSI) said that the credit growth was slow in three state-owned banks including Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) and Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), as well as private joint stock banks such as Military Commercial Joint Stock Bank (MB) and Asia Commercial Joint Stock Bank (ACB).
According to SSI, this may come from the fact that these banks have been more cautious when making new disbursements to limit credit risks in the future.
Meanwhile, Vietnam Prosperity Commercial Joint Stock Bank (VPBank), HCM City Development Commercial Joint Stock Bank (HDBank), Tien Phong Commercial Joint Stock Bank (TPBank) have chosen a different option and boomed with high credit growth rates, reaching about 4.8 percent by the end of February 2020 for VPBank, five percent by the end of February 2020 for HDBank, and nine percent by the end of March 2020 for TPBank.
“We recognise that VPBank and TPBank have particularly active in buying corporate bonds. For HDBank, the fairly high credit growth of the bank is thanks to the loan agreements with some corporate customers which were signed in the end of 2019,” said SSI’s experts.
SSI assessed that the business results of most Vietnamese banks will not be greatly affected because the Covid-19 epidemic only started to become complicated since the second week of March, except for some banks which proactively set up credit provisions in advance to have more reserves in the future.
However, in Q2 2020, SSI forecasted that the interest income, income from fee and recovery of bad debts of banks will decline when banks satisfy the needs of customers by providing preferential interest rate packages and cut down transaction and payment fees.
For consumer credit activities, SSI said that the impact will be seen in two phases. In the first phase, the credit demand from and popular segment and low-income segments still exists, because customers still need cash to cover living costs. However, in the second phase when the epidemic is complicated and peaks, in theory, the income of low-income people will be affected first and the ability to repay of borrowers following this scenario will decrease rapidly.
However, SSI is still quite optimistic on the business results of many banks in 2020. Accordingly, in the worst case where the epidemic is not controlled in 2020, 10 banks (forecasted by SSI) including Vietcombank, VietinBank, BIDV, MB, Vietnam Technological and Commercial Joint Stock Bank (Techcombank), VPBank, ACB, HDBank, TPBank and Lien Viet Post Commercial Joint Stock Bank (LienVietPostBank) will record a profit fluctuation of around five percent compared to 2019.
