The Covid-19 pandemic led to an increase in overdue debts that were threatening Vietnam’s banks’ earnings and capital growth momentum. Because of that, many banks would face a shortage of capital if economic conditions were still weakening, the latest Fitch Ratings report said.
According to the report, Vietnamese banks in Fitch’s ranking had increased 45 percent of overdue debts in Q1/2020 compared to the end of 2019 in the context of the Covid-19 pandemic devastating the economy. These debts were expected to grow even more vitally when the economic outlook remained bleak due to weak global demand.
Nearly 5 million people, or approximately 10 percent of Vietnam’s working-age population, were reported to have been negatively affected by the pandemic with the risk of reduced working hours or job losses. This signaled the risk of a sharp decline in retail loans, which accounted for 40 percent of banks’ total balance, according to Fitch (nearly double the 23 percent data at the end of 2014).
These loans mainly consisted of mortgages and personal business loans secured by assets. However, the debt settlement process could be lengthy and hampered by incomplete regulations and needed to be further revised.
Also, increasing credit quality tensions in the banking system could lead to lower profit quality and increase risk of capital decline as credit costs increase. Like many regional banks, some Vietnamese banks had applied priority measures to enhance loss provisions to protect the balance sheet even when many regulations were relaxed, allowing them to maintain the debt group for loans affected by the coronavirus outbreak.
If the bank continued to add provisions for new weak loans, Fitch Ratings estimated that banks might face a capital shortage of up to $2.5 billion to meet capital adequacy requirements. The minimum of the State Bank of Vietnam (SBV), according to Basel II standard, was eight percent, of which state-owned banks would face the greatest risk of capital shortage.
On the whole system, the shortage of capital would be much higher, because banks ranked by Fitch being the strongest banks in the system accounted for only 27 percent of total loans in the whole industry. If SBV continued to loosen monetary policy forcefully and directed banks to lower lending rates further to ease the financial burden on borrowers and boost the economy, Fitch Ratings assumed that the proportion of problematic loans of rated banks would increase to around six percent to nine percent (from 0.5 percent to 1.2 percent at the end of 2019) with the profit margin falling by 70 to 80 basis points.
However, Fitch Ratings expressed optimism that the impact of the pandemic on the profits of banks would be moderate because banks could take advantage of SBV’s support to reduce income fluctuations when stress became more pronounced. Besides, selling bad debts to Vietnam Asset Management Company (VAMC) allowed banks to depreciate provision expenses for five years, further reducing the short-term impact on income.
The final impacts on asset quality and profitability would depend on the timing and severity of the outbreak. If the disease were controlled, this rating organisation believed that Vietnam could restore the economy. Accordingly, the deterioration of asset quality might be less intense, which might cause Fitch to revise the prospects of the banking industry and increase its rating to ‘Stable’ from the current ‘Negative’ level. Conversely, a Negative rating might occur if economic conditions became more stressful, leading to weakening asset quality and profitability of banks, and this would likely cause a decline in capital.
