According to VNDirect, the profit growth cycle of Vietnamese banks peaked in 20172018 and the banking sector has moved into a stable growth period amid deceleration of credit growth. However, there is still plenty of potential for credit growth in the private and consumer segments.
Specifically, credit growth has slowed down in 2019 because the State Bank of Vietnam (SBV) has changed its focus to controlling inflation, leading to the credit growth tightening.
This securities company forecasts that credit growth will remain at about 14-15 percent in 2019 and 2020.
In the consumer segment, the household credit penetration rate of 47.9 percent of GDP in December 2018 was still lower than that of Thailand (78.6 percent) and Malaysia (82.1 percent), while these countries had the same level of credit to GDP as Vietnam (128 percent and 139 percent respectively compared to 130 percent in Vietnam).
Regarding the private business segment, the number of new business registrations continued to grow by 16 percent in 2018 while the number of businesses closed down was five percent compared to 2017.
“However, we believe that the main factor that helps banks succeed in retail banking competition is service and sales. The ability to deliver and sell will be important factors to capture market share. Part of this segment, therefore, banks have a wide network, large customer groups will have an advantage, “VNDirect said.
“We believe that Vietnam’s consumer finance market is still in its infancy, with products that have not yet been diversified and low credit card penetration rates, so there is plenty of potential for development. Therefore, the net interest margin (NIM) of this segment can still improve even though lending rates are being controlled strictly by SBV, “VNDirect experts shared.
Furthermore, the securities company said firstly, consumer finance was supported by increased consumption of houses, cars and household appliances. In contrast, consumer finance helped the consumer industry grow faster, creating a multiplier effect on the economy as a whole. Because consumer finance helped middle and low income people access to credit, policy makers would continue to support consumer finance to carry out the government’s development policy.
Secondly, consumer credit in Vietnam accounted for 17.3 percent of total credit at the end of June 2018, of which outstanding loans of consumer finance companies (not banks) accounted for only eight percent of total credit (while this figure is 34.6 percent in Asean-5 and 21.0 percent in China).
In addition, the total level of consumer credit penetration in Vietnam (including consumer credit of banks and financial companies) is estimated at 22.4 percent of GDP, lower than regional countries. Therefore, consumer finance sector still has great potential to develop from the current low penetration level.
Commenting on the modest increase in NIM in some banks, VNDirect said that this was due to the increase in capital costs, reducing the impact of improved asset yields.
According to VNDirect, the improvement of NIM is very important to the profitability of banks in Vietnam, especially in the context of limited loan growth, as interest income accounts for 80 percent of total operating income. Therefore, the shift to lending to higher-yielding segments is a positive trend, reflected by the improvement in asset yields in recent years.
“However, we believe that higher asset yields may be offset by factors such as stricter requirements of SBV on capital structure, which makes long-term mobilisation competition more intense, causing capital costs to rise, “the securities company said.
Citing further factors that increase capital costs, VNDirect said legally, the new regulations require increasing the risk factor with loans, inter-bank deposits and debt securities, along with is “tightening” the ratio of short-term capital for medium and long-term loans, making deposit rates tend to increase.
“However, we believe that the government and the State Bank will want to keep the lending interest rate level stable to support the development of SMEs and the growth of the economy in general and in particular. Particularly in the context of world economic growth decelerating, causing challenges for Vietnam’s export growth, banks will not be able to transfer all the increase in capital costs to lending rates, “VNDirect identify.
Therefore, this securities company forecasts that the industry’s NIM in 2019 will only increase slightly, even go sideways despite improved asset yields. However, the NIM trend will not be the same among banks as each bank is sensitive to different deposit rates and capital needs. The advantage will belong to banks with low credit/ deposit balance (LDR), large network (to help mobilise more easily) and high rate of demand deposits (to help reduce capital costs).
Besides the change in NIM, another noticeable change in the banking system is the slowdown in non-interest income growth, however, non-interest income still accounts for a high proportion.
VNDirect expects non-interest income of banks to increase thanks to bancassurance fee collection and bad debt recovery, in addition to regular fee collection services such as payment services, guarantees and credit cards.
The securities company said that insurance distribution through banks (bancassurance) will continue to be the main growth driver, after the wave of insurance distribution contracts in 20172018.
“Although there has been a wave of bancassurance cooperation exclusively in 20172018, some banks still do not have exclusive insurance partners. Therefore, these banks have great potential for external income growth. Strong profits, coming from prepaid fees from new exclusive bancassurance agreements, “VNDirect said
In view of this securities company, a successful bancassurance agreement will facilitate strong income growth for these banks in the next few years. Therefore, exclusive bancassurance contracts will be the factors that help increase the income for these banks.
Besides bancassurance, the improvement of bad debt recovery can also create extraordinary income for banks, while reducing the cost of credit provision. However, according to VNDirect, bad debt may increase.
While the existing bad debt has been actively dealt with, new bad debts continue to form. However, VNDirect said that unlike the past, bad debts in the past came from loans for speculative purposes and other non-core business activities (such as banking, securities, real estate) and Lending to inefficient investments of state-owned enterprises. Currently, bad debt comes from private investments and household and personal consumer loans, especially at retail banks.
“Therefore, NPLs will increase the most in banks with strong expansion in the retail segment, especially consumer finance due to this high risk activity; and slower growth in banks with strict lending standards. more slots and more prudent retail lending expansion, “said securities company.
Besides, the State Bank has asked banks not to buy corporate bonds for the purpose of restructuring debt for enterprises issued through the Circular No. 15/2018/ TT-NHNN, effective Aug/ 2018. Therefore, bad debt has increased because banks have to review and reclassify bad debts of enterprises.
“Overall, we keep a neutral stance on the banking sector in 2019 amid tight credit policies, rising interest rates and the spreading ability of global economic risks. However, we believe that each bank has its own unique challenges and opportunities, “VNDirect said.
