Rong Viet Securities Company (VDSC) has just released a report on the impact of Covid-19 on credit growth and net interest margin (NIM) of banks.
Specifically, to support the economy in general and businesses in particular in the situation of Covid-19 pandemic, interest rates are the most considered factor, as many guidelines of the State Bank of Vietnam (SBV) are directed to devote all resources so that banks can exempt and reduce interest rates for customers affected by the pandemic.
So far, banks have been actively involved in giving preferential interest rates to affected customers. Since SBV requested the exemption and reduction of interest rates for these customers in February, banks have provided a considerable amount of credit to provide new loans with preferential interest rates to support businesses to maintain production and business activities. The usual interest rate reduction is 0.5-1.5 percentage points (ppt) per year for new loans, in some banks there is a deeper cut at 2-5ppt such as TPBank, HDBank, and Vietcombank.
In addition, many banks also offer interest rate incentives for existing loans, such as Vietcombank with a reduction of 1-1.5ppt per year for loans in dong and 0.5-0.75ppt per year for loans in US dollar to the end of September; VIB with a reduction of 0.5-2ppt per year for the next six months to all existing corporate customers regardless of size or sector.
Despite such preferential interest rates, the credit growth of the whole industry in the first three months was still quite low, only about 0.68 percent while the same period last year increased by 1.9%, showing that demand credit is weakened because businesses are facing many difficulties, and having to narrow production and business activities.
Therefore, in the afternoon of March 31, SBV met with commercial banks to reinforce this policy as well as encourage banks to reduce lending rates by around 2ppt for both old loans and a new loan. Also on this day, banks were required to reduce operating costs and not pay cash dividends to reserve resources to support interest rate reduction when SBV’s instructions has become more urgent.
According to VDSC, with these policies, it is expected that the average lending interest rate of many banks will decrease. In return, banks are also supported in terms of input by reducing SBV’s policy interest rates. From March 17, 2020, SBV has reduced a series of rates from 0.5-1 percent per year and lowered the ceiling interest rate for deposits with terms of less than six months. Accordingly, banks have reduced short-term deposit rates and many banks have further reduced long-term deposit rates from 0.1-0.3ppt per year.
Also under unfavourable economic conditions and weak credit demand due to the pandemic, SBV has assigned a credit limit early in 2020 which is 2-3ppt lower than in early 2019. Lower credit growth will help direct credit to safer sectors, avoid the risk of banks pushing lending into high-risk segments, and reduce the level of competition in deposit mobilisation, thanks to that, reduce deposit rates and facilitate lower lending rates,” the analysis team said. Accordingly, reducing mobilised interest rate will partly compensate banks when lowering credit interest rates.
With the base scenario that the pandemic will be under control in the second quarter and the production and business activities will recover from the third quarter, which is also the beginning of the peak lending season for banks, we assume that SBV can loosen 2-3ppt for banks’ credit limit in the second half of the year. Accordingly, VDSC believes that credit growth in each bank may be 2-3ppt lower than in 2019, except for the case of VietinBank.
Vietinbank has set a credit growth target of 6-10 percent this year depending on the situation of the pandemic (compared to last year reached 8.8%), which can keep the credit growth of 2019, if the lending activity recovers or even improves in case of timely capital increase.
Regarding NIM, VDSC forecasts that it will remain unchanged or slightly decrease in most banks. It is likely that the impact on NIM in state-owned banks such as BIDV and VietinBank will be stronger than that of private banks due to the high ratio of outstanding loans to mobilised capital (LDR) that limits the reduction of mobilisation costs. We still expect some banks will be able to increase slightly NIM such as HDBank and MBB (thanks to consumption finance growing faster than the parent bank) and Techcombank (because lower deposit costs and credit growth in 2019 will be fully reflected in interest income of 2020).
However, it is not excluded that SBV will continue to set out policies to lower lending interest rates further. In addition, since the impact of the pandemic may be large-scale, credit support packages may not only be for businesses directly affected by the pandemic, but may also be extended to those indirectly affected or the whole economy. Thus, in that case, the effects of the covid-19 on banks’ NIM may be stronger than expected.
