When the ‘reserve’ breaking-through factors such as issuance of new stocks, sale of insurance or bad debts recovery no longer exist, the banking industry will only grow by 10-15 percent per year.
This is also considered the maximum potential growth since it is 2-2.5 times higher than the overall growth rate of the economy.
Breaking through cooperation in selling life insurance, issuing stocks
2018 is considered a successful year for some banks in particular and the whole Vietnamese banking system in general. Existing bad debts continued to be handled, while newly arising bad debts were also controlled at a low level.
According to data from the State Bank of Vietnam (SBV), by 31st December 2018, the system’s on-balance-sheet non-performing loan (NPL) ratio was 1.89 percent, down from 2.46 percent in 2016 and 1.99 percent as end of 2017. Meanwhile, potential bad debt ratio has dropped from 10.1 percent at the end of 2016 to 7 percent, at the end of 2017 and only 6.5 percent by end of 2018.
Remarkably, a number of banks appeared to have a sudden increase in profit compared to 2017. For example, the pre-tax profit of Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank) reached 18.016 trillion dong, an increase of 63.5 percent, or the figure of Vietnam Technological and Commercial Joint Stock Bank (Techcombank) was 10.661 trillion dong, an increase of 31 percent compared to 2017.
In addition to traditional banking activities, the results that Vietcombank and Techcombank achieved also come from other activities. In the context of favourable stock market, Vietcombank has divested from many banks such as Military Commercial Joint Stock Bank (MB), Vietnam Joint Stock Export Import Bank (Eximbank) and Saigon Bank for Industry & Trade (SGB). Meanwhile, Techcombank also earned significant profits from selling shares in Vietnam Airlines or selling Techcom Finance Company to Lotte.
In addition, many banks earn significant amounts through exclusive life insurance contracts (bancassurance). The cooperation fee that banks get from insurance companies is estimated to be from several hundred billion to trillions dong. Examples are the cooperation deals between Techcombank and Manulife, VPBank and AIA or Sacombank and Dai-ichi, etc.
Forced to find new directions instead of credit activities
Data from the general Statistical Office showed that credit growth as of 20th March 2019 was only 1.9 percent, lower than the increase of 2.23 percent in the same period of 2018 and 2.81 percent in 2017. According to SBV, on 25th March 2019, credit grew by 2.28 percent.
Net interest income (NII) still accounts for 70-80 percent of total operating income (TOI) of banks. Therefore, the low credit growth will threaten the high and continuous growth ambition of banks in 2019 as well as the following years. This development has been reflected in the profit growth plan of both Vietcombank and Techcombank.
Accordingly, the two banks with the highest profit in the system in 2018 only set modest growth in 2019, respectively with a rise of 15 percent and 10 percent. This result is equivalent to the credit growth that banks can be allocated in 2019. Thus, except for extraordinary earnings that come from bad debts handling, it seems that there will be no room to maintain the average profit growth rate of 20-30 percent per year. So which direction for banks to continue to break through in the near future?
Lower costs to increase profit
When “reserve” break through factors such as issuing new stocks, cooperating in selling insurance or handling bad debts are no longer available, the banking industry will only maintain growth of 10-15 percent per year. This is also considered to be the maximum potential growth since it is 2-2.5 times higher than the overall growth rate of the economy (i.e. gross domes product growthGDP). Therefore, banks are forced to find a new breakthrough direction to improve profits in the following years.
When revenue has reached potential growth, banks need to lower costs to increase profits. For banking activities, there are two main cost components, including cost of funds (COF) and total operating expense (TOE). The reduction in operating costs is a move that many banks have been and continue to do in the coming years.
According to practices in more developed countries such as Thailand, Indonesia or Malaysia, the cost to income ratio (CIR) is only about 35-40 percent. However, this number at some banks in Vietnam by the end of 2018 is still very high, such as Saigon Thuong Tin Joint Stock Commercial Bank (Sacombank) with 67 percent, Eximbank with 65 percent, MB with 62 percent, Vietnam Joint Stock Commercial Bank of Industry and Trade (Vietinbank) with 49 percent or Asia Commercial Joint Stock Bank (ACB) with 48 percent, etc. Those banks still have plenty of room to push profit growth even higher in the coming years.
However, some banks have a very low ratio and are now approaching the common standard like Techcombank with 32 percent, Vietnam Prosperity Joint Stock Commercial Bank (VPBank) with 34 percent or Vietcombank with 34 percent. Thus, these banks must find ways to reduce the second cost componentthe cost of raising capital from customers. To reduce the cost of capital mobilisation, banks must have solutions to increase the current account and saving account (CASA).
Some banks have the highest CASA rate of the system at present: MB 32 percent, Vietcombank 28 percent, Techcombank 27 percent or Tien Phong Joint Stock Commercial Bank (TPBank) at 18 percent. However, there may not be many banks focusing on this factor yet in order to further improve operational efficiency.
In Thailand, Indonesia or Malaysia, the average CASA ratio is about 50-70 percent. In order to increase the CASA ratio, the solution adopted by banks around the world is to increase the number of bank transfers. To achieve this goal, banks must aim to develop a superior payment system (transactional banking) capable of integrating each customer’s ecosystem.
Thus, it can be said that information technology will be a key factor for banks to further improve operational efficiency in the following years.
