If there was a vote for the most impressive growth in the past three years, Vietnam International Commercial Joint Stock Bank (VIB) would undoubtedly be the brightest name.
In 2017 and 2018, VIB’s profit before tax had quadrupled (nearly doubled every year) and continued to maintain a very high growth rate, up to 69 percent in the first nine months of 2019, reaching nearly 3 trillion dong. Credit was the primary motivation for VIB to achieve this impressive profit growth.
VIB was considered as a special private bank that was favoured about the credit growth limit from management agencies. The loan growth of this bank was up to 33 percent in 2017, 20 percent in 2018 and 28 percent in just nine months of 2019.
Notably, in 2019, the credit growth orientation of the whole banking industry was only about 14%, so the increase in debit balance was up to 28 percent in the last nine months of VIB was very high but still below the granted credit growth limit. This favour was thought to stem from VIB being one of the first two banks to apply Basel II standards on capital ahead of schedule.
Overall, VIB’s loan balance doubled in less than three years, from 60.179 trillion dong at the beginning of 2017 to 123.223 trillion dong at the end of September 2019.
However, growth in debit balance alone was not enough. The debt structure of VIB itself changed in the direction of increasing profit margin by increasing the proportion of medium and long-term loans that often had significantly higher interest rates than short-term lending rates.
Statistics of VietnamFinance showed that from 2012 to 2018, the proportion of medium and long-term loans to the total balance of VIB had continuously increased over the years. As a result, this proportion at the end of 2018 reached 85%, compared to 42 percent at the end of 2012, being the highest in the banking system.
Changes in the credit segment helped VIB significantly increase income, creating sources to handle bad debts. From a peak of 8.13 percent at the end of 2015, the non-performing loan (NPL) ratio (including both NPL and non-provisioning NPL at Vietnam Asset Management Company-VAMC) of VIB decreased to 5.52 percent at the end of 2016 and continued to decline to 3.49 percent a year later.
In 2018, VIB settled all bad debts at VAMC and brought the bad debt ratio to below the prescribed threshold of three percent, reaching 2.52%. Nine months later, the NPL ratio was 2.04%.
The bank’s bad debt coverage ratio had been continuously improved over the years and reached 50 percent by the end of September 2019. Although the level of 50 percent was still quite low, the whole process was very encouraging.
However, keeping the proportion of medium and long-term loans at a too high level created concerns that VIB was accepting to push risks to the future for profit.
The reason for medium and long-term loans was often high interest rates, which was followed by higher profits than short-term loans, because the longer the term, the higher the risk, the higher the interest rate to compensate expected loss.
To have medium and long-term loans, the bank would have to step up mobilising medium and long-term capital. The use of short-term capital for medium and long-term loans was limited by the ceiling regulated by the State Bank of Vietnam (SBV) and increasingly tightened due to potential risks of deviation.
By the end of September 30, 2019, the proportion of customer deposits with a term of one year or more accounted for about 39 percent of VIB’s total customer deposits, which was the highest percentage of the banking system.
Everything would be okay if the macro situation was stable, and there was less pressure to raise interest rates. In fact, the present time was a good time for VIB when SBV drastically reduced interest rates, especially short-term interest rates with powerful regulation tools such as the ceiling interest rate. The reduction of short-term interest rate ceiling helped a part of the bank’s cash flow into longer terms.
However, the economy was cyclical so the macro situation could not keep changing in the same direction. For example, once inflationary pressures appeared, interest rates would hardly stay still.
When interest rates were under upward pressure, banks with a high proportion of deposits as well as medium and long-term loans like VIB would be the most vulnerable. The loss would, first of all, be an increase in capital costs more than the general level and the risk of a deviation at risk.
Or simply as if the race of mobilising interest rates at medium and long terms became too hot, causing SBV to intervene to lower interest rates, it would also become challenging to mobilise medium and long-term capital, affecting lending activities and thereby affecting profitability.
Of course, VIB would not stay still. Early forecasting of future risks was particularly important, as initial forecasts could help to respond early, avoiding creating shocks. It was not easy to reduce the proportion of medium and long-term loans, and this reduction also affected the profit margin and hence the profitability.
The increase in non-interest income was also the direction to focus to create new pillars for the profit level, helping to restructure the proportion of medium and long-term loans to be ‘smoother,’ less affecting the profit.
At VIB, credit cards, payments and insurance were the three sources of service revenue being promoted by this bank and had contributed significantly to the operating income structure.
Statistics showed that in 2017, the proportion of revenue from services only accounted for 10 percent of total operating income and increased to 12 percent in 2018, then in the first nine months of 2019, this proportion had risen to 22%, which partly showed precise preparation from VIB.