18:04 (GMT +7) - Wednesday 22/05/2019

Banking & Finance

Room remains for credit growth

Released at: 14:36, 24/02/2019

Room remains for credit growth

Photo: Viet Tuan

Local banks posted positive business results for last year and see solid prospects for 2019 despite the SBV's policies on tightened credit growth.

by Hung Cao

Most local banks reported their business performance for 2018 during the opening month of the new year. Despite the central bank’s tightened monetary policy, Vietnam’s banking sector closed last year on a strong financial footing after overall pre-tax profit surged around 40 per cent year-on-year as local banks’ intensified their efforts to resolve bad debts, with double-digit earnings growth and rising income from services. 

The State Bank of Vietnam (SBV) recently set a credit growth target for 2019 of 14 per cent, focusing on priority fields to ensure risk control and support economic growth. The restructuring of credit institutions and the settlement of bad debts have had a positive effect and created a positive outlook for the local banking sector this year. The SBV will also continue to set credit growth quotas for each bank, depending on its health, to regulate overall credit growth and support government targets.

Profits high

In mid-January, Vietcombank reported that 2018 pre-tax profit hit a record level, reaching over $791 million and up a whopping 63 per cent against 2017 despite the central bank’s credit slowdown. Outstanding loans rose 14.9 per cent, to more than $27.4 billion, with growth down against 2017’s 17.2 per cent. The impressive result was attributed to the bank’s success in controlling credit quality and boosting its service segments. Chairman Mr. Nguyen Xuan Thanh said the bank has set a profit target of $862 million for 2019. 

Agribank also reported rising results last year, with an impressive pre-tax profit of $324.6 million, aided by bad debt being reduced to 2.78 per cent and service revenue increasing 20 per cent. Another State-owned bank, BIDV, reported accumulated profit of nearly $415 million for 2018, up 11 per cent against 2017. Chairman Mr. Phan Duc Tu said the bank aims to complete the basic criteria in its restructuring plan associated with bad debt resolution in the 2016-2020 period one year before planned. 

Along with large State-owned banks, private banks also reported positive performance last year. The Vietnam Prosperity Joint Stock Bank (VPBank) posted a pre-tax integrated profit of $396.4 million, representing a 13 per cent increase year-on-year. It was given a growth quota of 17 per cent and its subsidiary, FE Credit, 20 per cent - lower than its set targets and therefore partly affecting profits. MB Bank, meanwhile, recorded surging growth of 31 per cent year-on-year, with pre-tax profit at over $302 million.

The performance of joint stock banks was also encouraging in 2018 when viewed on the basis of trends in interest income, net fee income, recoveries, and bad debt formation, according to Mr. Long Ngo, Associate Director of the Research Department at Viet Capital Securities (VCSC). “Net interest income (NIM) for our stock coverage universe enjoyed a 9-bps gain in 9M 2018, net fee income was up 46 per cent, and recoveries up 88 per cent,” he said. “NPLs plus write-offs over gross loans were unchanged at 2.3 per cent in our coverage during 9M 2018, despite the efforts of banks like Sacombank to accelerate the clearance of legacy assets in 2018.” 

Overall, he added, net profit is expected to grow 34 per cent in its coverage universe in 2018 compared with 2017 and on a normalized basis (excluding one-off items), profit is expected to have grown 45 per cent in 2018. Driving strength in NIM is the continued expansion of retail lending, especially growth in mortgages.

Many banks also significantly raised their capital compared to the beginning of the year, according to Mr. Nguyen Hong Khanh, Head of Analysis and Research at the Vietnam International Securities JSC (VIS). “Although credit growth activities were tightened at the end of the year, all local banks in general had different strategies to almost achieve their target plans,” he said.

Credit growth limits

With the goal of macroeconomic stability in 2019, Mr. Khanh emphasized that one of the most important factors is controlling inflation to below 4 per cent. The SBV is prioritizing improving credit quality and raising credit quotas for banks that meet Basel II standards. In addition, tightening credit also prevents too much capital flows into real estate, which can cause bubbles and a repetition of bad debt loops.

According to the Viet Dragon Securities Corporation (VDSC), Vietnam faces risks when total domestic credit expands at a higher pace than nominal GDP. After several consecutive years of high credit growth, the proportion of domestic credit to the private sector, as a per cent of GDP, has risen to a very high 130 per cent from 20 per cent 20 years ago. 

International institutions such as the International Monetary Fund and the World Bank have recommended that growth needs to slow quickly to sustain macroeconomic stability in upcoming years. Therefore, a lower credit growth target, as announced by the SBV, is considered appropriate to maintain stable rather than rapid economic growth.

With a lower credit growth target this year, it’s expected that credit quotas for each individual bank will be equal to or lower than that in 2018. However, those complying with Basel II standards will be given higher credit quota than others. “We believe that most banks will be able to come up with coping strategies, as the direction towards credit tightening was announced in the second half of 2018,” said Ms. Nguyen Thi Thuy Anh, Research Analyst at VDSC. “We expect that banks will need to prioritize credit quality and margin over volume by restructuring loans and prioritizing segments with higher profit margins. The lower credit growth will also likely cool down mobilization pressure upon stricter funding regulations in 2019, i.e. reducing short-term capital financing and mid- and long-term loan ratios and applying Basel II to calculate the capital adequacy ratio (CAR). Lower credit growth limits, coupled with stricter requirements on capital adequacy, will force commercial banks to be more selective and careful in verifying and appraising a loan. This could help commercial banks control their NPL ratios.” 

Meanwhile, according to VCSC, the SBV’s target of 14 per cent is credible given the current capital adequacy of local banks and credit absorption capacity. Its estimate for credit growth for 2018 of 13.9 per cent implies that it is taking less credit growth to achieve a given level of GDP growth, which is undoubtedly a positive development. Controlling NPLs in the coming years is made easier for banks as they increase mortgage lending, as typically mortgages exhibit lower NPL rates than other type of loan categories.

“The investment community is worried about debt levels in Vietnam’s economy but I am not in that camp,” said Mr. Long. “The trigger point for debt-induced recession is normally over-leveraged consumers rather than over-leveraged corporates. Retail debt levels in Vietnam are still relatively low. Therefore, I think the SBV can maintain a 13-14 per cent credit growth level for the next three years.”

Prospects for 2019

Banks are incentivized to lift both charter capital and total shareholder equity. Charter capital levels determine how many branches a bank can support, whereas total shareholder equity is more applicable to CARs and single party lending limits. The most important item for most banks is their CAR, and retaining profits can stabilize the CAR but not significantly lift it. Hence, any major boost in the CAR must be done via issuing new equity.

Lifting the CAR at Vietcombank, BIDV, and Vietinbank is of extreme importance to fulfil 2019’s growth ambitions, and given that Vietcombank has already raised capital this year it is now free to pursue its 2019 growth targets. Private banks in general are not hampered by their CARs. 

Local banks are very early in the process of lifting fee income relative to interest income to approach levels seen in regional economies in Southeast Asia, according to VCSC. This should help lift ROEs in the coming years. Local banks are seeing no pressure on NIM, in fact some banks such as Vietcombank and MB Bank are enjoying NIM increases, a feature uncommon in other regional economies. 

The last strength is that buoyant real estate conditions and legal reform are enhancing recovery rates of debt already written off, enhancing banks’ net profit figures, Mr. Long noted. This trend should continue. Meanwhile, the major weakness of local banks is CARs, though this is a problem applicable more to State-owned commercial banks than private banks. “Vietcombank’s placement to GIC and Mizuho is a small step in solving this issue and we expect BIDV to issue new shares in 2019 too,” he said. “We see weighted credit growth for our coverage stocks moving up from 13.9 per cent in 2018F to 14.6 per cent in 2019F.” 

Otherwise, local banks will certainly face some challenges in the coming year. Circular No. 41 requires a thorough understanding of the new risk-weighted assets methodology, detailed data collection and processing, and a robust risk-weighted assets system, according to Ms. Thuy Anh from VDSC. “As such, banks might face some challenges such as a lack of capital and inappropriate business strategies or asset portfolios for achieving capital optimization,” she said. “Other difficulties include costs and the implementation of data warehouse, data management, and accurate CAR calculation tools, and the training needs for staff on new systems and policies.” 

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