Banks’ differentiation increases

14-Feb-2020 Intellasia | Nhip cau Dau tu | 6:02 AM Print This Post

The stability of the system is creating a good foundation for many banks in 2020.

The banking sector continued to be a highlight of Vietnam’s stock market in 2019 when many banks announced their highest profit ever. Many banks recorded a profit of around a trillion dong in 2019, including Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank), Tien Phong Commercial Joint Stock Bank (TPBank), Orient Commercial Joint Stock Bank (OCB), Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank), Vietnam Prosperity Commercial Joint Stock Bank (VPBank), Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), etc. although the credit growth of the sector was only 12.1%, lower than the target of 14 percent set by the State Bank of Vietnam (SBV). The profit growth also depends on the control of operating expenses and projected expenses, along with the increase in the Net Interest Margin (NIM).

Growth motivation

Nirukt Sapru, general director of Standard Chartered Vietnam, is also optimistic about Vietnam’s banking industry. “According to out predictions, the Vietnam’s banking sector will continue to be strengthened. Although profits and investment capital are somewhat limited, the basic fundamentals of banks have been improved in recent years. We expect this trend to continue in2 020, which helps further improve the system stability”, said Nirukt Sapru.

According to Maybank Kim Eng Securities, the growth drivers of the banking sector in 2020 will come from the government’s reasonable regulations, credit growth, and profit margins. The credit growth target of the whole sector in 2020 continues to be 14 percent with the bad debt ratio striving to be below two percent. The credit demand is forecasted to continue to come from production, construction, and consumer lending. NIM is predicted to be stable at a safe level of 3.5 four percent, helping banks maintain profit growth from 15 percent to 30%, along with the low capital costs and income from bancassurance.

Saigon Securities Incorporation (SSI) forecasted that banks’ pre-tax profit in 2020 may rise by 22.5 percent thanks to the recovery in some banks, bancassurance, and income from fees. In particular, banks predicted to have the best profit growth include Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), VPBank, Military Commercial Joint Stock Bank (MBB) and Vietnam Technological and Commercial Joint Stock Bank (Techcombank).

Another key driver of credit growth in 2020 is personal lending, especially at state-owned banks such as BIDV, VietinBank and Vietcombank, the banks with fairly lower proportion of retail lending than private joint stock banks. For the largest 12 listed banks, the proportion of retail lending on total credit increased from 32.2 percent in 2017 to 35.5 percent in 2018 and up to about 40 percent by the end of the third quarter of 2019.

Vietcombank recorded strong rise in profit and bad debt handling in 2019. The bank’s Chair of the Board of directors Nghiem Xun Thanh sai that the bank aims to expand pre-tax profit in 2020 by 15%, equivalent to about 26.565 trillion dong, while developing the total assets and mobilisation fund by respectively 12 percent and 14 percent and controlling bad debt ratio below 0.8%.

Some banks have strong potential for growth with special business models and unique competitive advantages compared to other banks. Typically, VPBank has FE Credit. According to JP Morgan, the ownership of the consumer finance company FE Credit with the largest market share in Vietnam is the main factor that promoted VPBank’s NIM (higher than the sector’s average of 9.6%). Consumer loans account for 57 percent of the bank’s total outstanding credit and create the core competitive advantage for VPBank.

However, there is a huge risk on business’ activities when the SBV decided to tighten consumer lending, which significantly affect FE Credit’s business situation. Techcombank with the potential bond segment in Vietnam is also a notable case. With the leading position in bond distribution. Techcombank has many benefits such as revenue from issuance fees, distribution costs, income and capital increase. In addition, the SBV has recently taken actions to consider reducing compulsory reserves.

However, the reduction of compulsory reserves will not release a large source of capital as usually seen in theory. Vietnam’s banks all have a ceiling credit growth limit, thus the reduction of compulsory reserves will not help banks inject more capital to the market, but help them cut the costs of capital by more taking advantage of the mobilisation fund.

Vo Tri Thanh, deputy director of the Central Institute for Economic Management also issued assessment on the improving banking industry the context of the positive economic growth, especially after a period of promoting restructuring. Nevertheless, bad debts remain a concern for banking activities. In fact, the bad debts sold to Vietnam Asset Management Company (VAMC) after five years will return to the bank and force them to use profit source to increase risk provisioning costs.

The tightening of Basel II standards is expected to increase costs for banks. In addition, a new period of bad debt formation is returning, due to the new debts from consumer loans, or from the restructured bad debts, which are now revalued. However, the tightening of regulations will bring many advantages for banks that have successfully applied these standards (3.8%). In fact, banks applying Basel II recorded an average credit growth of about 13.8%, much higher than the 9.54 percent of the entire system by the end of the third quarter of 2019. In the first quarter of 2020, the government will increase the charter capital of Vietcombank and VietinBank by about 10 trillion dong. For Commercial Joint Stock Bank for Agriculture and Rural Development of Vietnam (Agribank), all profits contributed to the budget in 2020 will be used to increase charter capital.

“It is estimated that this situation will continue in 2020, because banks meeting Basel II standards will continue to be assigned additional credit growth room and gain more market share compared to rivals thanks to their own capital and stronger financial health,” SSI Research report stated.


Category: Finance, Vietnam

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