Banks hastily restructure revenue sources

11-Nov-2017 Intellasia | TBKTSG | 6:00 AM Print This Post

In the period of “hot” credit growth amounting to 30-40 percent in the previous years, the net income from credit activities of many banks accounted for as much as 90-95 percent of the total net revenue, even more than 100 percent as credit income had to offset losses for other business segments such as forex and securities trading.

Because income only came from such one operational field, banks pursued the credit development race, competing for customers despite high risks, and even some banks almost did not identify risk tastes.

In addition, banks set increasingly high credit target to business development unit, leading to moral hazards. This unit, by all means, colluded with customers to achieve the target, which caused underlying credit risks to pile up. As a result, bad debt surged as we have seen in recent years.

The rapid and high growth of credit income not only afforded operating costs but was enough to offset losses from other operations and ensure high profit. Many banks slept on the glaze of victory and forgot that most of which were virtual interests on the book while in fact, the debt still had not been recovered or in other words, the capital was still used by customers. Therefore, many banks still keep paying large dividends to shareholders and huge bonus to their machine.

Because of such profitable credit segment, many banks did not pay attention to diversifying the sources of revenue to ensure sustainable development. Only when the bad debt “tornado” unexpectedly came, income from credit in particular and profit in general was gradually narrowed because of receivables and provisioning costs, many banks really got out of “their dreams”.

Recently, some banks have started focusing strongly on developing products and services as well as strengthening the cross-selling to diversify their revenue and reduce their heavy dependence on credit. Such targets as increasing the number of customers using an average of 2-3 products or raising the proportion of service revenue were concretised in the annual plan as well as the targets assigned to the business development unit.

Promotional programmes to issue credit cards, payment cards or competitions for caregiving or sponsoring to compete for customers are increasingly intense. Collaborative sales agreements for insurance companies under the name of bancassurance are no longer strangers to both bank employees and customers.

As a result, the profit proportion from service out of the total net earnings of banks has recently improved remarkably. For example, VPBank increased from 5.1 percent in 2016 to 5.9 percent in the first nine months of this year, compared to 7.5 percent to 8.7 percent in VIB, 3.7 percent to 5.1 percent in TPBank.

The scheme on economic restructuring in 2016-2020 aims at pulling down lending rates below the average of developing countries (or about five percent). This is not an easy task. However, inevitably this direction shows that the interest margin from credit organisation is likely to remarkably decrease compared to the highs in the previous period. Or in other words, banks had to sacrify partly for the restructuring purpose of the economy.

The scheme also targets at ensuring that 70 percent of commercial banks fully carry out Basel II standards in 2020. With the issuance of Circular 41/2016/TT-NHNN at the end of 2016 regulating more stringent way to calculate the Capital Adequacy Ratio (CAR) following international standards, banks will face a lot of pressures to strengthen credit if the equity does not grow fast enough to meet, while capital increase plan has always been a headache of bankers over the past few years.

In addition, with the orientation to develop and improve the performance of the stock and bond markets to become the main capital mobilisation channel of businesses to reduce the dependence on bank loans, the demand for borrowing from large businesses will inevitably decrease remarkably in the future.

Then, customers can only lend small and medium businesses and individuals, or large businesses with low credit rating (because they are not capable of seeking capital on the stock market). The reality shows that banks with wholesale strengths such as Vietcombank, BIDV or MB have gradually paid more attention to boosting retail segment.

In the scheme on credit organisation restructuring associated with bad debt settlement in 2016-2020 under the recent Decision 1058/QD-TTg, one of the important targets for banks is to strive to double the income proportion from non-credit operation in their total income.

To achieve this target, banks not only need to strengthen the development of payment services that apply digital technology but should also expand such services as asset management, money collection and financial advisory. These services have not really been paid attention to and developed in Vietnam market while the number of rich people in our country is larger due to rapid urbanisation.


Category: Finance

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