What awaits banks in 2019?

04-Jan-2019 Intellasia | Tri Thuc Tre | 6:00 AM Print This Post

It can be seen that the overall picture of banks’ business activities in 2018 saw many bright spots when many banks attained record high profits and income from their fast growth of service activities and transformation in technology. However, there are still many doubts about whether these successes and positive shifts can be maintained in 2019.

Summarising the year 2018, the credit growth, according to the National Supervision Committee, would only be about 14-15 percent, much lower than the 17.6 percent recorded in 2017. Meanwhile, according to updates of the general Statistical Office, by December 20th, the credit growth was only 13.3 percent. Many forecasts mentioned that the credit growth will continue to decline in 2019. For example, Bao Viet Securities Company (BVSC) said that in the next three to five years, this indicator will only be maintained around 14 percent per annum, lower than the period of 2015-2017 (average credit growth of 18.1 percent).

The slowdown of credit growth will much influence banks’ profits because in fact, over 70 percent of banks’ revenues come from lending activities.

Not to mention, the mobilisation rates have tended to increase in the recent time, and are forecasted to hardly decline in 2019. Meanwhile, banks still face a lot of pressure of not letting lending rates increase which may affect the operation of businesses. This interest rate difference will make it difficult for the Net Interest Margin (NIM) of many banks to be improved.

In addition, the BVSC believed that the NIM of some banks will gradually lose the cheap capital advantage. According to BVSC, cutting the ratio of using short-term funds for medium and long-term lending to below 40 percent and the decline of cheap capital source from the State Treasury will be the two factors affecting the NIM of some banks. In addition, Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), Commercial Joint Stock Bank for Industry and Trade of Vietnam (VietinBank) and Vietnam Prosperity Commercial Joint Stock Bank (VPBank) may face the pressure of NIM reduction as their Lending to Deposits Ratio (LDR) has nearly reached the prescribed limits.

Many experts and analyst groups of securities companies said that “Year 2018 may have been the peak of bank’s profit growth”, mainly based on the forecast on the slower credit growth, the less abundant of revenue when the divestment to meet Circular 36 has basically been done, and the modest revenue from the signing of insurance cooperation, etc.

However, the positive point is that banks are experiencing a shift in income structure from lending to service activities. In 2018, the service income of most banks increased sharply and there is still a lot of room for growth.

In such general situation, the profit of banks in 2019 will face many difficulties to maintain high growth rates like in the past two years.

However, the situation is different for each bank with their different advantages and difficulties. Accordingly, the differentiation in business results in 2019 will be more obvious. Banks with low bad debts will reduce the pressure of large risk provisioning, thereby lowering the pressure on profit. Or banks which have strongly raised capital will be prioritised in credit growth. Commercial Joint Stock Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam International Commercial Joint Stock Bank (VIB), and Orient Commercial Joint Stock Bank (OCB) are likely to be treated under specific mechanisms as they have completed the Basel II application.

Meanwhile, banks dependent on consumer finance segment will encounter difficulties in maintaining strong growth due to the volatility of macroeconomic conditions. Vietcombank Securities Company (VCSC) said that in the context when the interest rates are under the pressure of increasing, consumer finance companies still need to maintain their lending market share and NIM at reasonable levels. They may need time to promptly adjust so that the operation can be then be more optimistic.

Banks which still have to continue their restructuring process and provision for the risks of bad debts will face limitation in credit growth and profit.

Bad debt concerns still exist

Undeniably, the bad debt settlement in the past years have recorded many achievements and the speed has also been pushed. According to the National Financial Supervisory Commission (NFSC), the bad debt ratio in 2018 slightly declined compared to the end of 2017, reaching 2.4 percent (2.5 percent in 2017).

The provisions for risks in 2018 increased by about 30.1 percent compared to the end of 2017. The reported ratio of risk provisioning on total bad debts was improved to 78.2 percent from 65.4 percent in 2017. Some commercial banks have cleared of all the bad debts sold to Vietnam Asset Management Company or actively repurchased the debts sold to VAMC for self-handling. After more than one year implementing Resolution 42, the system of credit institutions (CIs) has handled about 30 percent of the bad debts identified on August 15th 2017.

Although bad debt handling has been accelerated, the debt collection and sale of secured assets still face many difficulties. Of the value of bad debts settled in 2018, the debt recovered from customers only accounted for 33.2 percent, and sale of secured assets only accounted for three percent. In 2018, many huge-value bad debts were offered for auction with value from hundreds to thousands of billion dong, but remained unsalable, although the prices were continuously lowered.

In parallel with the high profit, bad debts of banks in the first nine months of the year tended to increase, particularly the irrecoverable debts. Statistics on 17 listed banks showed that the bad debt ratio increased slightly to 1.79 percent from 1.67 percent in the end of 2017. The on-balance sheet bad debts were recorded at 77/23 trillion dong (up by 18.5 percent).

Analysts of Viet Dragon Securities Company (VDSC) noted that the bad debt settlement is likely to slow down as the economy is in the final phase of the growth cycle. The slowdown of real estate market is an important highlight when most secured assets are in the form of assets. Meanwhile, many banks, particularly those focusing on consumer finance sector, are witnessing the return of bad debts after the booming period in the previous time. The risk of insolvency may increase when the borrowing exceeds the ability to pay. In general, the ratio of national savings to Gross Domestic Product (GDP) of Vietnam has been declining since 2012 and is lower than the ratio of investment to GDP. Vietnam’s savings rate is also among the lowest in the region.

The pressure to increase capital

According to the report of NFSC, the average Capital Adequacy Ratio (CAR) of the system of CIs has improved in 2018. CAR of the entire system reached 11.1 percent, thanks to the 12.2 percent increase in equity while the total risk-weighted assets grew at a lower rate of about 10.8 percent. The ratio of Tier-1 capital to total risk-weighted assets in 2018 reached 8.8 percent (7.8 percent in 2017).

The implementation of the Basel II standards in Vietnam has received the first signals as Vietcombank, VIB and OCB have been officially recognised by the State Bank of Vietnam (SBV). In 2018, many banks successfully carried out huge capital increase, such as Vietnam Technological and Commercial Joint Stock Bank (Techcombank) and VPBank.

Nevertheless, the above positive signals were only seen at some banks. The requirement for increasing capital of banks in 2019 is still very urgent. VDSC noted that the CAR is currently a bottleneck for the Vietnam’s banking system as it reached only 12 times by the end of 2017. This is the lowest level in the Asean and only higher than Bangladesh.

According to Circular 41/2016/TT-NHNN, the system of CIs will have to start applying the Basel II standards will start from January 1st 2020. Ten banks have been chosen by the SBV to pilot the application of Circular 41 one year earlier than the stipulated time, which is January 1st 2019. These banks include Vietcombank, Commercial Joint Stock Bank for Investment and Development of Vietnam (BIDV), VietinBank, Techcombank, Asia Commercial Joint Stock Bank (ACB), VPBank, Military Commercial Joint Stock Bank (MBBank), Maritime Commercial Joint Stock Bank (MaritimeBank), Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) and VIB.

According to VDSC, to apply Circular 41, banks are facing numerous difficulties including the costs and deployment of data warehouse, management framework, and automatic CAR calculation tool; changes in business strategies and business operations; as well as the needs for training employees on new regulations and system.


Category: Finance, Vietnam

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