Banks under pressure despite a positive recovery in credit

VIETNAM, May 23 –

Customers of a bank in Hà Nội. The low spread between deposit and lending rates will lead to a reduction in the net interest margin (NIM) and net profit of banks. Photo

HÀ NỘI — Although credit demand is recovering rapidly, banks still face major challenges from rising bad debts, provisions and interest rates on deposits.

According to Lê Xuân Nghĩa, former vice chairman of the National Financial Supervisory Commission, the US Federal Reserve (Fed) will continuously raise interest rates this year, which will force Vietnamese banks to raise deposit rates.

Despite the sharp increase in savings rates, domestic banks will not be able to raise lending rates accordingly to support the economy, as ordered by the government. The small gap between deposit and lending rates will lead to a reduction in net interest margin (NIM) and net profit of banks, Nghĩa explained.

In addition, for a long time, many banks have made good profits from mortgage lending, investing and issuing corporate bonds. However, tighter cash flow in both channels in the near future could affect bank earnings.

In fact, many banks saw strong credit growth in the first quarter of 2022 thanks to the surge in investment in corporate bonds.

At the end of the first quarter of 2022, the largest corporate bond balances were recorded in Vietnam Technological and Commercial Joint Stock Bank (Techcombank), Military Commercial Joint Stock Bank (MB), Vietnam Prosperity Commercial Joint Stock Bank (VPBank), Tien Phong Commercial Joint Stock Bank (TPBank) and Saigon Hanoi Commercial Joint Stock Bank (SHB), reported.

According to Nghĩa, banks are also under heavy pressure in terms of bad loans in the last months of this year, as government regulations on debt rescheduling will expire from June this year.

Due to the adverse effects of the pandemic, the government allowed customers affected by COVID-19 to delay loan repayment while allowing banks to maintain debt classifications. Therefore, a significant amount of debt may become bad debt when the regulations are no longer in effect.

Banks’ financial statements for the first quarter of 2022 also showed that most banks’ bad debts worsened in the quarter.

Over the past two years, although banks have sharply increased their provisions for subprime loans, many banks’ provisions are under pressure to increase significantly when large amounts of debt are not allowed to be rescheduled.

Research analysts from Saigon Securities Incorporation (SSI) said that although the quality of banks’ assets in the first quarter of 2022 was not a concern, provisioning pressure remained high, up 18% from the same period last year.

According to experts, the biggest prospect for banks in the last months of the year is the acceleration of digitization and the increase in the current account savings account (CASA) ratio, which will help to mitigate the negative effects of rising input costs.

In addition, the recovery in credit demand should also partly offset the decline in the NIM.

In addition, revenues from insurance and divestment activities are expected to yield huge profits for banks.

During the recent Annual General Meeting (AGM) of shareholders season, most banks set positive targets for pre-tax profit growth at 31% on average. The commercial performance results of the banks in the first quarter of 2022, with the exception of the Orient Commercial Joint Stock Bank (OCB), exceeded the targets set.

However, according to SSI Research, banks’ business results in the first quarter of 2022 did not fully reflect the effects of recent measures to tighten housing loans and corporate bond issuance.

Near-term risks for banks remain until the impacts of the corporate bond market become clearer, SSI Research said. —VNS