Viet Nam’s banking sector earnings growth will likely moderate this year after a strong 2018.

Analysts from Fitch Group’s Fitch Solutions Macro Research explained that the deceleration in loan growth would be due to the State Bank of Viet Nam (SBV)'s lower loan growth target in 2019 versus 2018, the sector's attempt to transition to Basel II standards by January 1 2020 and a slower economic growth environment.

“Accordingly, we forecast loan growth to slow to 13 per cent in 2019, from 14 per cent in 2018,” the analysts said. “We expect a slower pace of loan growth to weigh on earnings in 2019.”

According to the Fitch analysts, this will likely be primarily due to three factors.

First, the SBV has set the credit growth target for the overall banking sector to be 14 per cent in 2019, the same as the rate achieved in 2018 but lower than the 17 per cent credit growth target initially set for 2018. In 2019, banks which have met Basel II standards earlier than the SBV’s 2020 deadline will be allocated a credit growth limit of 15 per cent, with the rest being allocated a limit of below 12 per cent. By comparison, most banks were assigned relatively high credit growth limits between 14 and 16 per cent in 2018.

Second, the incorporation of Basel II standards requires banks to meet a capital adequacy ratio (CAR) of 8 per cent. Although the CAR of State-owned banks and joint stock commercial banks (which together account for 85 per cent of assets in the banking sector) in Viet Nam are already at 9.3 per cent and 10.6 per cent, respectively, the calculation for risk-weighted assets will be stricter under Basel II standard, which could see the CAR of these banks fall.

“We believe that banks will tighten lending towards riskier ventures in anticipation of the Basel II standards and this will weigh on loan growth,” they said.

Third, Viet Nam's economic growth is unlikely to be spared from the global economic slowdown and it is forecasted that real GDP growth will slow to 6.5 per cent in 2019, from 7.1 per cent in 2018. Slowing economic activity amid a dimmer growth outlook will thus weigh on credit demand over the coming quarters.

Recently released reports from the SBV also showed that the credit growth as of April 17 this year expanded by only 3.23 per cent against the end of 2018. The rise was lower than that of the same period last year – 5 per cent.

Capitalisation issue

Fitch also forecast that many Vietnamese banks, especially small ones, will face the problem of undercapitalisation when the Basel II standards are implemented due to more stringent calculation of risk-weighted assets. This could see consolidation in the sector involving the smaller and weaker domestic banks with larger counterparts to attain the required capitalisation levels.

According to the analysts, the Government could also relax foreign ownership restrictions to incentivise foreign banks to inject capital into the banking system.

At present, foreign banks face a cap of 30 per cent on their ownership in Vietnamese banks, which makes it challenging for them to have managerial control. This has likely impeded foreign investment in Viet Nam’s banks.

Having managerial control of domestic banks is important for foreign players as most domestic banks are grappling with poor operations and management. This has resulted in a growing number of foreign banks preferring to set up a wholly foreign-owned banks rather than purchase a stake in a local bank.

To meet the SBV’s deadline to implement the Basel II standard in 2020, Vietnamese banks have been asking the Government to raise the foreign ownership cap to 49 per cent so as to attract foreign capital. An ownership cap at 49 per cent would still allow the Government to own 51 per cent of the bank and control the banks through the Law of Credit Institutions and other legal regulations if need be. — VNS