Vietnam’s banking system is becoming more susceptible to shocks as household leverage continues to increase – PHOTO: SBV

According to Fitch Ratings, credit leverage in Vietnam’s banking system has risen in recent years, with credit increasing to an estimated 134% of gross domestic product (GDP) by end-2018, significantly higher than the “BB” median of 60% and the “BBB” median of 55%.

According to the U.S.-based credit ratings agency, this has been primarily driven by the consumer sector, which has benefited from the country’s sustained strong economic growth and increasing affluence.

“However, with consumer debt growing faster than wages, borrowers’ debt-servicing capacity is weakening. We estimate that consumer debt per worker had risen to 83% of the average salary by end-2018 from 42% at end-2013,” stated the agency.

Fitch Ratings pointed out that most retail loans in Vietnam are secured by property, but recovery prospects are largely untested and more likely to be weaker in the event of a property market downturn.

Also, some smaller banks have been active in the unsecured and micro-consumer loan segment, whose borrowers tend to be of lower quality than traditional banking clients.

The State Bank of Vietnam (SBV) has introduced several measures in recent years to discourage over-lending to the real estate sector, including using higher risk weights to push up banks’ capital requirements for lending. It has also imposed lending caps on the micro-consumer loan sector to deter over-borrowing.

“Further tightening has also been proposed recently, but policy settings for the consumer sector are still accommodative, in our view, and systemic risks are likely to build,” said Fitch Ratings.

The agency said it has factored some of these risks into the Standalone Credit Profiles of Fitch-rated banks, which its economists view as some of the strongest in the system.

It added any rating impact would hinge on the severity of the fallout – whether it pervades other parts of the economy, denting consumer and business confidence – and the extent to which it becomes a binding constraint on the banks.

The World Bank acknowledged in its flagship report, “Taking Stock,” on Vietnam’s recent economic developments, released early this month, that despite moderate inflation, the SBV had maintained a prudent monetary policy stance to support its twin goals of sustaining macroeconomic stability and supporting overall economic growth.

The targets include achieving GDP growth of 6.6%-6.8%, maintaining the headline consumer price index below 4% and reaching a credit growth rate of 14%.

The WB noted that monetary policy became somewhat more restrictive in 2018, when the SBV lowered the credit growth target across the banking system and set a credit growth ceiling for each commercial bank.

The central bank also constrained real estate lending by imposing higher risk weights and limited short-term funding for long-term lending and contained consumer lending by introducing a cap on the share of cash loans as well as prohibiting further lending to clients with a bad credit history.

As a result, credit growth slowed to some 13% in March 2019 compared with the annual target of 14%.

In addition, less buoyant credit activity in 2018 and the first few months of 2019 was partly hampered by growing risk aversion among banks that remain saddled with outstanding nonperforming loans. SGT

Thanh Thom

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