Vietnam’s credit growth is projected to fall below the 14% target set for this year by the State Bank of Vietnam (SBV), due to lower-than-expected lending to businesses in the industry, construction and telecommunications sectors.
A Techcombank employee transacts with a customer. Vietnam’s economic growth has not been heavily reliant on credit growth in recent years
Maybank Kim Eng Securities said in a recent report that credit growth peaked at 18.3% in 2017 and has since moderated to an estimated 13.3% as of July 2019, versus 13.9% in 2018.
The ratio of credit to gross domestic product (GDP) sharply declined from more than 250% in 2015 to less than 250% in 2016, roughly 160% in 2017 and some 130% in 2018. This means the country’s economic growth in recent years has not been heavily reliant on credit.
Vietnam’s macro fundamentals have strengthened in recent years and economic growth has appeared to be more sustainable, said the firm, adding Vietnam has managed to achieve robust GDP growth with lower credit intensity in recent years.
The ratio of non-performing loans (NPLs), or bad debts, has fallen sharply. The restructuring of the banking system in 2011 coupled with moderate credit growth in recent years helped to reduce NPL risks.
NPLs officially reported by individual banks had dropped to a record low of 1.9% by the second quarter of 2019, while the off-balance-sheet NPL ratio had slid from the peak of 17.4% in the third quarter of 2012 to 4.8% as of the second quarter of this year.
With rising asset prices and moderate credit growth, Quan Trong Thanh, research manager at Maybank Kim Eng Vietnam, expects the off-balance-sheet NPL ratio to fall below 3% by end-2020.
Thanh does not expect a major consolidation of the crowded banking sector, with 36 domestic banks and nine foreign banks. There is currently a moratorium on new banking licenses. He also does not expect the Government to issue digital bank licenses.
Meanwhile, Nguyen Xuan Thanh, a lecturer at Fulbright School of Public Policy and Management, said that future restructuring efforts and reforms needed for Vietnam’s banking sector include the gradual removal of credit growth limits, the restructuring of weaker banks, and recapitalization.
In terms of recapitalization, Thanh explained that many State-owned and large private joint-stock banks remain undercapitalized.
Therefore, he proposed that these banks be recapitalized through capital increases with support from the State budget for State-owned banks or the lifting of foreign ownership limits for commercial joint-stock banks.
Lowest credit growth projection
In the year to the end of September, credit growth had reached 9%, below the 10.3% growth recorded a year earlier. This means there is room for growth of an extra 5% in the last quarter, Rong Viet Securities Corporation said in its latest investment strategy report.
Based on the current pace and credit growth of commercial banks, Rong Viet Securities estimated that 2019’s loans will rise by 13.2%. If this is the case, that will be the lowest credit growth in the last decade.
The low growth is mainly due to State-owned banks, including the Bank for Investment and Development of Vietnam (BIDV), the Vietnam Bank for Industry and Trade (Vietinbank) and the Vietnam Bank for Agriculture and Rural Development, which have become more stringent with loan disbursements.
Meanwhile, commercial banks continued to extend loans at satisfactory levels. “This begs the question: Will SBV redistribute the cap on credit growth among lenders to reach the initial target of 14%?” said the firm.
Commercial banks, such as Vietnam International Bank, Tien Phong Bank, Vietnam Prosperity Bank and Military Bank, recorded rapid credit growth and nearly reached the quotas set for them by SBV.
Meanwhile, BIDV and Vietinbank’s credit grew at 8.6% and 3.2% year-to-date, below the allowed levels of 12% and 7%.
At the beginning of the year, SBV said that all banks that meet the requirements of Basel II can be considered for higher credit growth rates. As of mid-2019, many commercial banks have met the requirements. Basel II is an international business standard that requires financial institutions to have enough cash reserves to cover risks incurred by their operations. SGT
The credit growth rates of state-owned banks are decreasing, but rising at joint stock banks.
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