Positive outlook for the banking industry in 2024

The banking sector began 2023 with high interest rates to control inflation following the prolonged pandemic. To tackle these challenges, the State Bank of Vietnam (SBV) reduced the operating interest rate four times and implemented various government support policies, such as easing lending conditions and unblocking capital flows. These measures led to a credit growth acceleration by the end of the year, achieving 13.8%, nearly hitting the 14.0% target.

In 2024, the bottom interest rate was noted as core inflation stabilized. Maintaining low interest rates throughout the year is crucial for stimulating credit growth, circulating capital, and reviving economic growth. With support policies proving effective, the banking sector saw optimistic results in the first quarter of 2024. Total operating income increased by 8.3% compared to the first quarter of 2023 and decreased by 3.3% compared to the fourth quarter of 2023. Profit after tax rose by 10.2% year-over-year and by 7.9% quarter-over-quarter.

However, credit growth still falls short of targets. By the end of May, credit had only increased by 2.41% compared to the end of 2023. Outstanding credit rose by nearly VND 327 trillion from the beginning of the year but remains far from the 2024 target of VND 2 million billion. Weak credit growth exacerbates asset quality deterioration, especially with persistently high bad debt figures.

Despite market challenges, the banking industry maintained a positive growth rate due to the low base level of 2023. According to a survey by Vietnam Report, 67.8% of experts and banks expect the banking industry to grow in the second half of the year, a significant increase from 14.3% last year.

Major challenges to system safety

Vietnam Report's survey highlights that while past shocks such as inflation risks and the global economic slowdown are easing, new challenges like increasing technology risks and financial crimes are emerging. These are now the second biggest threat after rising bad debt, posing significant risks to system safety.

By the end of May 2024, 29 commercial banks had published their Q1 financial reports. Ten banks had a bad debt ratio exceeding 3%, and 21 banks had a ratio above 2%, all increased from the same period in 2023. The overall bad debt ratio rose to 2.2%, up from 2.0% in the previous quarter.

The quality of debt remains a concern, with Group 5 debt (potential capital loss) accounting for the largest share, and Group 2 debt (requiring attention) at high levels. The total bad debt of the 29 banks reached VND 228,000 billion, up 32.6% and 103.1% compared to the same periods in 2023 and 2022, respectively.

The decline in asset quality is expected to continue through 2024 and beyond, putting pressure on banks to set credit risk provisions, affecting their profit targets. The total provision for customer loans of these banks reached nearly VND 197,000 billion in the first quarter of 2024, a 7.7% increase year-over-year. This rise is insufficient compared to bad debt growth, causing the bad debt coverage ratio to decline continuously from the second quarter of 2022. Despite this, large-scale banks with substantial corporate and state-owned enterprise clients maintain a bad debt coverage ratio above 160%, supporting their competitive advantages and operational efficiency for 2024-2025.

Information security challenges

The digital revolution has reshaped the banking business environment but also introduced challenges such as online fraud, data leaks, and cybersecurity threats. With the rapid emergence of Open Banking, sophisticated cyber-attacks have become a major concern.

Banks face the dual challenge of protecting user information and maintaining customer trust. According to Media Coding data from Vietnam Report, customer relations are a top media topic. Reports of customer scams and account theft have surged, leading to a significant drop in positive news stories about customer relations, particularly in March, when several incidents of asset appropriation and data breaches occurred.

Cyber threats and financial crimes are increasingly affecting customer perspectives. Survey results show that the three most critical factors affecting bank reputations are: safe and secure processing of customer data (82.6%), providing high-quality products and services (60.9%), and resolving customer complaints effectively and promptly (55.5%).

Survey respondents identified the top five growth opportunities for the banking industry in 2024 as: the recovery of the Vietnamese economy (100%), increased investment in digital technology by banks (88.9%), recently amended laws (66.7%), new policies from the SBV (55.6%), and significant operational restructuring by banks (55.6%).

With the ongoing economic recovery and gradual reforms, the banking sector is expected to support market growth, disburse credit, and assist businesses and individuals in expanding production and operations.

Source: Vietnam Report