Analysts of the Retail Research and Investment Advisory Division at Saigon Securities Incorporation (SSI) have predicted 2017 will be a challenging year for banks to increase their Net Interest Margin (NIM).

A graph created by SSI analysts demonstrates the relationship between credit growth, Net Interest Margin and lending interest rates in the 2012-16 period. 

NIM is the ratio of net interest income to invested assets, with the net interest income being the difference between interest income and interest expense.

According to the division, competitions among banks, compliance with Circular 06 and the government’s effort to maintain low lending interest rates are factors that may have an impact on the NIM ratio.

Circular 06 issued by the State Bank of Viet Nam requires banks to reduce the proportion of short-term deposits used to provide medium and long-term loans from 60 per cent to 50 per cent this year.

To meet the requirements, it is likely that banks would have to raise more medium and long-term savings and reduce long-term loans which would cause the loan-deposit ratio (LDR) and NIM to decrease.

To mobilise more savings, SSI researchers predicted that the average deposit interest rate banks offer this year could be higher by 50-70 percentage points, which will lead to higher interest expense.

The threatening of FDI outflow [as a result of Fed’s interest rate hike] and the return of trade deficit are also reasons for banks to make deposits more attractive.

On the other hands, banks still have to maintain stability of lending interest rates to lure more customers amidst fiercer competition and in response to the government’s call for support to priority sectors such as agriculture and parts supply.

SSI analysts also warned that those banks holding long-term government bonds with low coupon rates could face higher risks of reducing NIM.

According to analysts, last year, the banking system’s NIM reached 2.8 per cent, 0.1 percentage points higher than the previous year’s figure, mostly thanks to the consumption credit growth which helped increase their interest income.

As estimated by the General Statistics Office, lending for consumption surged by 39 per cent in 2016 to reach VND605 trillion (US$26.9 billion), accounting for 11 per cent of the system’s total credit loans.

Meanwhile, the low inflation rate of 2.66 per cent and the stability of the Viet Nam dong-US dollar exchange rate last year also helped banks reduce their interest expense. 

VNS