Thursday, 06 May 2021

Credit growth weakens in 2020, rebound expected in 2021

2020 witnessed rise in non-performing loans and lower economic and credit growth. Barring uncertainties, however, Vietnam is well-positioned for a rebound in 2021

Vietnam was exceptionally effective in managing the COVID-19 pandemic in 2020 with less than 1500 cases and 35 deaths. It managed to bring down the numbers of infection quickly thanks to its public health measures, contact tracing and strategic testing. The resulting economic fallout has therefore been better managed as compared to other countries in the region.

According to the International Monetary Fund (IMF), Vietnam’s economy is expected to grow 2.4% in 2020, compared to many other developing economies that continued to contract. However, the country witnessed a significant decline to 7% growth in 2019. Vietnam’s economy has been growing steadily over the last few years supported by the shift in the global supply chain in its favour due to the ongoing US-China trade war and high labour costs in China. Barring uncertainties and resurgence of infection in the country, IMF has predicted the country’s economy to bounce back in 2021 with a projected growth rate of 6.5%.

State Bank of Vietnam’s (SBV) prudent policies eased liquidity pressures, improved credit flows and costs of funding towards managing the pandemic-related economic stress in 2020. SBV cut the key refinance interest rates by 200 basis points to support liquidity, facilitated credit institutions’ access to low-cost capital, reduced the ceiling interest rates for deposits and the interest rate on short-term loans in the priority sectors. These initiatives aimed to reduce the cost of borrowing for businesses and support credit growth.

In 2020, most banks faced low credit demand due to the economic downturn as businesses delayed capital expenditure and borrowings. Credit growth was 6% in September 2020, compared to more than 13% in 2019. There was increased risk of credit defaults and therefore tightening of lending standards by institutions. SBV directed banks to offer more low interest rate credit packages while it took measures to increase their credit capacity, added interest waivers and reductions on the outstanding loans to support customers.

Before the pandemic, the performance of financial institutions was improving. In 2019, the deposit growth was 15.4%, compared to 12.6% in 2018. The assets of credit institutions increased by 13.69%. The capital adequacy ratio (CAR) of all the institutions stood at 11.95% at the end of 2019. Cooperative institutions had the highest CAR while the four state-owned commercial banks (SOCB) had 10.19%. SOCBs include Vietnam Bank for Agriculture and Rural Development (Agribank), VietinBank, Vietcombank, and Bank for Investment and Development of Vietnam (BIDV).

Not surprisingly, there has been a dent in the performance of banks this year. The non-performing loans (NPL) ratio of the sector climbed to 2.1 % in September 2020, compared to 1.8% in the previous quarter and 1.6% in December 2019. The return on equity (ROE) and return on assets (ROA) declined compared to previous year and stood at 9.09% (12.29% in 2019) and 0.75% (1.1% in 2019) respectively. As of October 2020, the loan to deposit ratio of banks stood at 72.44%, while the CAR

was satisfactory at 11.65%. Compared to the end of 2019, the assets for the entire sector grew by 4.75% but out of this the SOCBs increased their assets by just 0.06%. The ROE of SOCB stood better at 11.13% compared to 9.73% of joint stock commercial banks while ROA for SOCB was 0.66% lower than 0.78% of joint stock commercial banks.

In the AB500 Ranking 2020, Vietcombank emerged as the strongest bank in the country with an asset base of $51 billion, 20% ROE, 1.5% ROA and a low NPL ratio of 0.83%. The largest bank in the country is Vietnam Bank for Agriculture and Rural Development with an asset base of $63 billion. This bank had 16% ROE, 0.8% ROA and a comparatively higher NPL of 2.15%.

Third quarter performance shows that Vietnam’s economic parameters are improving and it appears well-positioned for an economic rebound. In 2021 the performance of banks is expected to improve if there is a sustained recovery in loan growth. However, compression of net interest margin, lower asset quality and provisions will create pressure on profitability. Notably, a significant 69% population remains unbanked in the country which if tapped successfully could mean a good business growth potential for banks as well as fintech solutions.

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