Rated Vietnamese banks' profitability improved in 2024, while asset risks remained high. Profitability increased slightly from that a year earlier because of widening net interest income. The problem loan ratio was stable in 2024. However, the stock of problem loans continued to increase, while rapid loan growth adds to unseasoned risks. Banks' deposit growth lagged loan growth, posing funding risks. Moody's Ratings said, "We expect strong economic growth, supported by foreign direct investment inflows and improving consumer confidence, will support stable earnings in 2025. Nevertheless, banks will face headwinds from macroeconomic uncertainty including trade tariffs." Asset quality remained weak across most rated banks In 2024, the problem loans ratios at rated banks stayed flat at 2.0% compared to last year, despite an increase in stock of problem loans due to faster loan growth. All banks expanded their loan book at a fast pace of 18% on average. Some private commercial banks, whose loan books grew more than 20%, will be more prone to unseasoned asset risk. Special-mention loans (SMLs) declined to 1.6% from 1.9% over the same period, as stock of SMLs declined. Concentration risk remained high at several banks in 2024, as exposure to real estate and construction grew. Many banks' average provision coverage ratio weakened further, with some banks' ratios remained below 50%. We expect asset quality risks to persist in 2025. Profitability will be stable Rated banks' average return on assets increased modestly to 1.5% in 2024 from 1.4% in 2023, as higher net interest income and lower operating expenses offset a moderate decline in non-interest income. In 2024, several banks increased the share of market funding instead of growing deposits in the overall funding mix to optimise the funding costs given the low interest rates in the interbank market. Non-interest income was weak at many banks because of lower revenue from bancassurance and investment. In 2025, we expect net interest margin to remain steady with interest rates hovering around current levels, and non-interest income will see an uptick with robust business activities. This will be offset by higher loan loss provisions, as banks rebuild their reserves, keeping overall profitability stable in 2025. Funding will remain tight, while liquidity remain modest. Funding has tightened at many banks due to increased reliance on wholesale funding, with the average loan-to-deposit ratio (LDR) climbing to 107% at the end of 2024 from 103% a year earlier. We expect banks with smaller deposit franchises to grow their reliance on market funds amid expectations of high loan growth in 2025. The liquid banking assets ratio was stable at 28% as of year-end 2024 because of a higher proportion of interbank assets. However, stock of high-quality liquid assets, which includes cash and government securities, declined across most banks to an average of around 8.3% of total assets, which is significantly lower than regional peers. Capital will be stable The average ratio of tangible common equity (TCE) to total assets at rated banks remained stable at 8.4% at the end of 2024 from 8.5% a year earlier, as most banks retain capital via share dividend. A few banks with sizable exposure to social housing, agricultural and rural areas benefited from lower risk weights stipulated in the recently issued Circular 22, leading to an improved capital ratio by around 50 to 100 basis points (bps). We expect overall capitalisation to remain stable in 2025 as banks' internal capital generation and capital retention policies such as share dividend will support asset growth. Moody's Ratings report re-disseminated by The Asian Banker.
