Since the beginning of the year, banks have continuously reduced lending rate in priority areas, as well as many preferential loan packages for businesses, but profit in the first six months still grew strongly. This result has contributed greatly from the restructuring of wholesale lending to retail lending.
Reducing interest rates does not worry about reducing profits
On August 1, large banks including Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Vietnam Joint Stock Commercial Bank for Industry and Trade (VietinBank), Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV) and Vietnam Bank for Agriculture and Rural Development (Agribank) lowered the lending interest rate by 0.5 percent per year, applied to new loans in priority sectors and start-up businesses.
Meanwhile, Vietnam Technological and Commercial Joint Stock Bank (Techcombank) also applied short-term interest rate incentives for small and medium enterprises (SMEs), with a reduction of about 0.5 percent. But looking at the banking business perspective, reducing interest rate will mean that the contribution of interest income to profits will also decrease.
However, the actual situation did not have much impact on profit growth of banks. According to Bao Viet Securities Joint Stock Company (BVSC), the new interest rate level was adjusted down for short terms in some priority areas, while the general ground was difficult to set new lower interest rate.
Bui Quang Tin, HCM City University of Banking, said in the funding for the economy, interest rate would be favourable depending on the subject. With high risk subjects, banks set high interest rate. That was why the mobilisation interest rate was pushed up in the early months of the year but banks still reported high interest rates. Typically, some banks increased credit card interest rate because that was the channel that generated a lot of profits.
According to Nguyen Dinh Tung, Chief Executive Officer (CEO) of Orient Commercial Joint Stock Bank (OCB), this year, the interest rate level would be kept as in 2018, but the discrimination against lending interest rate among different customers was becoming more and more obvious.
Firstly, the State Bank of Vietnam (SBV) had oriented. Secondly, banks had to apply Basel II, so they also applied lending interest rates according to the risk of assets, customers and loans. Accordingly, there are those who can get loans with interest rate of five percent to six percent per year, others still have to borrow at an interest rate of 11 percent to 12 percent per year.
The operation of banks currently has a big change in business structure. Corporate loans are no longer attractive, instead banks are moving to those who can bear higher interest rates.
For example, Vietcombank reduced lending rates with outstanding loans equivalent to 38 percent of current short-term loans, accounting for 20 percent of total outstanding loans of dong. But from the beginning of the year, the bank’s leader stated that last year Vietcombank shifted 34 percent of credit to retail and this year continued to boost retailing.
This is a potential area, in addition to increasing business efficiency, it also helps risk management very well. If a corporate loan transfers bad debt and must make provision, the bank’s profit will decline sharply. But retail lending has a low balance and guaranteed collateral, debt collection is also easier. Business results for the first 6 months of Vietcombank showed that after-tax profit reached 9.076 trillion dong, up 41 percent compared to the same period of 2018.
Retail segment will be promoted
Currently retail is the general direction of banks to increase profits. In the first six months, Techcombank achieved a record profit of 5.7 trillion dong. At the update of the first half of the business results last week, Techcombank representatives shared significant growth figures in the retail segment.
In particular, regarding loans, the bank recorded a 43 percent increase in the number of credit cards in the past six months. Along with that, the total value of transactions via credit card grew 80 percent over the same period, reaching 13 trillion dong in the first six months. Notably, credit card debt balance was not high (nearly 4 trillion dong) but it was also an important component in the bank’s lending segment.
In mid-July, the interest rate applied for Techcombank’s new issued Standard class credit cards increased to 29.8 percent per year, instead of the previous 27.8 percent; Gold class card interest rate reached 28.8 percent per year, increased from 27.8 percent per year earlier. For existing cardholders, the interest rate was also adjusted by two percent to 28.8 percent per year with the Standard Class and by one percent to 27.8 percent per year.
Besides, this bank was also lending to buy houses according to the value chain of about 62 trillion dong (up 1.9 times compared to 2016), and about 10 trillion dong for existing customers who borrowed loans to buy houses not in projects or buy houses in residential areas.
Similarly, in Q2/2019, Sai Gon Hanoi Commercial Joint Stock Bank (SHB) recorded net income of 1.742 trillion dong, up 60.3 percent compared to the same period last year. In six months, net income of this bank is 3.153 trillion dong, up by 46 percent. This growth contributed greatly to personal lending.
Specifically, personal loans of this bank in the last six months reached nearly 74.8 trillion dong, up to 39.2 percent compared to the beginning of the year, accounting for 31.16 percent of total loans, while the proportion of this segment at the beginning of the year was only 24.76 percent. At banks such as Military Commercial Joint Stock Bank (MB), Asia Commercial Joint Stock Bank (ACB), and Vietnam Prosperity Joint-Stock Commercial Bank (VPBank), personal lending had also been growing well over the past time.
In the context of SBV’s low credit growth limit, commercial banks will boost retail services to offset credit income, focusing on personal lending. This is also the general trend of banks in the world, focusing on retailing and providing short-term capitals to the economy.
This shift is giving good prospects when the profitability of banks is growing rapidly. However, when banks shift credit growth into personal consumption, they must be accompanied by better risk management requirements. At the same time, SBV should pay attention to this issue.
The reason is that most of the capital for personal consumer loans now focuses on real estate. In addition, boosting personal lending also raises concerns about the ability of borrowers to overcome their ability to pay.
