As of March 20, the credit growth of the whole banking system reached only 0.68 percent compared to the end of 2019. Temporarily, in the first 80 days, the whole system only disbursed an additional 55.7 trillion dong. to the economy, equivalent to less than 700 billion dong per day. This was the lowest credit growth rate in the past half decade, which was directly attributable to enterprises struggling with the COVID-19 epidemic.
Not only low credit growth, but increased overdue debt during the season would also adversely affect the business results and the ability of many banks to raise capital. This comment was given by Fitch Ratings in the context that many banks in Vietnam were involved in the process of rescheduling repayments for many businesses that were struggling during the epidemic season.
According to the State Bank of Vietnam (SBV), as of May 8, the banking system had restructured the repayment term for over 215,000 customers with a loan balance of about 130 trillion dong. At the same time, banks had exempted, reduced, and lowered interest rates for 260,000 customers with a balance of 1.08 quadrillion dong, provided new preferential loans with preferential interest rates with cumulative sales from January 23 till then reaching about 630 trillion dongs for about 182,000 customers.
According to Fitch Ratings, Vietnamese banks rated by the company had an increase in overdue debts in Q1/2020 at 45 percent compared to the end of 2019, in the context of the economy being stagnant, only grew at 3.8 percent in Q1 (the lowest since 2013). These overdue debts were expected to grow even stronger as the economic outlook remained bleak due to weak global demand.
The risk of bad debt came back in the first few months of 2020 while before that, the bad debt handling momentum was progressing well until the end of 2019. According to SBV, about 2 quadrillion dong of outstanding loans (accounting for about 23 percent of the total balance of the whole system) was affected by the disease and predicted a high risk of bad debt.
Fitch said that if banks continued to apply preventive measures on new loans that were likely to become bad debts, there might be short of capital up to $2.5 billion (equivalent to 27 percent of equity at the end of 2019), to meet Basel II’s minimum capital adequacy requirement of eight percent. In particular, state-owned banks would face the biggest capital shortage.
In this regard, Can Van Luc, member of the National Financial and Monetary Policy Advisory Council, said that although the budget was difficult, it was still necessary to increase capital for commercial banks with state-owned capital. If unable to raise capital, certainly the ability to provide capital, reduce interest rates to support the economy of banks would be worse.
Viet Dragon Securities Company (VDSC) forecasted that interest income of banks would decrease more clearly from Q2. Compared to private banks, interest income of state-owned banks this year was likely to be more affected because these groups were expected to be at the forefront of applying interest rate exemptions, debt structure for customers. Expected negative impact on net income margin (NIM) (and then interest income) would become more progressive than Q1.
Lower profit margins would occur in case SBV continued to maintain monetary easing policy and required commercial banks to lower lending rates to stimulate economic growth.
In the situation that the COVID-19 epidemic caused difficulties in production and business, deputy Governor Dao Minh Tu required four banks with the state capital, including Vietnam Bank for Agriculture and Rural Development (Agribank), Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank), Joint Stock Commercial Bank for Investment and Development of Vietnam (BIDV), Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank), to reduce at least 40 percent of profits to support businesses and individuals.
For example, Vietcombank had a huge annual profit. Typically, in 2019, its profit was 22 trillion dong. This year, the Bank had to reduce 30 percent to 40 percent of this profit, contributing about 8 trillion dong to reduce interest rates. Nghiem Xuan Thanh, Chair of Vietcombank’s Board of directors, said that the Bank automatically reduced interest rates for customers with a reduced debt balance of 600 trillion dong. With the above adjustment, the Bank accepted a decrease of 2.24 trillion dong in profit in Q1. In 2020, VietinBank also planned to cut profits from dong 3 trillion dong to 4 trillion dong to reduce interest rates and reduce fees.
According to Luc and the author of the BIDV Training and Research Institute, the operating income of credit institutions this year would be reduced by at least more than 30 trillion dong, equivalent to 20 percent to 25 percent of the original profit plan.
In fact, according to the financial statements of 26 banks, up to 11 banks saw a drop in profits in Q1/2020 compared to the same period, including some big banks such as Vietcombank, VietinBank, Military Commercial Joint Stock Bank (MB MBBank), Sai Gon Thuong Tin Commercial Joint Stock Bank (Sacombank). Difficulties were also present in other banks. For example, Vietnam Export Import Commercial Joint Stock Bank (Eximbank) had to reduce its business targets in 2020 with a pre-tax profit of 40 percent to 1.318 trillion dong. Nam A Commercial Joint Stock Bank (Nam A Bank) also forecasted that the profit before tax target in 2020 was 14 percent lower than the previous year, at 800 billion dong.
Previously, SSI Securities Corporation adjusted its pre-tax profit forecast for the 10 large-scale banks studied with a decrease of 11.1 percent and a decrease of 16.4 percent compared to the previous forecast with two Scenarios. Firstly, the disease would be controlled by the end of Q2. Secondly, the disease would not be stopped until the end of 2020.
