The consumer sector has benefited from Vietnam`s sustained strong economic growth and increasing affluence.
Vietnam’s banking system is becoming more susceptible to shocks as household leverage continues to increase, but near-term risk appears limited amid the benign operating environment and strong economic growth, Fitch Ratings has said in its latest report.
Credit leverage in Vietnam’s banking system has risen in recent years, with bank credit increasing to an estimated 134 percent of GDP as of end-2018, significantly higher than the ‘BB’ median of 60 percent and ‘BBB’ median of 55 percent. This has been primarily driven by the consumer sector, whose leverage jumped to 58 percent of GDP by end-2018 from 31 percent at end-2013, much higher than that of the Philippines (10 percent) and Indonesia (17 percent).
The consumer sector has benefited from Vietnam’s sustained strong economic growth and increasing affluence.
However, with consumer debt growing faster than wages, borrowers’ debt-servicing capacity is weakening. Fitch Ratings estimates that consumer debt per labour force had risen to 83 percent of the average salary by end-2018 from 42 percent at end-2013. This ratio is forecast to rise as consumer-loan growth is likely to continue outpacing income growth.
Most retail loans in Vietnam are secured by property, but recovery prospects are largely untested and more likely to be weaker in the event of a property market downturn. Some smaller banks have also been active in the unsecured and micro-consumer loan segment, whose borrowers tend to be of lower quality than traditional banking clients.
The State Bank of Vietnam (SBV) has introduced several measures in recent years to discourage over-lending to the real estate sector, including higher risk weights to push up banks’ capital requirements for lending.
The bank has also imposed lending caps on the micro-consumer loan sector to deter over-borrowing. Further tightening has also been proposed recently, but policy settings for the consumer sector are still accommodative and systemic risks are likely to build, the credit rating agency noted.
Near-term stress unlikely
According to Fitch Ratings, the longer rapid consumer-loan growth is sustained, the more vulnerable the banking system could become to shocks and asset-quality deterioration. The banks’ growing exposure to the residential property market also makes them susceptible to a shift in real estate market sentiment.
Vietnam’s relatively open economy also exposes the country to external risks. A shock to domestic interest and exchange rates, possibly through undue tightening in global liquidity, is likely to have repercussions for the financial system as the household debt-servicing burden increases.
Nevertheless, a consumer-debt crisis in the near term is less likely in light of the relatively benign economy, the agency said.
Fitch expects Vietnam’s GDP to grow 6.7 percent a year in 2019 and 2020, being one of the fastest-growing countries in the Asia-Pacific, while the unemployment rate continues to be low at 2.2 percent and inflationary pressures remain subdued, an average 2.6 percent y-o-y in 1H19.
In addition, Savills’ house price index for major cities in Vietnam shows that property price increases have been modest, suggesting current demand is likely to be more fundamentally driven than in previous cycles.
The SBV has also demonstrated some level of readiness to ensure the real estate sector remains healthy, as indicated by some of the macro-prudential measures it has introduced. For example, the central bank increased risk weights on loans for real-estate investments to 200 percent from 150 percent in 2016 and recently proposed an increase in the risk weight on housing loans worth more than VND1.5 billion (US$60,000) to 100 percent-150 percent from 50 percent. This should ensure the banks maintain some level of discipline in underwriting new housing loans.
