Banking sector in 2017 witnessed the spectacular surge of stocks after long periods of “hibernation”. Not only shown on the stock market, which is considered as the test of the economy, in fact, the operation of the system has improved much in the past year.
According to a recent analysis of SSI Research’s institutional customer division, the banking sector in 2017 had many remarkable points such as the new policy issued by the government and the State Bank helped turn the wheel, accelerating the settlement of bad debts, restructuring solutions for ailing banks including the permission of bad debt sales to the Vietnam Asset Management Company (VAMC), application of long-term lending rates at zero percent to zero-dong banks or approval of bankrupt process.
Apart from policy from regulators, the asset quality of banks has also improved with the non-performing loan (NPL) ratio (including NPLs sold to VAMC) to fall from 11.9 percent in 2016 to 9.5 percent by 2017.
At the same time, the lack of capital does not adversely affect the bank as previously forecasted. The reason is that banks are still able to restructure their assets to reduce risks, and good business results in 2017 also helped boost undistributed profits of banks. The NIM was improved thanks to the expansion of consumer credit segment. The average PB ratio of listed banks has significantly increased by 1.3x-1.4x in 2016 to 1.6x-1.7x in 2017.
Assessing the factors affecting the banking sector in 2018, SSI Research pointed out six key factors that will affect the profitability of the banking industry. In particular, the slowing down credit growth plan, the favourable condition to reduce interest rates and development potential of consumer credit segment is the main factor affecting the core business segment.
*Credit 2018: Opportunity to “shine” for consumer lending segment
For traditional lending, credit growth is likely to decline from 2017 as concerns about inflation have caused the State Bank to revise credit growth target for 2018 down to 17 percent compared to the plan in the same period and be lower than the 18.17 percent implemented in 2017. Credit growth limit allocated to banks can therefore decrease compared to previous years.
The maximum proportion of short-term capital used for medium and long-term loans has fallen from 50 percent to 45 percent. However, the aforementioned reduction is still easier for banks to “breath” because the previous plan was to reduce this ratio to 40 percent.
Regarding lending, the government has repeatedly issued the message asking banks to reduce interest rates. This also raises the question of policy influence on the industry’s NIM.
However, according to SSI Research, the average capital cost in 2018 will decrease thanks to the government support policies and significant improvements in the balance of payment in 2017 and 2018. In particular, operating and lending rates on OMO have dropped to 0.25 percent within more than a year. At the same time, the sale of state capital by SOEs and private companies in 2018 may continue attracting a large amount of foreign capital inflows, leading to the injection of a large amount of domestic currency into the system.
This will also bring about a large amount of money to the state budget, reducing the supply of government bonds and government-backed bonds while increasing the deposits of the State Treasury at commercial banks. According to SSI analysis, the aforementioned amount of money could help liquidity of the banking system increase significantly, short-term interest rates may decrease while medium and long-term interest rates remain low.
“Capital inflows will help the banking system reduce interest rates”, SSI Research reported.
Lower interest rates also allow banks to shift their loan structure by extending their exposure to retail/consumer lending. This is a sector with a higher NIM, and at the same time, plays a role in boosting domestic consumption.
As personal credit is still at an early stage of the cycle, SSI Research believes that overall risk will be managed and be more diversified over the next year or two. The penetration rate of retail loans is still low. Low and stable interest rates can facilitate higher mortgage rates. According to SSI, Vietnam has a special opportunity to “shine” in this area.
The proportion of consumer lending on total increased outstanding credit is one of the factors that will have a positive impact on this sector’s growth in 2018.
*The potential from bancassurance and profits from “savings”
In the non-credit sector, SSI Research said that the sale of insurance through the banking channel (bancassurance) will contribute more and more to the income from fees of banks. For the first nine months of 2017, it is estimated that $3.2 billion of original insurance premium, equivalent to seven percent of the total premium of insurance industry was sold via bancassurance channel, up 66.7 percent over the same period last year. A number of “handshakes” for exclusive cooperation between banks and insurers with credit products packed with non-life insurance products took place in 2017. Currently, the five leading banks in this segment are Techcombank (23.1 percent), VietinBank (10 percent), BIDV (8.8 percent), Maritime Bank (6.1 percent) and Citibank (5.6 percent).
At the same time, this securities company also assesses many banks will record significant growth of income from the divestment of investments and the recovery of handled bad debts. Some capital divestments are forecasted including MBB, EIB and OCB at Vietcombank, STB at Eximbank, PG Bank and PVComBank at Maritime Bank and STB at LienVietPostBank.
With the recent surge of bank stocks, this security company is expected to generate a large return on investment. SSI Research said most banks will maintain their growth momentum in 2018 with average profit growth at 14 banks estimated at 32.9 percent. The strongest growth was ACB (expected to increase 120 percent to nearly 5.830 trillion dong), HDBank (60.5 percent to 3.885 trillion dong), VIB, TPB, VPB, and VCB with the expected growth of 37-40 percent in the following year.
*Challenges from the plan to raise capital for banks
According to the scheme on banking system restructuring in the period of 2016-2020, the pilot application of Basel II on 10 banks will be implemented in 2017-2018. These banks will have to comply with Basel II deadline and need to start preparing for raising capital, including BID, CTG, VCB, TCB, ACB, VPB, MBB, Maritime Bank, STB and VIB.
Considering 14 banks alone, SSI analysts estimate that about half will raise Tier 1 and Tier 2 capital with an estimated mobilised capital of 69.774 trillion dong or $3.07 billion by 2018.
Another challenge that weaker banks may face is the growing disparity in deposit rates between large and small banks. The amended Law on Credit Institutions that took effect from January 15 has provided detailed provisions on how to allow banks in trouble to go bankrupt.
“Some banks will benefit because this will increase the attractiveness of banks to depositors, while demand for interbank loans may increase in more ailing banks”.
