The Covid-19 epidemic has put many businesses into a difficult situation, and the banking system had to "suffer" in the end. However, this is also the general situation worldwide. According to the Global Financial Stability Overview report of the International Monetary Fund's released in April, the longer the suspension of economic activities, the greater the credit losses as loans to households and companies are huge. The pressure also increased when the prices of assets, such as oil prices, plummeted.
Banks will also face indirect losses caused by loans to households that are working in vulnerable sectors. Accordingly, lower profitability will lead to less available income to offset losses than before. JP Morgan Vietnam assessed that pre-tax profit for the period 2020-2022 could be reduced by 25-45%, due to Net Interest Margin decreasing and credit costs increasing.
Despite facing the challenges in profitability this year and the following year, Vietnamese banks are still believed to have advantages in terms of credit growth, and return on equity (ROE) remains high compared to other Southeast Asian economies (ASEAN).
According to statistics of the SBV, as of May 8, Vietnam’s banking system had restructured the repayment term for over 215,000 customers with a loan balance of VND 130,000 billion; exempted, reduced, and lowered interest rates for 260,000 customers with a loan balance of over VND 1 million billion, etc. In addition, the banking industry also exempted and reduced payment fees with a total amount of over VND 1,000 billion.
The above comment was made by the credit rating agency Fitch Ratings in the context that many banks in Vietnam are involved in the process of rescheduling debt repayments for businesses heavily affected by the Covid-19 pandemic. Rescheduling debt repayments and keeping debt groups for customers without limit in business lines and types prescribed by Circular 01 of the State Bank (SBV) will increase overdue debts.
According to Fitch Ratings, Vietnamese banks that are rated by this agency have had a 45% increase in overdue debts in the first quarter compared to the end of 2019. These overdue debts are forecast to increase even further when the economic outlook is still gloomy due to weak global demand. Fitch previously had forecasted that Vietnam's GDP would increase by 3.3% in 2020, before recovering and accelerating to 7.3% in 2021.
Nearly 5 million people, equivalent to 10% of the working age population, are believed to have been negatively affected by the pandemic and lost their jobs. Fitch said that signals the risk of declining retail lending, which contributes up to 40% of total loans in banks.
The proportion of retail lending has nearly doubled, from 23% at the end of 2014 to 40% at the end of last year. These loans mainly consist of mortgage loans and personal business loans secured with assets. In cases where borrowers are no longer able to repay the loan, these assets may be sold for capital recovery. However, the debt settlement process can be long and hindered by the debt resolution legal framework which is still in the process of being finalized.
Like many regional banks, some Vietnamese banks have taken necessary measures to increase risk provisions to protect the balance sheet. These measures are still in place although the SBV's supportive policies during the epidemic allow these banks to maintain the debt group for loans affected by the disease.
Fitch believed that if banks continue to apply preventive measures on new loans that are likely to become bad debts, they may face a capital shortage of up to USD 2.5 billion (equivalent to 27% of equity at the end of 2019), in order to meet Basel II's minimum capital adequacy requirement of 8%. In particular, state-owned banks will face the biggest capital shortage. Across the system, the shortage of capital will be much higher, as banks rated by Fitch account for only 27% of loans within the banking system.
NPL ratio of some Vietnamese banks, according to a Fitch endurance test, is assumed to increase by 6-9%, compared with an increase of 0.5 - 1.2% at the end of 2019, with profit margins decreasing by 70-80 basis points. Lower profit margins will occur if the SBV continues to loosen monetary policy and require commercial banks to continue lowering lending rates to stimulate economic growth.
However, Fitch believes that the impact of the pandemic on banks' profits will be moderate because banks can take advantage of the SBV's support policies to reduce revenue fluctuations if economic tensions become more pronounced. Some banks can continue to sell bad debts to VAMC, allowing depreciation of provision expenses over five years to further limit the short-term impact on revenue.
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