2021 remained a tough year with the emergence of the fourth wave since the end of April, which has shuttered major manufacturing hubs and disrupted supply chains. In turn, credit demand and repayment abilities of both firms and individuals diminished, which exposed the banking system to deterioration in financial performance and risks of increased defaults.

Credit growth strongly recovered in the first nine months of 2021 but flattened since the onset of the fourth COVID-19 wave

The YTD credit growth reached 7.4% as of 7^th Oct 2021, which was superior to last year’s level of 5.5%. However, closer look into its movement reveals that credit growth escalated in the first half of the year, while started to slow down since July and levelled off since August. The fourth wave of COVID-19 pandemic had massively affected operation and credit demand of businesses. Thousands of enterprises were forced to either temporarily shut down or operate at reduced capacity due to social distancing measures. Looking forward, the factors expected to lessen the impact of the outbreak on credit demand include nationwide vaccination, production ramp-up once restrictions are loosened and extension of credit growth quota by SBV for banks with strong performance.

Customer deposits slumped in 2021 along with lowering saving interest rates

Deposit rates had sunk to a record low level due to liquidity abundance in the banking system. As a result, retail depositors who contributed the most to the deposit base switched to invest in other high-return channels, such as stock, bonds and real estate. This caused customer deposit growth to stagnate in 2021 and fall below the last year’s rate. Liquidity remained abundant and has been supported by slowdown in credit growth, bank’s funding diversification to valuable papers and interbank borrowings and SBV’s backup through purchase of USD.

Loan forbearance policy masked the actual asset quality of banks

NPL ratio slightly increased in the first 6 months of 2021 to 1.73%, indicating that the system had started to absorb the deteriorating effect of the new and strong COVID-19 wave. However, the actual NPLs have not been fully reflected in reported figures as CIs have applied Circulars 01 and 03, which rescheduled loan repayments and retained debt categories. Also, a huge amount loans incurred after 10^th June and hit by the pandemic could not be restrcutured under Circular 03 but had to wait for Circular 14 (the newest amendment of Circular 01 effective from 1^st Oct). The suspension of businesses and dipped income of individuals would threaten capability to repay of both existing and new restructured borrowers, exposing the banking system to a new wave of defaults once the loan relief scheme expires.

Banks’ earnings rebounded in 1H2021 along with recovery of credit demand and growth of fee income

Net interest income improved from the second quarter of 2020, as banks enjoyed a wider interest rate spread thanks to stronger reduction of deposit rates compared to lending ones. However, in the coming time the margin would be squeezed, as SBV requested commercial banks to lower lending rates and report the results on a monthly basis. Besides, banks made commitment in exchange for extension of credit limits. By the end of 21^st Sep 2021, 16 commercial banks, accounting for 75% of total credit outstanding, had reduced a total of VND11.8trn of interest, 57.31% of the committed amount. Meanwhile, fee income emerged and remained a healthy income source, to which bancassurance and settlement services made the largest contribution.

The prolonged COVID-19 pandemic ignited faster digital transformation in banks

Banks have accelerated to digitalize their processes, both front- and back-end. Especially, they have started to provide end-to-end online banking services through their digital banking initiatives, with which customers are not required to visit physical branches at any steps. Also, banks have been increasingly cooperating with Fintech companies in many areas to take advantage of their technology and expand their ecosystems.