In 2022, Vietnam’s banking sector stepped on a rocky recovery road with new challenges from external turmoil and internal corrections. Entering 2023, the first signs of dents in economic growth are now visible. Commercial banks suffered stagnant credit growth due to low capital absorption, given the subdued demand for business expansion amid the ongoing downturn in global trade and domestic real-estate roadblocks. Meanwhile, they struggled to meet the minimum CAR ratio imposed by the SBV as credit risks tend to pick up, particularly loans for real estate and personal consumption, impacting banks’ plans for credit growth and profit in 2023.

Credit growth remained stagnant due to squeezed demand for business expansion and real-estate roadblocks.

Credit growth faded in YE 2022 and spread into early 2023, driven by dimmed credit demand amid the global economic downturn. Slumped production due to reduced export orders and lending rates anchoring at a high level were the main drivers hampering borrowers from applying for new loans. Being aware of the pain points, the Government has furnished supportive policies to both borrowers and credit suppliers. Besides, with recovered system liquidity, SBV's reduction in policy rate also acted as a forward guide for commercial banks to lower lending rates, thus reigniting credit demand in 2H2023.

Customer deposit growth remained sluggish, driven by the plunge in the wholesale segment

Customer deposits slowly grew in early 2023, mainly thanks to the return of money flow from the individual segment as attracted by appealing saving rates. Meanwhile, the wholesale segment witnessed dropped deposits as facing macroeconomic challenges. The average deposit rate experienced continuous movement after accelerating in Q3.2022 to confront the liquidity crunch, which has recently cooled down to create a premise to lower lending rates, facilitating business recovery and economic growth. However, deposits would remain appealing among fixed-income assets in the midst of macroeconomic turbulence.

The NPL ratio persistently surged, showing further deterioration in banks’ credit portfolio

The NPL ratio of the banking system continued to edge up in the first quarter of 2023 as Circular 14/2021, allowing debt restructuring expired, and customers’ payment capacity was eroded in unfavourable economic conditions. Some early warning signals for credit risk have raised concerns about lending portfolio quality, partially unveiled via loan group 2 expansion and accrued interests. However, a silver lining for commercial banks in 2023 is Circular 02/2023 allowing loan payment rescheduling for customers meeting difficulties in economic hardship, which can help ease the burden of managing asset quality and provisioning.

NIM was hit as accelerated funding costs took a toll on banks’ interest income

NIM shrank in the first quarter of 2023 as the cost of funds hiked in the rising deposit rate environment. CASA, banks’ low-cost funding source, continued to drop in 1Q2023 following customer behaviour to move to term deposits to enjoy favourable saving rates. Meanwhile, stagnant credit disbursement also dragged down interest income, thus contributing to the squeezed NIM.

Digital transformation boomed with inclusive digitalization from the front, middle to back office

2022 and 2023 marked a special milestone in promoting digital transformation with the Government’s New plan on the application of information technology, digital transformation and information security. Banks are in the race to digitalize the experience of customers’ journey at each touch point, offering digital services to both retail and wholesale segments. “Open banking” is on the rise, creating a “super app” with an all-in-one experience, thus breaking the norm of “going to the bank”. Banks also thrive on deploying alternative credit scoring from customers’ digital footprint and National database, thus strengthening the risk management process.

Green financing stated increased importance in the Vietnamese banking system

As Vietnam committed to “Net-zero” emissions by 2050 as a critical component of economic growth, the financial sector played an important role in navigating capital flow to green Vietnam’s economy. Despite green financing size in Vietnam being modest compared to regional peers and mostly contributed by green loans, robust growth in 2018-2021 and increasingly diversified sustainable products shed light on further growth of the green credit market. With the roadblock lying in the legal framework and fragmented ESG management in Vietnam commercial banks, additional guidance from the Government is expected to bolster sustainable credit activities in the upcoming period