What’s new in this issue? In our second issue of banking sector, we have seen the high credit growth in recent years, the implementation of several prudential regulations, as well as the emergence of newer types of financial services such as consumer finance and fintech companies, diversifying the product offering and enhancing user experience. However, given such tremendous growth in contrast with a lower GDP, concerns are raised from a surveillance as well as supervisory and safety standpoint. Our report examines the reported numbers as well as goes after their background story, while observing the general trend, namely retail banking, which offers higher profitability with better control on costs. While traditional banking has been highly regulated, retail banking is relatively new and policies are still in the development process. Seeing the potential, banks are enhancing their product offerings to individual customers with mobile banking and e-banking, venturing into consumer finance business, and cross sale via bancassurance. These services help increase bank coverage, open up new revenue sources, and bring fresh air to the competition landscape in financial services.

Credit grew by 15.3% in 11M2017 compared to YE2016, however it is hardly expected to meet targets at 21% by YE 2017

Loose credit policy, lower interest rates coupled with strong demand for consumer and retail banking are the reasons behind the strong credit growth. The government sees in current macro-economic environment where inflation subdued at 3.79% after nine months, VND/USD parity maintained stable an opportunity to ask banks to expand credit, thus to give more support to GDP growth.

The strongest driver of the credit growth in recent years has been consumer lending. By 11M2017, consumer lending accounts for 15.47% of total credit outstanding, up from 11.2% in 2016. Meanwhile, credit for production increased albeit at a slower rate.

Average lending interest rate VND to lower by 0.5% by the end of 2017 to support credit expansion, but it looks that interest rates could hardly go lower than they already are given the current inflation.

Reported NPL increased from 2.46% by YE 2016 to 2.9% by 9M2017, nearing the ceiling of 3% that SBV has set.

Following the issuance of Resolution 42 in June 2017, VAMC and banks has been taking more resolute measures to deal with NPLs. Additionally, the recovery of bad debt is also indirectly boosted thanks to favorable economic environment, especially the recovery of real estate and stock markets.

In August, Techcombank became the 2nd bank to announce that all the NPLs transferred to VAMC had been recollected or provisioned. Vietcombank announced the same at the beginning of this year. On the heels of these two banks are ACB, which also plans to achieve the same by the end of this year.

Current reported CAR is well above the minimum requirement, however dropped slightly to 12.37% in overall in 9M2017

Given the strong growth of credit and allocation to consumer finance products, banks are facing undercapitalization issues and scrambling for capital injection. By October, only five out of the 14 banks who announced capital increases managed to meet their target. At the same time, how much additional capital is needed if actual NPL is 8.61%, instead of the reported NPL at 2.46%?

In general, 2017 is a good year for Vietnamese banks as some banks have even achieved the profit targets they set at the beginning of the year by Q32017

Better profitability resulted in higher the return on bank assets and banks are increasingly looking at retail, consumer sector to earn higher returns on assets:

- Increase customer coverage: Vietnam consumer finance market accounts for 37% of the retail banking segment and is expected to continue its expansion given low penetration compared to other countries

- Add on products: Bank cards are adopted more widely with increasing percentage in total value as well as total volume of transactions as people warm up to the idea of cashless transactions via e-commerce websites, POS coverage, etc.

- Enhancing services: The proliferation of Fintech and non-traditional payment services on the back of improving access to internet and technology could usher the economy to a cashless one regardless of banking penetration.

- Cross-sale: Bancassurance could ride on the growth of the insurance industry, which has been developing rapidly at 21% YoY in the last three years. For banks, this could be an important additional source of revenues in the context of thinner interest margins.

The government and the SBV has been implementing firmer requirements and mandates, moving closer to international standards, albeit allowing certain delays for banks to adapt.

More stringent and prudential requirements are being implemented on banks’ practices. By 2020, the SBV aims for 70% of the banks to meet Basel II standards. Active measures are also taken to resolve the bad debts that have plagued the sector since the financial crisis and collapse of real estate market in 2012. Earlier this year, the Governor announced that the actual NPL in the system amounted to 10.08% of outstanding debts, despite reported NPL consistently below 3%. After Resolution 42 has been passed, VAMC and banks have been given more authority in terms of debt settlement, and have made progress with the debt recovery as NPL reduced to 8.61% by Q32017.

 Amendment to Law on Credit Institutions made breaking news by introducing a new option for credit institutions under special supervision: declaring bankruptcy

The actual probability of bankruptcy for weak banks, however, remains a question in our view. Declaring bankruptcy is a last resort and it would take a while for us to see a bank going under.

Above is a sample of the many progresses of the banking sector, as we aim to provide you with a more comprehensive and inquisitive view of the market, adding local insights and analyses from our point of view to help you with your decisions.

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