What’s new in this issue? Vietnam’s banking reported a successful outcome in 2017. The sector received USD2.39bn in net profit, financial efficiency improved, loan growth was strong, bad debts are being resolved, cost of financing was low, operations become more effective, and bancassurance booked enormous commissions. Macroeconomics played an important role in the growth of banking system with strong incoming foreign currency sources from FDI, FII, net exports as well as recovered overseas remittances. The government’s slow disbursements of investment funds, successful g-bond auctions and SOE divestments have resulted in a large amount of money supply at banks, effectively keeping interest rates low. The issuances of Amended Law on Credit Institutions and Resolution 42 proofed the Vietnamese government’s determination to combat the bad debt. Nevertheless, banks remain under-capitalized. High credit growth coupled with unsuccessful capital raise plans have exacerbated the issue. In this 2018 Banking Report, we aim to provide you with the latest industry updates, together with our local insights and analyses, to help you understand the unique opportunities and challenges that the Vietnamese banking system is facing.

Despite missing the target, 2017’s credit growth was still high at 18.17% thanks to a more consumer-oriented economy and a low-interest rate environment With 32.5% YoY growth and accounting for 16.7% of Country loan book, consumer finance has contributed approximately 5.43% to overall credit growth and became one of the key drivers for the country’s credit market. The high growth rate of consumer loans in 2017 was mainly driven by banks’ increased participation when they see the benefit of consumer finance. Consumer loans for housing/home improvement increased rapidly in 2017 thanks to a warmer real estate market and has been more restricted in 2018 with SBV’s directives and banks’ increase of interest rate for real estate by 1 – 2%.

A low-interest rate environment was mainly attributed to high liquidity in the market, which would be discussed in the next section and the interest rate reduction policy. The Government’s policy to cut down 0.5 – 1% of interest rates for priority sectors increased loans for agriculture, hi-tech and supporting industries by more than 20%. In 2018, the SBV wants to further lower interest rates to incentivize economy sectors. However, there is not much room for this reduction given the current cost of financing of 5.9% for short-term and 6.9% for long-term deposit.

Thanks to high proceeds from SOE divestments and foreign currency buying, liquidity has been improved with LDR decreased to 88.2% in Q12018

In 2017 and 2018, successful divestment from SOEs while budget disbursement was slow led to a high amount of idle cash in commercial banks. The buying of foreign currency also resulted in high VND supply in the market. G-bond yields also decreased sharply to reflect this high liquidity, 10-year bond yield has decreased from 6.51% at YE 2016 to 4.13% at Q12018. Banks who hold large amount of g-bond would suffer for revaluation losses when yields bounce back or cost of financing higher than g-bond investment income.

NPL has been on the decline to 2.2% reported per bank in Q12018, accelerated by Resolution 42. As a result, banks would enjoy higher retained earnings when they don’t need to make provision for bad debts at VAMC

NPL was on the decline, mainly thanks to banks’ effort in collecting and making provision for bad debts. Notably, Resolution 42’s enforcement has helped to resolve a total of VND 100,500 billion of NPL since its effective date (August 2017 – March 2018). As a result, banks could reduce the provisions they have been making towards their VAMC special bonds and long-standing NPL, and retain more of their profits.

CAR of the system continued decreasing to 11.98% at M2018 while banks are exhausting ways to increase Tier II capital, under pressure to increase Tier I capital

Undercapitalization continued to be a pressing issue for banks while CAR continued decreasing. As Tier II Capital is approaching Tier I capital and is not allowed to be higher than Tier I capital, banks are exhausting options to raise CAR but to raise charter capital. Although 14 banks plan to raise charter capital in 2017, only 6 banks realized the plan with an increase of USD613mn (41% of planned).

The rise of retail banking in 2017 boosted NIM, fee and commission income, and one-off income from partnerships with life insurers

NIM of banks increased slightly to 2.9% in 2017. This positive change is thanks to the growth in retail lending, which leads to a wider spread between interests on loans and deposits in a high liquidity environment.

At the same time, retail banking also boosted fees and commission income growth, which booked an impressive 50.7% growth in 2017. Many banks have posted a significant commission income from their partnership with life insurer in 2017, which allows life insurers to access and take advantages of banks’ retail network.

Riding the wave of high banking stock price, many banks had their IPOs, attracting foreign investors who are looking for entry

In 2017, banking stock price rose in tandem with the booming of Vietnam’s stock market. Many banks had their stock prices increased by over 60% Y-o-Y. Compared to other ASEAN peers, Vietnamese banks’ TTM P/B was much higher at an average of 3.17x. Many banks took advantage of high stock price and IPO’ed/undertook private placements. TCB, HDB, and VPB are three well-known banks for their recent listing with USD700mn proceeds from their IPOs/private placements in 2017 and 1Q2018.

Banks are targeting retail lending and bancassurance for higher profitability while investing in technology and cooperate with fintech companies for to improve their competitiveness

Retail lending has been a key strategy with many banks report this sector’s growth at more than 30% in 2017. Bancassurance also brought in high income for banks through exclusive agreements to distribute insurance products via banks’ network and is expected to continue with commission fee in the following years. Besides, banks are investing in technology and cooperate with fintechs in payment to provide better customer experience.