After a period of strong loan book growth during 2013-2017, Vietnam has witnessed a slowdown - the national loan book grew by 14% in 2018 compared to 18% in 2017. Concerns about aggressive lending practices, and the possible risk in the real estate and non-production sectors have resulted in a tightening of regulations by the State Bank of Vietnam (SBV). Additionally, the focus was on resolving the legacy bad debt with the resulting non-performing loans ratio (NPL) at only 1.89% by YE2018. Considering these events, the SBV also set a modest target of 14% YoY credit growth for 2019.

The strongest driver for credit growth, the consumer finance market, has been maturing after several years of exponential growth. In 2018, CF increased its contribution to the national loan book, at 19.7%, compared to 16.7% in 2017. At the same time, although the market has been growing at 59% YoY for the last five years, in 2018, the overall growth registered at 30.4%. The slowdown is attributed to the market’s development, growing from a larger base, the increasing exposure to real estate loans, as well as the saturation of some of CF key products such as installment loans for home appliances and consumer electronics.

Banks vs. FinCos

Although banks traditionally account for a significantly larger market share due to their big-ticket products of housing and automobile loans, in recent years they have been much more active in other CF product segments, motivated by a wider interest spread and building on their advantages of existing customer database, widespread branch networks, and robust risk management. Some of the top names in CF include both domestic and foreign banks, such as VIB, Techcombank, and Shinhanbank. These banks utilize their partnerships with ecosystems (e.g. Techcombank and VinGroup) to provide attractive products in housing, automobile, and credit card loans.

With regards to Finance Companies (FinCos), although they experienced strong growth in early years, FinCos could not sustain such speed in 2018. YoY Growth decreased, signaling a slowdown for the market players. This slowdown could be explained by the crowding market as the existing FinCos have to compete against both retail banks and new entrants. At the same time, the players are being constrained with SBV’s tightened supervision and lack of new products. installment products have started to reach saturation, whereas cash loans are facing the SBV’s restrictions. New products based on online platforms require licenses, which motivated partnerships between FinCos and fintech companies such as Home Credit and Momo.

Market Share

While the market share for the Big 4 leaders slightly contracted, some companies emerged as growth stars - Mcredit and Mirae Assets. Although relatively young, with support from parent bank MBBank’s network, Mcredit has taken over 5% of market share by the 2^nd year after thanks to the strong focus on cash loans, accounting for about 80% of the company’s loan book. Mirae Assets, a FinCo with backing from the Korean Mirae Asset Financial Group, also experienced 79% of loan book growth in the context of overall market slowdown.

Product Composition

In terms of product composition, POS installment products such as loans for home appliances and consumer electronics have seen a decrease as the market reaches saturation for sales at physical locations. Meanwhile, strong growth is maintained for vehicle loans products (including both two-wheelers and four-wheelers, but especially for motorbike products) and cash loans and loans for other purposes. Credit card loans grew from a small base and enjoyed strong growth, as the segment witnessed a few new entrants in 2018 such as Home Credit, VietCredit and upcoming Lotte Card.

Development of the Regulatory Framework

Vietnam has to juggle the goals of financial inclusion while maintaining healthy development of the financial system. In 2019, the SBV released two new drafts for amendment of Circular 39 and Circular 43, regulating the consumer lending activities of banks and non-banks respectively. While the changes are still in drafts, it is clear that the SBV has taken a stronger stance in managing the risks and impact from consumer lending activities. After the growth period of 2015-2018, the sector is moving towards professionalization under SBV’s guidance and monitoring.

Profitability

In light of slower credit growth, profitability ratios including ROA and ROE have decreased while prudential ratios such as NPL have increased slightly for the sector as a whole. The move towards a higher composition of cash loans has also increased NPL as unsecured cash loans is a high-risk product segment, especially for new market entrants with limited experience and robust growth appetite. This has further caused the authorities to toughen risk management practices among FinCos.

M&A Activities

Despite the slowdown in 2018, interest in the CF market continues based on current low penetration and potential room for growth. With the SBV’s plans to consolidate the financial sector, rather than establishing new FinCos, foreign investors are encouraged to acquire inactive and insolvent FinCos. Although most of these targets are under special supervision by the SBV, their valuation is high due to heightened interest. Other alternative lenders such as P2P lending platforms may aggressively expand once the regulatory sandbox for P2P lending has been issued. The near future 2019-2020 of Vietnam’s CF sector already looks very exciting as the market takes shape.