Credit growth optimism 12-12.5%We’ve had a pretty successful 2020. Due to the impact of the COVID-19 epidemic, many countries have faced an economic downturn, Vietnam is a few countries that still maintain positive growth. In this context, the banking industry has had a fairly successful year in many aspects. The State Bank of Vietnam has implemented a flexible monetary policy in the direction of prudent and appropriate loosening in order to ensure liquidity and support economic recovery in the context of epidemics. The exchange rate continued to be stable, foreign exchange reserves continued to be added, helping to ensure national monetary security and consolidate Vietnam’s credit rating. Popular deposit interest rates in banks decreased from 0.9 to 1.5% (short term) and about 0.6 to 1.5% (medium and long term) compared to the beginning of the year; Lending rates also decreased rapidly, about 0.5-2% compared to the beginning of the year. Credit growth in 2020 will still reach 12%, although still lower than 2016 credit growth of 18.25%; in 2017 it was 18.28%; in 2018 it was 13.89% and in 2019 it was 13.65%.
The banking industry continues to perform well the pillar role of the economy, accompanying and supporting businesses and people in the epidemic situation through business support policies such as: providing interest credit packages preferential rate from 1 – 2.5%; restructuring debt, rescheduling debt, keeping the debt group in accordance with Circular 01.
Statistics also show that total bad debt balance tends to increase, potentially risky the banking system. Even so, banks are still able to maintain very good interest rates thanks to low deposit interest rates.
Entering 2021, the epidemic situation in the country has been well controlled, and countries around the world have started to deploy vaccination. With a positive change in disease control, the world and Vietnam economies are expected to recover strongly in 2021. Growth in production and business activities will facilitate credit growth. Besides, promoting public investment will also be a big driver for the growth of the banking industry. We can completely achieve the credit growth plan of the State Bank of 12-12.5%.
However, it is also important to note the effects of bad debt and low credit interest rates on banking stocks.
Challenges from virtual money
In particular, bad debts and low credit interest rates often have a direct impact on the financial situation and business results of the bank and thereby affect the bank’s stock price. Increased bad debts reduce the quality of assets, increase the cost of reserves. Meanwhile, low credit interest rates reduce the bank’s income, however, low credit interest rates often occur simultaneously with low-cost capital raising, where according to which the bank’s profits may not be greatly affected.
Banks’ financial statements for 2020 show that the trend of increasing NPLs and decreasing interest rates does not reduce bank profits because input interest rates fall even faster. Banks also handled bad debts of the previous period, so this period still has plenty of room to handle the arising bad debt problem.The State Bank’s credit growth target of 12-12.5% is completely optimistic.
In fact, stock prices are influenced by many other factors besides intrinsic factors of each bank. Recently, the stock prices of banks are in a continuous uptrend, even some banks have even reached new peaks in price.
Along with that is the impact of the development of non-cash payments, which positively affects the development of commercial banks in Vietnam. Help the bank increase revenue from services, increase demand deposits, as well as reduce operating costs of transaction offices, human resources, or traditional ATM withdrawal.
However, the participation of other payment intermediaries, or an alternative means of virtual money, is also a challenge to threaten the position of banks. This trend is continuing in both Vietnam and internationally, with no clear results. The current bank still has many advantages due to its customer base, technology, and ability to manage risk, despite its limitations in capturing demand and rapidly deploying services. However, we will have a chance to see a compromise between the two systems and users and translation providers alike will benefit from this development.
It is worth mentioning that there is a remarkable trend in 2021 that is the interest of many foreign investors in the Vietnamese banking industry. Accordingly, Vietnam has been an attractive investment address for international investors and the banking industry is not out of that trend. Macroeconomic stability, attractiveness in economic growth in recent years, attractiveness from the market of nearly 100 million people with increasing income, growing middle class … are factors that make investors can not ignore investment opportunities in Vietnam. Foreign banks as well as banks with foreign shareholders have been doing business with very impressive results. It is also impossible not to mention the very good control of the epidemic, improving the prestige of Vietnam in the eyes of international friends.
Currently, the limits of ownership make the level of attractiveness in investment decrease, investors do not have much control over the bank’s activities, so the likelihood of significant large transactions will be relatively limited for the banking sector, and will focus on the group of fund investors, financial institutions seeking profits or opportunities to explore the market.
Along with that, EVFTA and EVIPA and many other FTAs were signed, opening opportunities for Vietnamese banks to welcome the wave of foreign investors and recover growth momentum after the epidemic.
The signing of EVFTA and EVIPA and other bilateral and multilateral trade agreements opens up great opportunities for Vietnamese businesses to provide goods and services as well as invest in these markets. At the same time, it also brings a wave of foreign investment into Vietnam to take advantage of new business opportunities. With positive signals in disease control and great opportunities from the successful signing of the EVFTA Agreement, Vietnam’s economy is expected to recover strongly. Besides providing opportunities for cooperation and development for many industries in Vietnam.
However, we believe that in the short term, EVFTA forecasts a small impact on the EU’s capital inflows on the Vietnamese banking and financial market. The EU is a region that has not had much investment in the banking sector in the past. One important factor is the difference in management qualifications and culture. However, in the long run, when the governance gap shortens, with the attractiveness of the Vietnamese market, Vietnamese banks will attract investment capital from this market.
Compared to EU banks, Vietnamese banks are still very limited in size, capacity, risk management as well as standards of operation and governance. For example, at present, new banks are completing Basel II standards, while European banks are applying Basel III and proceeding to Basel IV. In the context of the current capacity of the banking system, it will be difficult for us to take advantage of opportunities in the near future.
In Vietnam, Circular 41 was issued by the State Bank in 2016 and officially came into effect on January 1, 2020, creating a great motivation for banks in Vietnam to change and strive to meet international standards in risk management as well as capital management in accordance with basel standards. Then, in 2018, the State Bank of Vietnam issued Circular 13 to regulate the internal control system and the internal assessment process of capital stability (ICAAP) as close to the practice according to Basel II Pillar II, with the compliance period for the ICAAP component is 1/1/2021. In fact, many banks have been very proactive in implementing Basel II, applying data analysis models in credit risk management, market risk, fraud risk,… However, the journey to build a solid internal control and risk management system is just beginning. Banks in Vietnam themselves also have to prepare a lot in terms of systems, calculation data and related processes and regulations to comprehensively meet Basel II, as well as move towards the implementation of Basel III, Basel IV.
In Europe, banks have implemented Basel II in an advanced method since 2008 and are in the process of completing and meeting new Basel III standards since 6/2021. As a result, these banks have achieved technological and system maturity that enables modern risk management methods to be implemented.
The process of cooperation between credit institutions in Vietnam and in developed markets will face many difficulties, because the market in general and Vietnamese commercial banks in particular have not reached the maturity level to be able to receive and immediately implement solutions from more developed markets. In order to close the gap and make the most of cooperation opportunities, banks need to actively invest significantly to upgrade the core banking system, build dosing and training models, develop personnel of commensurate quality. This investment should be specifically planned in the bank’s short-term plans and long-term business strategies to overcome difficulties, challenges and meet the benefits and opportunities that EVFTA and major credit institutions in Europe offer.
Period II: Development prospects of the banking sector’s M&A in 2021
Source: enternews.vn – Translated by fintel.vn