Customers at a BIDV office in Hanoi. Banks are expected to raise yields, even if lending rates for some priority sectors are held down through informal guidance from regulators and social pressure. (Photo: VNA) However, the banks should be able to pass some of the additional cost on toborrowers, limiting the impact on net interest margins (NIM), according toFitch Ratings.
In a recent report, the rating agency said the State Bank of Vietnam’s (SBV)decision to raise key policy rates by 100 basis points on September 22 exceededits expectation that these rates would rise by only 50 basis points byend-2022.
It follows a sharp rise in US interest rates and weakening global demandprospects, which have increased the risk of capital outflows and contributed todownward pressure on the Vietnamese dong,although the currency has weakened by less against the US dollar than manyother APAC currencies this year.
“We now believe that further policy rate hikes are likely in the near term,partly in order to reduce the risk that exchange-rate weakening could add toimported inflation, and further upward pressure on deposit rates is likely asUS dollar interbank rates push up against dong interbankrates,” Fitch said.
According to Fitch, the policy rate adjustments will have little impact onVietnamese banks, as they apply to central bank facilities that do notconstitute an important source of funding for most major banks. The increase indeposit rate caps, which took those for one-six month dong depositsto 5%, will have more impact as the caps have constrained deposit rates at anumber of banks in recent months.
“This will raise funding costs to a modest extent, but we believemajor Vietnamese banks are well placed to absorb these higher costs. Demand forloans is robust and credit expanded by 17.2% year-on-year by September 16, butlending is constrained by the SBV’s cap on annual system credit growth, whichthe central bank recently reaffirmed at 14% for 2022.
Fitch believes demand for credit is likely to outstrip the quota-constrainedsupply in the remainder of the year and credit conditions are unlikely to easemuch, as persistent inflationary pressures amid robust domestic growth andfurther đồng depreciation willleave the SBV wary of faster credit expansion.
“We still expect banks to be able to raise yields, even if lending rates forsome priority sectors are held down through informal guidance from regulatorsand social pressure. Banks have, for example, been shifting lending portfoliostowards higher-yielding segments like retail, and may also be able to bundleother fee-generating products with much-coveted loans.
“We still view the overall outlook for net interest margin (NIMs) and earningsas positive, even though the increase in funding costs relative to our previousassumptions will dampen upsides for NIMs. This is because of rate pass-through,higher balance sheet leverage, and because the quota constraint on creditgrowth and a lack of alternative financing sources leave banks in a favourablebargaining position with borrowers. Consequently, the limited rise in fundingcosts that we now anticipate is unlikely to affect banks’ standalone creditprofiles, as there is adequate headroom at current rating levels. Moreover, theIssuer Default Ratings of most Fitch-rated Vietnamese banks are driven by ourexpectations of extraordinary support, which are more sensitive to movements inthe sovereign rating."
According to Fitch, Vietnamese banks could nonetheless be vulnerable ifinterest rates rise sharply beyond Fitch’s base case. Corporate leverage ishigh and interest-rate hedging rare, so a spike in lending rates would weigh onasset quality. Banks’ capital buffers are generally thin, especially atState-owned banks, reflecting persistently rapid loan growth. This reducestheir ability to absorb any unexpected spike in credit costs./.
VNA
