A bank teller counts cash. (Photo: VNA)In a report released last week, the rating agency said headwinds maypersist into the second half of 2023 and banks' financial performance is likelyto diverge according to the strengths of their funding franchises and appetitefor risk, but long-term fundamentals and business prospects for the sectorremain positive.
Liquidity and interest rates in the banking system have eased in recent weeks,although loan growth remains relatively subdued and was at a decade-low inApril 2023.
Narrow spreads between Vietnamese dong andUS dollar market interest rates limit the extent by which policymakers canreduce banks' funding costs further, which has eaten into net interest margins(NIMs) – especially for smaller banks.
Public pressure to cut lending rates is also likely to compress lendingmargins, but banks have headroom in lending spreads to maintain substantialpre-provision profitability.
Fitch said the Government and the State Bank of Vietnam (SBV) have demonstrateda clear policy will unclog liquidity flows. This includes conventional cuttingof red tape and fiscal and monetary stimulus, but also encouraging credit andgranting forbearance on bank regulations.
Many banks have not reduced real-estate lending or bond holdings significantlyin Q1 2023, suggesting that such debt will be refinanced to avoid crystallisingwider defaults and losses. Primary-market bond issuance remains a mere shadowof recent years, but is starting to thaw amid conspicuous state endorsement.
According to Fitch, the SBV became one of the first central banks in the regionto cut policy rates to ease funding pressure for borrowers, althoughexchange-rate stability priorities could limit how much more it can injectliquidity without pressuring the dong.
“We expect liquidity to recover gradually over the next fewquarters as macro headwinds subside and domestic sentiment recovers,"Fitch said.
"Revival of the bond market to help issuers refinance maturities totalling239 trillion VND (10 billion USD) for the remaining of 2023 will also be anindicator of liquidity reprieve.”
Non-performing loan (NPL) ratios rose across most major banks in Q1 2023, butFitch does not expect a spike in 2023 as Circular 02/2023 issued in Aprilpermits banks not to downgrade restructured loans between now and mid-2024.
The SBV nevertheless requires banks to provision for half of such loans byend-2023 and the rest by end-2024. Transparent disclosure and timelyprovisioning will guide Fitch assessment of banks' risk profiles and assetquality.
“Banks' access to deposit funding is driven by the strength of their depositfranchises, where we believe State banks have an edge. NIMs are likely tonarrow moderately in the near term as there is limited flexibility to raiselending yields, while credit costs will be another near-term differentiator ofbanks' profitability,” Fitch said./.
VNA
