An interesting aspect of the July rate cut by the State Bank of Vietnam, which we had alluded to in the first article of this series, is that though commercial banks have moved swiftly to reduce their lending rates, they have not done the same for their deposit rates.
According to central bank Governor Le Minh Hung, after the rate cut, interest rates for short-term loans have declined to 6-6.5% and medium and long-term loan rates are in the 8-10% range.
The decline in lending rates with deposit rates remaining unchanged has a direct impact on bank profitability. In order to make up for the compressed spread between borrowing and lending rates, banks need to see a marked increase in credit off-take. Failing to do so would see their net incomes negatively impacted.
Vietnamese Bank profits: an illusion?
Vietnamese banks have posted impressive profit figures of late. For instance, Vietcombank reported pre-tax profit of 5 trillion dong ($220 million) for H1 2017, up 20% from a year ago. Meanwhile, LienVietPostBank posted pre-tax profits of 900 billion dong ($33 million) in the same period – double from a year ago.
However, all local banks may not be as healthy as their current profits may make it seem. Việt Nam News cited the example of Vietinbank which reported pre-tax profits of 4.7 trillion dong ($207 million) in H1 2017.
It’s important to note that these profits will be wiped away and turn into a loss as the bank has to settle its bad debts at the Vietnam Assets Management Company (VAMC) this year.
The newspaper further reported that profitability amongst local banks are much less than in many other sectors and are not commensurate with their size.
Banks need to comply with a central bank directive which puts limits on the maximum ratio of short-term funds used for medium and long term loans. Banks will need to keep this ratio at 50% until end-2017; starting 2018, this ratio will decline to 40%.
The deadline for this ratio would make it nearly impossible for banks to reduce deposit rates as they’ll face liquidity issues.
Combating bad loans
Vietnam’s Prime Minister Nguyễn Xuân Phúc recently set the wheels in motion in order to facilitate the implementation of the National Assembly’s resolution on bad debt settlement from August 15.
The resolution allows credit institutions and the VAMC to trade bad debts openly at market prices.
Meanwhile, on July 21, the central bank organized a conference to prepare for the implementation of the scheme.
Under the scheme, which aims to settle non-performing loans and restructure credit institutions in 2016-20, all credit institutions will be restructured based on their type: state-owned banks, joint stock banks, finance companies, and financial leasing companies, among others.
Impact on bonds
With a rate cut and the implementation of the scheme to restructure credit institutions and trade bad debts transparently, yields on Vietnamese bonds can be expected to decline. Some of this impact can already be seen from the graph above, with yield having declined in from the July 7 announcement on rate reduction.
For holders of Vietnamese bonds, this is good news.
But what about equity investors? Let’s look at impact on that segment in the next article.