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Grim warning for local banking sector
With lending activities expected to generate less profit and bad debt tipped to rise, the local banking sector is facing a testing time this year, experts and bankers say.
Vietnam’s credit growth in 2008 was 22 percent, well below the 30 percent growth limit imposed to cool soaring inflation and a widening trade deficit. Since late October, the central bank has tried to spur the economy by lowering interest rates but by then many businesses had already stopped taking out new loans.
Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank), the sixth-biggest company by market value on the Ho Chi Minh Stock Exchange, Tuesday said its pretax profit fell 17.4 percent last year to VND1.2 trillion (US$68.7 million) as tighter monetary policy reduced lending.
Analysts said with deposit interest rates last year surging as high as 21 percent, many commercial banks hardly made any profit from lending, with some even incurring losses.
While small banks had to stick to lending activities last year, large banks tried to boost earnings through currency trading and opening gold exchanges. Asia Commercial Bank, for example, made 40 percent of its 2008 profit from trading foreign currencies and providing gold exchange services, according to the Ho Chi Minh City Securities Corporation.
Both Vietcombank and DongA Bank said only banks that focused on restructuring their loan portfolios and restricting non-performing loans last year, instead of seeking more borrowers, were prepared for the difficulties that 2009 will bring.
State Bank Governor Nguyen Van Giau last month forecast 2009 would be even more “challenging and difficult” for the economy as well as for the banking sector because savings and investment were expected to slow.
Bad debt in the banking system accounted for 3.5 percent of loans by the end of 2008, up from 2 percent a year earlier.
However, analysts said the ratio of bad debt might have been higher in reality as many commercial banks tried to extend loan terms in a bid to avoid reporting high rates of nonperforming loans.
Analysts also said the quality of credit may decline this year because local businesses are expected to be hit even harder by the worsening global economy, leading to higher levels of bad debt in the banking sector.
The central bank said in a statement that it would “closely control the quality of credit and realize credit growth in line with the level of control over inflation” in 2009.
But analysts said the central bank’s efforts to control credit quality could make it difficult for commercial banks to deal with the increasing amounts of cash set aside for lending.
Banks would also have difficulty attracting deposits after a series of cuts to official interest rates, which means deposit rates have also been reduced.
The State Bank of Vietnam cut interest rates for a fifth time last month to 8.5 percent from 10 percent. Commercial banks are allowed to set interest rates at a maximum of 50 percent above this rate.
Nguyen The Binh, chief executive officer of state-run Agribank, said if interest rates were slashed further, small banks would be unable to survive and the collapse of banks would have a huge impact on the whole economy. Agribank, or Vietnam Bank for Agriculture and Rural Development, is Vietnam’s largest lender.
Capital problem
The appearance of five foreign banks in Vietnam may make 2009 an even tougher year for local banks. Last September, HSBC and Standard Chartered Plc. were the first foreign banks to win licenses to set up fully owned operations in Vietnam.
Australia and New Zealand Banking Group, South Korea’s Shinhan Bank and Malaysia’s Hong Leong Bank Bhd. later received similar approvals.
Economist Ho Quoc Tuan said many local banks have limited registered capital and thus are easily able to be taken over by larger banks, including foreign banks.
In Vietnam, a bank’s registered capital determines how much it can loan and accept in deposits. The central bank asked all joint stock banks to increase their registered capital to at least VND1 trillion ($57 million) by the end of last year and then VND3 trillion ($171 million) by the end of 2010.
The central bank said in a recent statement that the last nine commercial banks with less than VND1 trillion registered capital had finally managed to meet the new capital requirement. Therefore, none of them were closed or taken over, leaving the total number of joint stock banks in Vietnam unchanged.
But of the 38 partly private banks in Vietnam, 10 have sold shares to foreign banks, with SeABank being the latest. The commercial bank, 15 percent owned by France’s Societe Generale, said Tuesday it had raised its registered capital by 36 percent to VND4.07 trillion ($240 million).
Tuan said the number of banks in Vietnam was still relatively small, considering the country’s population of more than 80 million.
Around 15 million Vietnamese people, or 17 percent of the population, had bank accounts at the end of 2008, up 36 percent from the previous year, and 13.4 million automatic teller machine cards were in circulation, according to the State Bank of Vietnam.
The problem with the local banking sector was that many banks were unable to meet safety requirements, Tuan said, noting several banks had struggled to increase their registered capital to the minimum level.
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