We believe Vietnamese banks' profitability will be squeezed after providing debt relief to support borrowers affected by a recent typhoon. The strain adds to the sector's intensifying competition for good quality borrowers and loans, which have driven down asset yields and margins.
What's Happening
The central bank has directed commercial banks to provide debt relief to individuals and businesses affected by Typhoon Yagi. The landfall of the category-5 typhoon in Vietnam on Sept. 7, 2024, caused widespread damage and scores of fatalities. The banks' measures include lowering lending rates by 0.5% to 2% to new and existing borrowers until the end of 2024. The extent of the relief could vary according to the levels of damage incurred by the borrowers.
Why It Matters
Debt relief could further pressure a banking sector already facing lower asset yields. Banks have been competing to lend to good quality borrowers as they try to meet the State Bank of Vietnam's (SBV) credit growth target of 15% amid slower lending conditions. Tightening domestic consumption has affected credit demand, lowering margins for many banks. The provision of debt relief via lower interest rates will further crimp banks' margins.
According to the SBV, banks are ready to provide a total of Vietnamese dong (VND) 405 trillion in preferential loans with reduced interest rates. This accounts for about 3% of the sector's total outstanding loan by our estimates.
State-owned commercial banks (SOCB) will bear the brunt of the impact. Given the vast network of SOCBs across the country, including Northern Vietnam (where the typhoon impact was most severe), the proportion of affected loans could be higher than that of smaller privately owned peers.
For example, we estimate the Bank for Foreign Trade of Vietnam (Vietcombank; BB/Stable/B), one of the four SOCBs in Vietnam, has VND160 trillion of outstanding loans eligible for debt relief. This accounts for about 12% of Vietcombank's total loans as of June 2024, far higher than the 3% we estimate for the sector.
That said, we believe this will be manageable for Vietcombank because it is the most profitable SOCB in Vietnam. For the second quarter of 2024, it reported an annualized return on assets of 1.73%.
Privately owned commercial banks are offering similar debt relief, though we expect the scale to be smaller than that of SOCBs.
Table 1
| State-owned commercial banks offering loan relief | ||||||
|---|---|---|---|---|---|---|
| Banks | Estimated loan relief amount (tril. VND) | Percentage of loan book* | ||||
|
Joint Stock Commercial Bank for Investment and Development of Vietnam |
100 | 5.4 | ||||
|
Vietnam Joint Stock Commercial Bank for Industry and Trade |
100 | 6.4 | ||||
| Joint Stock Commercial Bank for Foreign Trade of Vietnam | 160 | 11.7 | ||||
| VND--Vietnamese dong. *As of June 2024. Sources: S&P Global Ratings. Bank filings. | ||||||
What Comes Next
The next 12 months will be a testing time for the asset quality of Vietnamese banks. The debt relief may temporarily ease borrowers' repayment burden and keep banks' headline nonperforming loan (NPL) ratios stable. But it comes at a time where the country's domestic real estate sector is still recovering. When the relief measures end, and the Circular 02 loan-structuring policy expires at the end of 2024, overall NPLs could climb and cause banks to set aside additional provisions. This would further weigh on the sector's profitability.
Related Research
- Banking Industry Country Risk Assessment: Vietnam, July 10, 2024
- Your Three Minutes In Vietnamese Banking: Effects Of SCB Failure Reach Far, June 5, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Sue Ong, Singapore 62161082; sue.ong@spglobal.com |
| Secondary Contact: | Ivan Tan, Singapore + 65 6239 6335; ivan.tan@spglobal.com |
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