We are entering a period of great volatility in the world and Vietnamese financial market. The collapse of two U.S. banks, the U.S. Federal Reserve’s (Fed) continued monetary policy tightening, and the State Bank of Vietnam’s (SBV) policy interest rate cuts from March 15, 2023 were important events representing changes in the financial market.
Meanwhile, the bank credit supply in Vietnam is still very limited, and deposit and lending interest rates remain high, causing difficulties for the economy.
Outlook for bank capital in 2023
Vietnam's banking industry sees quite optimistic forecasts for 2023. Banking experts predicted that the banking sector will continue to grow strongly, especially in digital financial services. The application of technology to banks’ operations will be promoted more strongly, creating more convenience for customers.
However, the industry will also face many challenges, especially in controlling credit risks related to the stock and real estate market downturns. At the same time, bank credit will be tightened as banks increase risk control while a significant part of deposits will be used to aid liquidity, instead of for lending.
Moreover, high interest rates, rising inflation, slow growth and stock and real estate crises will directly affect the business activities of banks in the short, medium and long term.
Particularly in the credit segment, banks hold a large volume of corporate bonds, with over VND300 trillion ($12.72 billion) due for repayment this year. With issuers’ low repayment capacity, the situation is alarming for the banking system.
The value of corporate bonds that banks are holding is equivalent to 18% of the entire banking system’s equity, estimated at about VND1,700 trillion ($72.08 billion). The massive corporate bonds defaults, once occurring, will seriously affect the banking system’s equity and is likely to pull down credit institutions’ capital adequacy ratio (CAR) from 11.69% in October 2022 to less than 10%, increasing the level of systemic risk for Vietnamese banks.
Small banks holding a large amount of corporate bonds which are potentially illiquid face a high risk of falling into unsafe zones. The SBV may tighten inspections over this field to avoid a systemic risk.
What risks await Vietnam's banking system?
Taking into account the health of banks according to the CAMELS (capital adequacy, assets, management capability, earnings, liquidity, sensitivity) rating system’s criteria, the Vietnamese banking industry is currently facing three major problems: liquidity, asset quality and interest rates.
Firstly, some banks are completely relying on the support of the central bank to ensure liquidity. The lack of liquidity comes from two main causes: bad debts and risky investments.
Bad debts make loans unpaid and force banks to mobilize new capital at high interest rates to ensure liquidity. Meanwhile, holding corporate bonds, especially those of real estate businesses, is a risky investment, as many issuers have announced debt repayment postponements. The government has just issued Decree 08 to defrost the frozen bond market because many issuers are facing the risk of default.
Due to weak liquidity, many banks have to maintain high interest rates to mobilize deposits. High deposit rates push up lending rates, thus paralyzing the economy and pushing many businesses into shutdown or bankruptcy. It forms a spiral: business difficulties lead to bad debt and late debt repayments; bad debt and debt repayment postponement lead to interest rate hikes to mobilize new deposits to pay off old ones, kicking many businesses out of the market. Eventually, crises and recessions will come.
Improving banks’ asset quality
The banking system cannot strengthen and unleash credit sources as banks’ asset quality is a problem, with bad debts going up.
In fact, the credit quality in the fourth quarter of 2022 showed that the business results of many banks were not positive, and the bad debt ratio increased, although the loan loss reserve ratio was very high, up to 200-300% in some banks.
One of the reasons for rising bad debt is that from 2020, banks reclassified bad and overdue debts according to the SBV's regulations, especially Circular 14/2021/TT-NHNN on debt restructuring, maintaining debt groups, and exempting and reducing interest rates for customers affected by the Covid-19 pandemic. These regulations expired on June 30, 2022 and now many of these debts are classified under the current regulations as bad or unpayable debts.
In 2023, the bad debt situation has become worse as businesses continue to face many difficulties. According to the Vietnam Chamber of Commerce and Industry (VCCI), 51,000 businesses stopped operating or dissolved in the first two months of 2023, a very alarming figure. Meanwhile, demand was weak, reflected in the quiet atmosphere at supermarkets and shopping centers in the first days of the year, which had rarely been seen before.
The quality of bank assets, especially loans, is a dark point in the picture of the Vietnamese banks’ health under the CAMELS rating system. To improve asset quality, we need to make bad debt numbers and information transparent. Bad debt will not disappear automatically if we keep "sweeping all the trash under the carpet".
Banks may find ways to sell bad debt on the bad debt exchange that the Vietnam Asset Management Company (VAMC) set up last year. However, to make the bad debt market vibrant, the law needs to amend regulations on the transfer of collateral and mortgages.
Resolution 42/2017 on piloting bad debt settlement has been extended from August 15, 2022 to December 31, 2023. This resolution needs to be supplemented, amended or replaced with another resolution of the National Assembly to legalize bad debt settlement. Many provisions need to be added to make debt settlement and collection more effective and suitable in the new legal and business environment.
Regulators and inspectors should pay special attention to the two areas posing the highest credit risk, namely real estate and securities.
The SBV announced that it had unexpectedly inspected a number of banks and sanctioned those violating the regulations on corporate bond investment. The central bank should disclose the results of these inspections, especially specific violations by banks. Of course, it does not need to name the banks being inspected. The inspections will certainly help improve the lending activities of banks, thus unleashing credit flow.
However, in the current banking system, many banks have very poor financial health and rely on the support of the SBV. In order to unclog credit and other capital sources, the Vietnamese banking system must be reformed in a comprehensive and substantive manner. When the banking system does not operate effectively, the capital released is only a short-term and temporary solution.
For banks that are rated “at risk of default or bankruptcy”, the SBV should plan to merge or let them withdraw from the market, instead of allowing them to exist and become an obstacle to the healthy and stable development of the financial system. The unleashing of credit and investment capital can only be effective if the banking system eliminates counter-productive players.