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MORE BANKS INCREASINGLY VULNERABLE IF PANDEMIC LASTS LONG
The current turmoil was not caused by a surplus of capital in the financial sector like the global crisis in 2009. The Covid-19 pandemic has hurt the whole economy, from both supply and demand sides. Fiscal policies are considered part of the solution rather and they cannot entirely handle the root of the problem.
According to a research by the World Bank (WB), in most countries, including Vietnam, the central bank loosened monetary and credit policies to rescue hard-hit businesses and families. However, the financial sector cannot avoid the current Covid-19 crisis because the decline in business efficiency and consumption of households will eventually impinge on the banking industry and capital market.
At present, the credit balance for the economy is about VND8,251 trillion (US$350 billion), of which 54% is for corporate borrowers. Since the outbreak of Covid-19 epidemic, outstanding loans in most sectors have declined, most notably in services, trade, tourism and transportation sectors. In the first three months, outstanding loans to the economy rose by just 0.68%, the lowest growth in five years. Credit growth at many commercial banks was little changed or even declined due to low credit demand from both lending segments, corporate and consumer.
On the consumer side, credit demand also decreased along with the retail growth of consumer goods and services at 4.7% in the first two months, much slower than the growth in the same period of 2019 (12.1%). Deposit mobilization increased slowly at banks. Deposit growth and total money supply (M2) growth were respectively 0.51% and 1.55% (versus 1.72% and 2.54% in the same period of 2019).
Due to falling revenue, many companies resorted to withdrawing bank deposits to cover operating costs. Individual deposits were likely to dip amid fears of declining monthly incomes when their employment was threatened and/or uncertain.
These negative trends still occurred although the State Bank of Vietnam (SBV) issued many support policies and measures. In March 2020, the central bank slashed the primary rate by 0.5-1% and reduced the ceiling cap on short-term deposit rates by 0.25-0.3% and the cap on short-term lending rates by 0.5% in priority areas while raising interest rates paid for compulsory reserve deposits in Vietnamese dong. The government announced a VND250 trillion credit package (equivalent to about 4% of the country’s GDP in 2019) to support businesses and households affected by the Covid-19 epidemic by restructuring existing loans of affected entities and exempting/reducing interest rates.
According to experts, these support policies will alleviate temporary difficulties for businesses fraught with cash flow and loan repayment problems. The credit support package is mainly beneficial to formal sectors, notably large enterprises, as the credit balance for small and medium enterprises is not much although it has increased in recent years.
However, according to the World Bank, when support measures are launched, banks will face pressures on net interest margin (NIM) and eventually declining profit.
In the event that the Covid-19 crisis is forecast to continue in the next few months, both credit and deposit growth rates are expected to decline further in the second quarter as business operations are still stagnated in most sectors. Although most commercial banks seem to be well prepared to deal with the temporary economic downturn, the quality of the bank's assets may start to worsen due to the bad debt ratio in the portfolio. Credit will increase if the crisis lasts.
In addition, some banks may be in more difficulty as their loans account for a relatively large share in tourism and real estate sectors, which have been hit hard by the crisis. Some do not have enough equity capital to improve their resilience. At present, ensuring a certain financial adequacy for small businesses in impacted areas to avoid illiquidity that leads to corporate bankruptcy is a pressing concern. Liquidity in the banking system in the first quarter was still stable due to slowing credit growth, low interest rates in the interbank market and the SBV’s net withdrawal of capital open market operations or treasury bills issuance (in In February, the State Bank withdrew VND94.96 trillion (US$3.98 billion). The liquidity is expected to remain stable in the second quarter due to low credit demand since the Lunar New Year and abundant cash in the banking system before the Covid-19 outbreak. By the end of 2019, deposits increased in tandem with credit (13.6%) while total money supply (M2) grew even faster (14.2%).
Building a long-term plan
According to the World Bank, a wise and necessary measure for monetary authorities is developing a plan for a context where the economic impact of the pandemic continues after the second quarter, the banking industry needs to continue, or even must have, more direct assistance. The longer this pandemic lasts, the more seriously the banking industry will be affected and a broader fiscal option will need to be taken into account. Structural constraints in the banking sector reduce feasible options for the SBV. For example, a measure to reduce capital buffer in banks to improve liquidity as adopted by some other countries is not a chosen option in Vietnam.
In addition, according to the WB, the SBV will need to further monitor system liquidity and may have to pursue loosened monetary policies by cutting interest rates at least once more time, reducing the amount of net capital withdrawn from the market, or consider adding liquidity into the economy to support liquidity in the banking system if credit funding lasts longer than expected and leads to liquidity crisis for banks. Liquidity pumps may include targeted interventions to support the banking industry such as policy lending, emergency lending and other support credit packages.
Finally, it is important to assess the impact of the pandemic and economic recession on enterprises that issued corporate bonds in the bond market over the past two years to estimate likely impacts on revenue and solvency.
Vietnam’s GDP growth is forecast at 3.1% in 2020 before rebounding to 7% next year, while ASEAN+3 growth is predicted to sink to 0% in 2020, according to the ASEAN+3 Macroeconomic Research Office (AMRO).
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