South-east Asian country organised a robust response to the pandemic, but concerns remain about its economy which has long-standing issues with non-performing loans.


Vietnam has plenty to be proud of with regard to Covid-19. Authorities were quick to respond to the threat in early 2020, and by year-end had kept the total caseload below 1,500 with only 35 deaths — not bad for a country of 95.5 million people.

Despite the negative impacts on international tourism — which accounts for about 6–8% of gross domestic product (GDP) — and on domestic consumption, Vietnam’s economy was already showing signs of recovery in the third quarter of 2020, with at least 2.4% growth in 2020 and a resumption of its normal rapid pace of 6.8% growth in 2021, the World Bank projects. Foreign direct investment (FDI) in 2020 continued to be disbursed, although down 3% year-on-year, helping to boost exports and resulting in a hefty current account surplus. Inflation has stayed below 4%, the central bank’s target, and the dong currency has been kept stable against the dollar. 

Vietnam’s fragile banking system appears to have weathered yet another storm, albeit a short-lived one this time round, buoyed by the economy’s swift recovery. Bank lending growth has been exceeding GDP expansion for almost two decades, although the pace has slowed since the last banking crisis of 2011/2012. Between 2004 and 2011, banks’ lending grew by an average of 33% per annum, with much of it going to dubious property projects led by Vietnamese state-owned enterprises (SOEs). 

After the stock market and property market tanked in 2009/2010, the bank system’s non-performing loans (NPLs) skyrocketed, forcing the government to set up the Vietnam Asset Management Company (VAMC) — a vehicle for parking the system’s distressed assets. Those legacy NPLs were largely amortised before the Covid-19 crisis hit. Bank credit growth is estimated to reach 8-9% in 2020, compared with 14% in 2019, and is forecast to resume at a rate of 11-13% in 2021.

Waiting for the NPLs

The Covid crisis will create a new batch of bank NPLs, although no one will know the extent of the damage until mid-2021 — probably several months after January’s national congress of the Communist Party of Vietnam.

Vietnam remains a one-party communist regime, and certain old central planning habits die hard, such as presenting only rosy economic statistics to the congress. After the Covid outbreak hit the corporate sector and retail sectors hard in the second quarter of 2020, the State Bank of Vietnam (SBV) introduced an open-ended period of forbearance on the banks’ NPLs, essentially allowing them to avoid labelling them as distressed assets until three months after the government declares the pandemic over, well after the party congress. “So you can’t tell what a real NPL is right now,” says Michael Kokalari, chief economist for VinaCapital, a Vietnam-based private equity firm. “I think [this year] you will start to see the NPLs start to reflect reality.”

The country has one of the highest credit-to-GDP ratios among emerging markets. “Not only is the economy quite leveraged, but we also see that the capitalisation of the banks is also quite low,” says Amit Pandey, associate director of financial institutions at S&P Global Ratings in Singapore. “If some kind of shock hits Vietnam, the banking system does not have either the profitability or the capitalisation to sustain those shocks,” he warns.

Not only is the economy quite leveraged, but we also see that the capitalisation of the banks is also quite low

Amit Pandey, S&P Global Ratings

Although the situation has improved dramatically since the 2011/2012 crisis (after which the independence of the SBV was enhanced), the banking system’s overall equity-to-asset ratio is about seven times — low compared with its peers at more than 10 times, Mr Pandey says. The capital adequacy ratio (CAR) requirement for banks remains low at 8%, although many banks are well above that.

Regulatory efforts stalled by Covid

The SBV has been pushing the banks to become Basel II compliant. Prior to the Covid pandemic, it set a target for all 42 commercial banks to comply by January 1, 2020; however, this has now been rescheduled for 2023. By year-end 2019, only 18 banks met Basel II standards, including most of the system’s leaders, such as the state-run BIDV and Vietcombank, and half a dozen medium-sized joint stock private banks, including Asia Commercial Bank, HDBank, Maritime Bank, SeaBank, Techcombank and VPBank, along with two foreign locally registered banks — Shinhan Bank (South Korean) and Standard Chartered (British). Another six or seven banks have complied in 2020, SBV sources claim.

Vietnam is overbanked, which adds to the system’s inherent instability. The big four state-owned banks (AgriBank, BIDV, Vietinbank and Vietcombank) account for about 45-50% of the market, with six or seven medium-sized private banks claiming another 25-30% — the remainder is held by foreign banks and more than 30 very small Vietnamese banks. Between 1990 and 1993 the central bank was handing out bank licenses left and right, creating a glut that the system is still saddled with. In 2011/2012, three small distressed banks were nationalised and classified as “zero-dong” banks since they cost the SBV nothing to acquire; although authorities have been in the market for foreign buyers for these banks, there have been no takers.

More disruption for the system ahead 

While Vietnam has refrained from the massive Covid-related stimulus packages seen elsewhere in Asia, the central bank has gone out of its way to encourage bank lending. The SBV has done this by lowering interbank rates four times, and printing fresh dong to purchase inflows of foreign exchange from exports and FDI, industry sources say. “What’s happened is that the banking system is flush with liquidity,” Mr Kokalari says. “Interbank interest rates have been almost 0% for months now; the 10-year bond has been at 2.6%. So it’s incredible. There is so much liquidity floating around.”

Net interest income still accounts for the lion’s share of most banks’ revenues, but in the low-interest rate environment, credit rates have fallen more than deposit rates, leading to a smaller spread and less profitability for the banks. The trend is particularly worrisome for the smallest banks that have a history of keeping their deposit rates above the system’s average in order to attract new accounts, leading to yet more risk for these already shaky institutions. “On average, the spread is declining, and the NPLs are growing,” says Ketut Ariadi Kusuma, senior financial sector specialist with the World Bank. “It will not impact the big profitable banks, but the risk is with the banks on the margins.”

jens lottner

Jens Lottner, Techcombank

Another disruptive force on the horizon for the existing system is digitisation. Launching and maintaining a digital platform is not cheap, and only the biggest, most profitable Vietnamese banks will be able to afford it. Techcombank has been at the forefront of the digital revolution and is likely to remain there under its new chief executive, Jens Lottner, who was previously chief financial officer at Siam Commercial Bank — one of the pioneers of digital banking in Thailand and the first Thai bank to waive service fees on digital banking transactions in 2018, a tactic that Techcombank initiated in 2016. “Our strategy is very clear: being the first in the market, and still not yet followed by the large state-owned commercial banks, allows Techcombank to have a continuous value proposition,” Mr Lottner says. 

Thus far, Techcombank is the only Vietnamese bank to have waived fees on online transactions. For the four big state-run banks, transaction fees are a significant income earner, making it unlikely management would waive them any time soon. Techcombank plans to invest millions of dollars in the coming years in technology to continuously upgrade its digital platform. “In our next five-year strategy we are putting a lot of effort into overhauling our digital infrastructure and making sure that we have our data infrastructure completely up to the mark, in order to reap the full benefit of that,” Mr Lottner says.

The strategy appears to be paying off. “We will probably hit a 40% current account/savings account (CASA) ratio this year, continuing to be the highest in the market,” Mr Lottner says. “And a lot of this CASA we are getting through digital apps, and this translates into a funding advantage of 50-70 basis points [compared with the system’s average]. That is completely attributable to the fact that we are very much digital,” he adds.

In 2020, during the brief Covid lockdowns in Hanoi (but not Ho Chi Minh City) and social distancing, Techcombank’s retail side e-transactions shot up by 120%. The digital path seems to have paid off on the bottom line too. During the first nine months of 2020, Techcombank’s revenue reached VND19.3tn ($837m), up 33.5%, while pre-tax profit was VND10.7tn, up 20.9% — the second highest in the system.

The state-run Vietcombank, is still Vietnam’s most profitable institution (with an estimated pre-tax profit of VND20tn in 2020, despite dipping by 13% year-on-year). Vietcombank has likewise embarked on an aggressive digitisation programme as part of its long-term growth strategy. “Digital banking transformation is among our strategic concerns,” Nghiem Xuan Thanh, Vietcombank chairman of the board of directors, said in a 2019 interview with The Banker. “Vietcombank aims to become the leading digital bank in Vietnam. Most of Vietnam’s largest banks are being forced to go digital as a matter of survival; but for the smaller banks, this will be more difficult.”

Retail banking still the future

While Covid put a dent in retail lending in 2020, especially the consumer finance segment, it is still where the growth is at. VPBank — one of the private sector champions in retail banking — has been focused on strengthening its asset quality by tightening the credit policy and shifting to more secure lending in 2020. Its subsidiary, FE Credit, which claims more than 50% of the consumer finance market, saw a 3-4% decline in revenue in the first nine months of 2020, as 60% of salaried Vietnamese saw their income impaired because of Covid. NPLs are above 6% and profits are down.

Despite the fact that there has been a slowdown in the economy, the property market is still relatively resilient

Tamma Febrian, Fitch Ratings

“While we were navigating Covid, one of the things we did not lose focus on was on this transformation and digitisation we had undertaken,” said Kalidas Ghose, chief executive of FE Credit, addressing a third-quarter 2020 results session with investors. Nguyen Duc Vinh, chief executive of VPBank, told the same meeting: “Retail banking continues to be our key strategic development plan and we are targeting very high growth in the fourth quarter as well as next year, so retail banking and small and medium-sized enterprise lending continue to be the key focus of the management to bring profit to the bank.” 

Analysts still see plenty of room for growth for Vietnamese banks in retail lending. Currently, retail banking accounts for about 30% of the system’s loans, while it is closer to 60-70% elsewhere. “There is a lot of headroom for Vietnamese banks to grow in totality, but they can also grow very fast because the retail penetration is very low,” Mr Pandey says. “And as the retail loans increase their share you will find that the net interest margin of the banks will improve because retail loans tend to have higher yields, plus the risk to the system will reduce because these loans are gradual in nature.”

While Covid may have made consumer finance a riskier proposition, analysts predict an acceleration of retail lending in the more conservative property and mortgage sector next year. “While there has been a slowdown in overall lending growth for most banks, what we are seeing is that residential mortgages continue to post fairly strong growth, with some banks registering double-digit year-on-year expansion in 2020,” says Tamma Febrian, associate director of Asia-Pacific financial institutions at Fitch Ratings. “Despite the fact that there has been a slowdown in the economy, the property market is still relatively resilient,” he adds. 

And since most loans still use property as collateral in Vietnam, a resilient property market might be good news for Vietnam’s uncertain NPL outlook too. “An NPL crisis did not materialise in 2020 because Vietnam’s economy just didn’t feel the full brunt of the pandemic,” says Willie Tanoto, director of Fitch’s Asia-Pacific financial institutions. “In our view, banks’ underwriting and risk management remain untested, and asset quality could have been significantly worse if the economic shock had been more severe.” 


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