High profits in banks from risky loans
Illustrative photo: Viet Chung
Two state owned commercial banks, namely, Vietcombank and VietinBank, recorded huge profit-before-tax numbers in the first quarter of the year, reaching VND 8,631 bn, up by 65%, and VND 8,060 bn, up by 171%, respectively. These were followed closely by Techcombank with VND 5,518 bn, up by 77%; MB with VND 4,580 bn, up by 109%; VPBank with VND 4,006 bn, up by 38%; BIDV with VND 3,396 bn, up by 87%; ACB with VND 3,104 bn, up by 61%; and HDBank with VND 2,100 bn, up by 68%.
With the exception of Eximbank, which was down by 53%, and VietBank, which was down by 46%, the financial statements of other banks showed favorable business results. Many banks recorded very high profit-before-tax numbers, such as Kienlongbank which was up by 1.131%; MSB was up by 296%; NamABank was up by 223%; Bao VietBank was up by 216%; SeABank was up by 126%; SHB was up 113 %; LienVietPostBank was up by 84%; and NCB was up by 78%.
Banks with high profits in the first quarter still contribute to the credit segment. Compared to the gloom phase faced last year by banks, this year credit has grown since the beginning of the year, showing an increase of 2.93% compared to the end of 2020. Out of 27 banks that have announced their financial statements for the first quarter of the year, there are three banks with negative growth, namely, BacABank with minus 3.73%; Saigonbank with minus 3.56%; and VietBank with minus 1.58%. The remaining twenty-four banks all recorded high credit interest rates. Among these, there are banks with remarkable credit growth rates such as MSB with 12.8%; MB with 8.62%; Techcombank with 6.76%; HDBank with 5.02%; NamABank with 5.04%; and Vietcombank with 3.83%.
Potential risk signs
Vietnam's economy is still mainly based on bank credits. Therefore, the recovery of credit is normally a good sign in the economic sector. However, the growth of net interest income of banks, led by strong net interest margin, which helped increase the profit-before-tax numbers, has many issues when the banking industry is associated with the goal of reducing interest rate to support the economy.
First of all, banks have large profits due to a strong increase in net interest margin, which means that deposit rates will decrease, but lending rates will not decrease accordingly. As observed, after the State Bank of Vietnam reduced operating interest rates in 2020, credit institutions immediately adjusted to reduce the interest rates. The deposit interest rate decreased very quickly, but the loan interest rate only decreased in hearsay. In 2020, deposit interest rates will decrease by about 2% to 2.5% per year, but lending rates will only decrease by 1% to 1.5% per year. Interest reduction is applied for the first months, then the bank uses the formula of highest deposit interest rate plus the margin to calculate the interest after incentive. At the same time, banks then raise the margin by 1% to 2% higher than before. Hence, the loan interest is still at a high level.
In the current complicated pandemic scenario, not many people would be willing to accept such a loan interest rate. However, there may still be many businesses that need to borrow capital for production and other activities, but there is the question of lending to areas under increased risk.
According to statistics released by the State Bank of Vietnam in the first quarter, credit for agricultural and rural development increased by 2.4%; small and medium enterprises increased by 1.49%; the export sector increased by about 2.5%; support industries increased by 3.04%; and high-tech enterprises increased by 0.3%. The outstanding balance of securities investment and trading in the first quarter reached VND 45,300 bn, a slight decrease of 1% compared to the end of 2020. However, credit for this sector in November and December 2020 increased quite a lot, but by January 2021 it decreased up to 10%, and from March 2021 it was up again.
Outstanding securities at the end of February were concentrated in a few credit institutions such as Vietcombank which accounted for 25.75% of total securities; BIDV with 13.47%; and Techcombank with 12.46%; while credit for life reached VND 1.87 quadrillion and real estate credit reached VND 1.85 quadrillion, up by 3%. Credit for production and business sectors increased, but consumer credit, securities, and real estate are still raising the question whether banks are benefiting from lending to high risk areas. It is certain that the net profit margin of banks also has conditions to expand and the banking industry always applies the principle of high risk corresponding to high interest rate.
No one has dared to come to a straight conclusion on this, but risk warnings are constantly being issued. At the online conference on credit work and the implementation of Circular 03/2021 on debt restructuring, loan interest exemption, and reduction to support customers affected by Covid-19 pandemic, which was organized by the State Bank of Vietnam in mid-April, a representative of the Credit Department for economic and credit sectors reminded that some areas have higher than average growth rates, such as real estate credit and investment in corporate bonds. This comes along with excitement in the real estate market, and domestic securities which may have many potential risks, with the State Bank of Vietnam continuing to identify and take preventive measures.
More recently, the State Bank of Vietnam mentioned ten potential risk signs in credit institutions, including showing that credit in the real estate sector still accounts for a large proportion of total outstanding loans, and that the real estate credit growth rate is high and requires credit institutions to strictly control credit in these areas. Thus, when the State Bank of Vietnam reduces operating interest rates to create conditions for banks with low input, capital flows into risky areas, which is unreasonable and unfair for other sectors of the economy.
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