Dr. Nguyen Quoc Hung, general secretary of the Viet Nam Banks Association

The new year is coming with both optimism and uncertainty about the new variant Omicron and its impacts on the economy. The banking sector is among a few bright spots in Viet Nam’s economy this year with positive business results. However, the question is whether these results are sustainable amid the complex development of the pandemic. Vietnam News Agency talked to Dr. Nguyen Quoc Hung, general secretary of the Viet Nam Banks Association, about the prospects of the banking sector in 2022.

Many businesses were forced to stop operation during the pandemic and many workers lost their jobs this year. How has this issue affected the banking industry?

The banking industry is the lifeline of the economy, so when the economy faces difficulties, banking activities will certainly be affected. However, unlike some industries directly hit by the pandemic, the impact on credit institutions has a time lag.

Banks are implementing several policies to support customers affected by the pandemic, such as Circular 01/2020/TT-NHNN, Circular 03/2021/TT-NHNN and Circular 14/2021/TT-NHNN which allow credit institutions and foreign banks’ branches to restructure debt repayment terms, waive and reduce borrowing interest and fees, and keep debt classification unchanged to help borrowers access new loans with a lower interest rate if their projects are effective.

Therefore, all structured outstanding loans are subprime debts with a very high possibility of becoming bad debts. Besides, many businesses are classified to Group 1 (standard debts) but due to supply chain disruptions, they fail to repay debts and credit institutions will have to omit accrued interest from their income. At that time, the banking industry is under the pressure of bad debt, lower receivables and higher provisions for risky loans.

If many businesses have difficulty in paying their bank loans, low credit turnover may affect banks’ liquidity, so in the future, the banking industry will face many difficulties.

However, at present, the banking industry has been actively supporting customers to overcome difficulties. According to data from the State Bank of Viet Nam, the lending interest rate decreased by 1 per cent in 2020 and another 0.66 per cent per year for more than half of 2021. Banks have exempted, reduced, and lowered interest rates for over 1.9 million customers with a total interest amount reaching VND32.6 trillion (US$1.4 billion). In addition, banks have also actively participated in activities to prevent the pandemic with estimated funds of up to tens of trillions of dong.

Despite challenges, banks have reported high profits. How should this result be explained?

In my opinion, the profitability of banks should be viewed in four points.

First, the bad debt handling process of the banking system has obtained relatively good results. The bad debt ratio has been brought to a tolerable level and many risky debts have been dealt that contributed to banks’ profits.

Second, in the process of restructuring, credit institutions have invested a lot in technology and digital transformation and have reaped rewards with the rapid expansion of non-cash payment, especially as the pandemic forced people to limit travel and direct contact. Some banks reported revenue from services accounted for 40 per cent of their profits.

Third, with the rising non-cash payment, the amount of money in the current account (demand deposit) increased, significantly reducing the input costs of credit institutions. This is also the reason why banks have reduced interest worth VND32.6 trillion for customers but profits still increased.

Fourth, currently, credit institutions have yet to make provision for structured debts according to Circulars 01, 03, 14, while at the same time, the receivables from Group 1’s outstanding loans have been recorded into their income, contributing to the bank's profits.

What is your forecast for the profitability of the banking system this year?

As I analysed above, this year, the bank's profitability is still relatively positive but maybe not sustainable. About 10 per cent of the bank's profit is calculated on accrued interest, and currently, the banks have yet to make provision for structured debts (by the end of this year, they must make a provision for 30 per cent of structured debts).

Next year, the difficulties caused by the pandemic will have a heavier and more obvious impact on businesses, upsetting banks with big expected receivables and the profits of credit institutions will be reduced.

Besides, by August 2022, Resolution 47/2017/QH14 on pilot settlement of bad debts of credit institutions will expire, if there is no alternative legal document at that time, it will affect the operation, bad debt settlement results of credit institutions, reducing revenue and indirectly affecting the bank's profits.

What awaits the banking industry in 2022?

The outlook for the banking industry in 2022 depends greatly on the ability to control COVID-19 as well as the speed of the economy's recovery. If the economy recovers rapidly, the ability to absorb capital of businesses will increase and the supply of capital to the economy will increase. Both credit and asset quality will grow, and the bank's income will be better.

In the worst case, if the recovery is slow or lower than expected, the production and business activities remain sluggish, banks will have to increase provision for bad debt and have lower interest income.

A bright spot next year is fee income (service fees, bancassurance fees), which is an important growth driver of the banking industry, and will continue to drive banks in the near future. Besides, speedy digital transformation in the banking industry will enable banks to better control operating costs. Along with that, efforts to improve demand deposit ratio (CASA), as well as access to wholesale capital at a cheaper cost, will help banks reduce costs. These factors will facilitate banks to get better income.

In addition, mergers and acquisitions (M&A) activity in the financial-banking sector, especially in consumer finance companies, is expected to take place strongly in 2022, promising to bring great revenue for banks owning financial firms. In 2021, the market witnessed a super deal in which VPBank sold 49 per cent equity in its consumer finance arm FE Credit to Japanese SMBC, fetching $1.4 billion. VNS