In this report, we discuss further the State Bank of Vietnam’s (SBV) guidance for banks with updates from a recent meeting between the government and the public on 9 May. This is a follow-up on our report on the impact of Covid-19 on banks from the SBV’s order to reduce lending rates or tolerate loans to those economically hit by the pandemic (Circular 01/2020/TTNHNN).
Giving priority to economic recovery. The government has identified that the need to restart economy activities and growth is urgent and must be supported by the entire country. Prior to that, the Prime Minister insisted that actual 2020 GDP growth must be higher than IMF’s latest forecast of 2.7% (trimmed from 7% in January 2020) and mentioned a target of at least 5% (while actual GDP growth achieved in Q1 was 3.82%). This implies that growth in the remaining quarters must recover strongly to reach this desirable level. Banking (especially credit service) as one of the primary instruments to boost GDP growth should be more willing to deepen customer supports.
Progress of forbearance implementation by banks (according to Circular 01). As of 8 May, 2020, the whole banking system has implemented the Circular 01 as follows: (1) 215,000 customers with outstanding loans of VND130tn have been accepted for loan restructuring/extension (1.6% of total banking loans); (2) 260,000 customers with loan balance of over VND1,000nn are granted interest discounts or exemptions (12.2% of total banking loans), and (3) 182,000 customers with VND630tn new loans are granted preferential interest rates since the virus outbreak (7.7% of total banking loans). Overall, the new interest rate applied is from 0.5 to 2.5ppts lower than the previous level. In particular, corporate clients accounted for nearly 80% of the total loans forbearance by banks. We believe this effort has contributed to loan growth recovery from 0.8% YTD at mid-April to 1.3% YTD by 28 April.
SBV urges banks to implement forbearance measures more decisively and timely. The SBV governor emphasised that the forbearance policies specified in Circular 01 can be granted to any businesses or individuals regardless of their size or category, and to any loans regardless of currency or loan groups. He also urged banks to timely handle relevant client’s requirements, and that SBV might punish those showing unsupportive attitudes to customers. With this direction, it can be expected that the scope and magnitude of lending rate discounts and loan tolerance would expand further in the coming months. As a result, a stronger impact on NIM (an in turn, net interest income) can be expected, at least during Q2.
Supporting measures given to banks. SBV also hinted at several easing policies to encourage banks to deepen their support to customers. First, banks can be given some additional credit growth quotas (on top of the initial limit given at the beginning of the year) so that they can have more room in giving loans to customers. Second, policy interest rates, such as refinancing, rediscounting and OMO rates can be reduced further to support banks in lowering their funding cost and have more room to discount lending rate at a wider scope. Third, SBV would also consider extending loan restructuring deadline (versus Circular 01) if necessary, which would allow banks to grant longer loan tolerance to customers with liquidity difficulties.
We maintain our view on credit growth and NIM movement. Regarding credit, we do not expect a significantly higher credit quota considering SBV’s view is to maintain credit quality of the entire sector, along with the need to control inflation. As such, we maintain our forecast that credit growth limits to banks would rise by 2-3ppts versus the initial quotas given by the SBV at the beginning of this year. Accordingly, credit growth at each bank under our watch list might reach from 13% to 15% by end of the year (except for BID and CTG who might find their growth below this range). Regarding NIM, we still forecast it to remain the same or slightly decrease for most banks, mainly due to a stronger downside caused by loan forbearances than the potential upside by policy rate cuts. Overall, we expect that banks’ net interest income would continue to slow down further in Q2. Among banks, state-owned banks are likely to witness a stronger negative impact on interest income than their private counterparts, due to their more proactive roles in cutting lending rates or tolerating loans to support distressed customers, as per the specific request by SBV.