To support the economy in general, and businesses in particular, the State Bank of Vietnam (SBV) has issued several lending guidelines to help those hit by the coronavirus crisis (whose income or profits have declined). In accordance with the SBV’s order to lower lending rates for customers since February, banks have set aside a considerable amount of credit to provide new loans with preferential interest rates to support businesses. Banks now provide an average discount of 0.5-1.5ppts/year on lending rate for new loans to customers affected by the pandemic; in fact, some banks have even cut rates more deeply (TPB 1.5-2.5ppts; HDB 2-4.5ppt; VCB 2-5ppt).
Banks are also offering preferential lending rates for existing loans. For example, VCB offers a lending rate decrease of 1-1.5ppt/year for loans in VND and 0.5-0.75ppt/year for loans in USD until September. VIB also said it would continue to expand the interest rate promotional package with a discount of 0.5 to 2.0ppt for six months for all existing business customers regardless of size and sector.
Impact on banks’ credit growth and NIM
However, despite the incentive programmes, banks’ credit growth in the first three months of the year was still quite low, at only c0.68% YTD versus 1.9% YTD in the same period last year, showing weak credit demand. As such, on 31 March, the SBV reinforced its instruction by encouraging banks to lower lending rate by c2ppts applied to both existing and new loans. Banks were also asked to save operating cost and not to pay cash dividends to reserve resources for this cut.
With these policies, it is expected that the average lending interest rates in commercial banks will drop. In return, banks would enjoy some support as the SBV cut its policy interest rates. From 17 March, the SBV reduced a series of policy rates by 0.5-1.0ppt/year and lowered the ceiling deposit rates of less than six months tenure. Following this regulation, banks have reduced deposit rates for less than a six-month tenure, while some have also cut deposit rate for long-term tenures from 0.1-0.3ppt/year.
In the context of the unfavourable economic condition and weak credit demand, banks have been assigned early 2020 credit limits at 2-3ppts lower than the corresponding limits in early 2019 (Figure 1 in full report). We believe that such a lower credit growth limit will: (1) direct credit to avoid the risk of banks pushing lending into high-risk segments, and (2) ease the competition on deposit attraction, thereby reducing deposit rates and facilitating lending rate cuts. The ease in funding cost should partly compensate for the adverse impacts of the drop in lending rate.
With the base case assumption that the epidemic will be contained in Q2 20 and production and business activities will recover from Q3 20, which is also the beginning of the peak lending season for banks, we expect SBV to extend the 2-3ppts credit limit for banks to H2 20. Accordingly, credit growth at each bank may be 2-3ppts lower than that in 2019, except for CTG, which we believe can maintain the 2019 credit growth in this base case (even a bit higher if the bank is allowed to increase capital timely). CTG has set a credit growth target of 6-10% this year (versus actual growth of 8.8% in 2019), with the final growth expected to be dependent on the coronavirus pandemic.
Impact on NIM
We forecast NIM to remain the same or slightly decrease for most banks. We expect that the impact on NIM of state-owned banks such as BID and CTG to be stronger than their private counterparts due to less room to save funding cost from the currently high LDR. We hope that some banks should still be able to increase NIM marginally, such as HDB and MBB (owing to faster growth in consumer finance than their parent banks) and TCB (due to lower deposit costs and the full reflection of the late 2019 lending growth in 2020 interest income).
However, we do not exclude the possibility that the SBV will continue to extend the support by further cuts in lending rates. In addition, since the impact of the pandemic may be larger than expected, banks’ credit support packages may not only be applied solely to businesses directly affected by the coronavirus, but also extended to indirectly impacted businesses. In that case, the negative impact on banks’ NIM could be stronger than expected.