A customer at an HDBank transaction office. Vietnam’s policy rate is expected to rise 50 basis points to 4.5 per cent by end-2023. (Photo: VNA) Under a report on the impact of rising interest rates on Asia-Pacific (APAC)banks released this week, Fitch said annual credit targeting remains acentrepiece of the State Bank of Vietnam's (SBV) monetary policy framework, andthe refinancing rate is not a primary policy lever.
Moreover, strong foreign investment inflows underpin the dong's resilience,which has depreciated by only 2% year-to-date by end-July 2022, making it thesecond-best performing currency in APAC behind only the Hong Kong dollar.
According to Fitch, Vietnam’s rates are driven chiefly by economic activity andinflation.
“Lending rates in Vietnam are driven chiefly by credit demand since its supplyis pre-determined by SBV's annual quota. Meanwhile, deposit rates areinfluenced by the need to fund these assets, and are sensitive to depositors'expectations on inflation. Interest rates are therefore edging up as economicactivity and inflation quicken, but are little correlated with the US Fed'sinclinations,” Fitch said in the report.
Price pressures have intensified in recent months, but are manageable relativeto other regional emerging markets and remain under the government's target of4% for the year.
According to Fitch, net interest margins (NIMs) are buoyed by new credit demandrather than higher rates. Vietnam's economic rebound and the SBV's guidance forbanks to support the economy have caused loan growth to accelerate in Q1 2022and the system loan/deposit ratio to race towards 100%.
Banks have been raising deposit rates in recent months to fund growth, whileyields are also rising but partly constrained by social pressure to keeplending rates low to aid borrowers trying to get back on their feet after thepandemic. Nominal lending spreads are therefore little changed, but higherbalance-sheet leverage is nevertheless lifting banks' NIMs.
Fitch said rapid loan growth and high credit intensity are key asset-qualityrisks for Vietnamese banks. System loans have grown by a compound annual growthrate (CAGR) of 14% in the past five years, and continue to outpace nominal GDPgrowth. This has pushed up the credit/GDP ratio further, which was already oneof the highest among 'BB' rated markets.
High and rising system leverage is astructural risk in the banking sector, with much hinging on the economycontinuing to perform strongly. Corporate leverage is high and interest-ratehedges are uncommon, making borrowers vulnerable to any unexpected spike ininterest rates.
Under the report, Fitch noted credit reserves of Vietnamese banks improve, buttheir capitalisation buffers remain thin. The rapid pace of credit expansionduring the sharp economic slowdown of the past two years could contain latentimpairment risks. Some of these risks may loom as pandemic debt relief has recentlyexpired.
SBV's Circular No.03/2021/TT-NHNN requires banks to provision for restructuredloans in advance, and this is reflected in banks' significantly improvedloan-loss reserves. However, capital ratios remain thin due to persistentlyhigh loan growth, which could leave banks vulnerable to any new economicshocks.
According to the report, most APAC banks will benefit from rising interestrates, but their asset quality risks warrant attention. Global inflationarypressures are pushing many APAC markets into what is likely to be the mostmeaningful monetary tightening cycle in almost two decades. Most banks willbenefit from higher interest rates to the extent that NIMs widen. The upside islikely to be highest in Hong Kong and Singapore.
In general, asset-quality vulnerabilities of most APAC banks appear wellcontained. These risks should not be dismissed, though, after a longperiod of broadly supportive monetary policy, particularly in markets whereleverage and asset prices have increased./
VNA
