Credit growth could temporarily slow down in 3Q2021

Sustained momentum

The credit growth reached 6.5% in June on a year-to-date basis. This equals a 15.2% year-on-year growth. On the other side, the deposit balance expanded by 4.1% year-to-date, or 13.2% year-on-year. The pace has accelerated from a month ago, represented by a steeper slope compared to that of May 2021. In comparison to the announced figures as of June 21 (credit and deposit growths were 5.5% and 3.1% year-to-date, respectively), credit and deposit bases expanded strongly in the last few days of June (1% increase each).

Year to date, the credit growth has regained momentum with the support of a low comparison base, as the slope in the first half of 2021 was approximately that of 2019. Meanwhile, the performance of deposit expansion has also kept up with the pace of last year. The gap between credit and deposit growth turned positive since May 2021. So, VDSC projected that ample liquidity could afford a positive credit-deposit growth gap in 1.0-1.5 years. Therefore, the current gap implies a possible shortage of liquidity.

Temporary slowdown

Due to the outbreak of the pandemic, social distancing was imposed. Several banks were concerned, as they mentioned a rise in the credit risk of customers recently, and expected it to continue to be higher in 3Q2021. However, they also admitted that there were firms that posted resilient profit growth in the latest meeting regarding the call for interest rate cuts. Therefore, VDSC thinks that the influence is polarized. In other words, there might be a “K-shape” impact: different parts of the economy were hit at different times and magnitudes. This left the demand intact in several regions and sectors where the capital flowed into. Real estate was one of those, which the authorities were worried about the speculation.

In the third quarter, the recent expectation survey indicated that commercial banks were conservative about the forward-looking annual credit growth as the pandemic development seemed to be complicated, while the projection of deposit growth was unchanged from the previous one. The survey implies an expectation of 11.2% and 9.6% respectively for credit and deposit expansion. However, VDSC thinks that unless the third approval of credit quota occurs and the social distancing is fully lifted, credit growth is likely to be around 9.5-10.5% year-to-date at the end of 3Q. Currently, the demand is still resilient in some parts of the economy, but the paperwork process is affected, thus, hampering credit disbursement. Meanwhile, deposit activities can proceed via online channels easily.

VDSC said, the credit growth would be likely to be around 9.5-10.5% year-to-date at the end of 3Q. 

Moderate impact

The SBV has encouraged commercial banks to reduce lending rates for customers. There were only 16 banks offering the new preferential interest package.

Last year, when the interest rate reduction occurred, commercial banks proceeded to lower deposit rates as the primary tool to sustain the risk-adjusted NIM, maintain balance sheet growth and meet new policy rates. Several financial institutions, including banks and consumer finance companies, also cut operating costs to achieve efficiency when credit costs and NIM were under pressure. At first, the annualized NIM was down as a consequence of the repricing gap. Nevertheless, the banking sector soon witnessed NIM rose significantly as the deposit structure changed. This led to the listed banks posting superior earnings growth from 4Q2020 to 2Q2021.

In VDSC’s view, the actual situation is somewhat similar to that of last year. Annualized NIM is likely to be pressured in the short term, probably for a quarter based on the reset gap of large banks. However, this stock company does not think operating expenses can be further reduced to a sustainable level as CIRs of the sector and some banks have already dropped tremendously, contributed largely by a smaller staff base. In addition, it does not expect that the change in the deposit structure will help in this case. Fortunately, the momentum of surging credit costs might not be too serious given the support of Circular 03/2021/TT-NHNN and controlled balance sheet expansion due to undesirable credit quota.

In short, VDSC projects that NIM will be negatively affected in the short term, and the recovery after the repricing effect fades out will not be material in comparison to that of last year. On an aggregate basis, the sustainable NIM (annualized) is expected to still be higher than the pre-pandemic level, but lower than the high levels from 4Q2020 to 2Q2021.