Credit speed makes it tough to lower lending rates

Credit Growth to Accelerate in 2H24

By the end of the first half of 2024, loan growth had achieved 6% from the start of the year to June 30, reaching the six-month objective established by the government and the State Bank of Vietnam. This gain is particularly noteworthy given that, credit growth as of June 24, 2024 was only 4.45%. In the final week of June, credit growth increased by 1.5%.

This loan growth is generally favorable, in line with economic indicators from the late second quarter. Part of this is due to the ongoing pressure to distribute money as the SBV reallocates limit s from banks with low demand to those capable of development. However, as with the end of 2023, a rapid credit increase over a short period may have a detrimental influence on credit advancement in the next months.

According to Mr. Tuấn, credit growth is expected to accelerate in the second half of 2024 after a slow first half. This will be driven by (1) large-scale public investments, particularly in major infrastructure projects, (2) a gradual recovery in retail credit, led by housing loans as more projects are launched in the last two quarters of 2024, and (3) the continuation of a low-interest-rate environment to support the economy.

Differentiated Credit Demand

In the first quarter, banks drove credit growth, mostly through corporate and SME lending, while retail lending remained modest due to low capital demand, particularly for house loans.

This distinction is visible in the favorable credit growth of banks with strong corporate lending portfolios, such as LPB, TCB, HDB, and ACB in the SME market.

The real estate industry has been a driving factor, with commercial banks that hold major real estate loan portfolios (excluding home loans) such as MSB, TCB, and HDB reporting positive growth, indicating that the real estate market is recovering.

In the early phases of economic recovery, corporate credit demand outperforms retail demand. Banks will favor corporate loans since demand from enterprises increases faster than demand from retail segments. Mr. Tuấn believes banks with strong corporate loan portfolios would see favorable growth in the coming quarters.

Asset Quality, NIM, and Interest Rates

Deposit interest rates rose marginally in the second quarter, but remain historically low. With projections of faster credit growth in the next two quarters, deposit interest rates may climb further in the second half of 2024 as higher capital demand raises the need for mobilization. However, lending rates are unlikely to fall further, and with expected credit acceleration, banks will be able to boost lending rates to offset the growing cost of funds (CoF). Therefore, the impact of rising deposit rates on the net interest margin (NIM) is insignificant.

NIM is expected to improve in 2024, driven by (1) anticipated accelerated credit growth in the second half to offset rising funding costs, (2) a recovery in retail credit in the second quarter in line with economic recovery, led by housing loans, and (3) improving asset quality as the economy recovers.

The level of NIM improvement will vary from bank to bank, depending on its ability to extend credit and current account savings account (CASA). Banks that do not benefit from CASA's CoF advantage, such as SHB, STB, and VIB, will struggle to raise NIM and must rely on credit production. However, the industry's competitive interest rate environment presents hurdles to attracting clients.

Asset quality at 11 banks deteriorated in the first quarter, as the non-performing loan (NPL) ratio rose by 24 basis points to 1.88%, reaching the peak NPL level in Q3 2023. The need to make provisions will be strong in the coming quarters, as banks have begun to use their provision buffers to tackle bad debts while maintaining profit growth in the face of poor loan growth in the first half of the year.

Furthermore, despite the good prognosis for the economy and credit in the near future, FIDT observes that asset quality remains a worry, since risks associated with corporate bonds and real estate loans have not dissipated, and banks' provision buffers have shrunk since the first quarter.