Challenges facing Vietnam’s banking industry in 2024

Banks profits to be eroded

The problem will become more serious especially when Circular No. 02/2023/TT-NHNN of the State Bank (Circular 02), which regulates the restructuring of debt repayment terms by credit institutions and foreign bank branches is no longer be valid on June 30, 2024.

Therefore, bad debt continues to "weigh heavily" on banks, increasing pressure on provisioning and eroding profits.

According to economic expert, Associate Professor, Dr. Dinh Trong Thinh, in recent times, although the banking industry has taken stepping stones in setting up provisions for structured debts and reducing lending to risky areas, when Circular 02 expires, debts being restructured will return to the correct debt classification group and more bad debts may appear.

This requires banks to release reserve funds to handle bad debts, so bank profits will also be eroded.

Sharing this view, analysts of MB Securities Joint Stock Company (MBS) said that although bad debt is expected to peak in the fourth quarter of 2023 and the provision costs of the entire banking system are showing a positive trend, there is still pressure to make provisions in 2024.

The reason is that banks' provisioning room will not be much left when business results in 2023 are forecast to be less than positive. At the same time, when Circular 02 expires on June 30, 2024, the pressure to make provisions for restructured debts or non-restructured bad debts will increase.

Restructuring of bad debt

According to updated data from the State Bank by the end of September 2023, the total outstanding debt restructured according to Circular 02 reached about 140,000 billion VND, accounting for 1.09% of the total credit of the whole system.

However, the financial statements for the third quarter of 2023 show that most banks recorded an increase in bad debt rates compared to the beginning of the year and compared to previous quarters. Total bad debt as of the end of the third quarter increased by 61% compared to the end of the previous quarter, to 196,755 billion VND. Debt groups 3, 4, 5 (substandard debt, doubtful debt, debt with potential loss of capital) all increased.

MBS statistics show that the average bad debt ratio at state-owned joint stock commercial banks increased by 0.4% compared to the beginning of the year, while at other joint stock commercial banks increased by 0.7%.

MBS believes that provisioning pressure in 2024 will have a clear differentiation among banks. Accordingly, banks that have increased provisioning in 2023 and brought asset quality to a low level may have more room to handle and have the advantage of higher profit growth.

In addition, MBS forecasts credit growth will reach 13-14% in 2024 with the net interest margin (NIM) ratio improving thanks to maintaining a low interest rate environment, thereby helping most banks' after-tax profits to be optimistic in 2024, forecast to grow at 25.1%.

Source: SBV, MSB

Compiled by VBI