HSBC: Vietnam Urgently Need to Reform the Banking Sector

Diep Nguyen

It’s widely acknowledged that Vietnam has weathered the COVID-19 pandemic relatively well.

HSBC: Vietnam Urgently Need to Reform the Banking Sector
Along with mainland China and Taiwan, it was one of the only three Asian economies that registered positive growth in 2020, of 2.9%. Thanks to its sharply-improved external metrics, it is also in a much stronger position to guard against shocks compare to previous crises. 
That said, lingering banking issues remain a source of vulnerability (see: Vietnam at a glance: Banking: The clock is ticking, 5 February 2020). We revisit the banking sector to see how it has fared during the pandemic. 
Although there is a lack of timely available data, HSBC has used balance sheets in the latest financial statements and annual reports of the “Big 4” SOE banks (Vietcombank, BIDV, Vietinbank and Agribank) to dissect the key data. 
Since they account for half of total loans, HSBC believes they are good indicators of the overall health of the banking sector.
First, the sharp rise in riskier consumer lending, along with elevated household debt, remains a big concern. Loans to households rose substantially from 28% of total “Big 4” loans in 2013 to 46% in 2020, which translated into rapid growth in household debt from 25% of GDP to 61% in the same period. 
Growth in household debt moderated significantly in 2020, but the level remains elevated. In per-labour-force terms, consumer debt even jumped from 41% of income in 2013 to more than 100% in 2020. As no detailed breakdown is available, we acknowledge the limitation that our estimate for household debt is broad, as it includes personal loans used for business purposes. Based on the latest IMF Article IV Consultation, over 50% of household debt was for individual businesses and 25% for mortgages in 2019. 
Assuming the same case for 2020, consumer lending would account for roughly 50% of income per labour force, still a high ratio for an emerging market like Vietnam. Elevated consumer leverage could drag down future consumer spending, especially as labour market conditions have been severely impacted by the pandemic.
Although Vietnam’s economy is in a more robust shape than regional peers, its labour market weakness remains a concern for the recovery of domestic demand (see: ASEAN Perspectives:
Labour markets: The crux of it all, 9 April 2021). On the surface, unemployment metrics look decent, with the unemployment rate falling to 2.4% in 1Q21 from its peak of 2.7% in 2Q20
(Chart 4). However, employment was still c950k below the pre-pandemic level, while wages fell for the first time in recent years. A detailed breakdown of the job data by sector is only available up to 2Q20, but it is fair to assume workers in traditional manufacturing and tourism-related services have continued to suffer. Indeed, Vietnam’s Tourism Advisory Board estimates that almost 40% of employees in tourism have remained idle (Hanoi Times, 2 May 2021). Moreover, a large chunk of Vietnam’s labour market is still concentrated in the informal sector, which may not be captured in formal employment statistics. This is particularly the case in sectors like furniture manufacturing, restaurant services and entertainment, where workers have very little social safety net. Thus, even Vietnam’s fiscal support is constrained by its elevated public debt-to-GDP, some targeted fiscal stimulus for vulnerable households and workers is still needed. And even more urgently, the spending of support disbursements, such as cash transfers and tax deferrals for household businesses, needs to be accelerated, which would in turn support a rapid recovery in private consumption.
Turning to debt composition, in terms of loan maturity, short-term debt (<1 year) dominates with almost a 60% share in the “Big 4” SOE banks in 2020, suggesting 2021 is a crucial year for timely debt collection. How about debt quality? This looks relatively healthy with 97% being “current” debt and just 1% classified as “loss” (Chart 8). This is largely consistent with on- balance-sheet NPLs, which only edged up slightly from 1.6% in 4Q19 to 2.1% in 3Q20. 
That said, HSBC also needs to be mindful of the systematic NPL risks. If we include other impaired loans, such as those sold to Vietnam Asset Management Company (VAMC), overall NPLs are estimated to rise from below 5% in 2019 to 7% in 2020.
What about credit allocation in each sector? Although each bank has a different breakdown of loans by industry, manufacturing and wholesale/retail stand out, boding well for Vietnam’s bright prospects in industrial production. Indeed, the authorities have been consistently calling for credit channelling into productive sectors, and credit to industry and trade still grew by over 10% y-o-y in 2020. That said, credit to riskier sectors like real estate has accelerated since December 2020, prompting the State Bank of Vietnam (SBV) to flag potential risks (Hanoi Times, 22 April 2021).
Lastly, we think Vietnam needs to resume its reforms in the banking sector, which have been partly disrupted by the pandemic. Looking through the lens of the most important indicator capital-adequacy ratios (CARs), Vietnam lags behind regional peers as it is the only ASEAN country that has not fully met the Basel II minimum standard of 8%. In particular, CARs remain low at some SOE banks. Thus, Vietnam needs to progress its recapitalization plans and accelerate its adoption of Basel II requirements, which has been delayed from 2020 to early 2023. While its robust economic growth may prevent a sharp deterioration in the health of the banking sector, we believe it is time for the sector to restore reforms and build strong capital buffers against potential risks.


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