Viet banks to shoulder economic shock

The central bank has ordered banks to extend debt relief to affected borrowers.

The Vietnamese banking sector will likely shoulder much of the policy burden of financial relief as the State Bank of Vietnam (SBV) orders them to extend debt relief to borrowers affected by the economic downturn, reports S&P Global Ratings.

The country’s gross domestic product grew only 3.8% in Q1 2020 from 7% in Q4 2019. Further, thesteep economic shock caused by the current downturn is poised to spur an increase in unemployment and push informal workers and micro businesses to financial strains.

In response, the SBV slashed its policy rates and ordered an extension of debt relief to affected borrowers, whilst relaxing requirements on loan classification and borrowing.

The sudden loss of momentum will primarily strike banks’ asset quality and earnings, whilst risk appetite, capitalisation and governance scores could also be lowered should the pressure for banks to undertake policy lending manifest in large-scale non-risk-based lending, the report said.

Outlook on asset quality factor has also been lowered as brewing stresses signify accumulating deferred credit impairments. It also considers the sector’s rapid credit growth especially in consumer loans and unsecured lending, which has not been tested in economic cycles.

A dwindling credit demand and lower lending rates also spells trouble for profitability, the report said. The resulting margin compression, laggard credit growth and lower fee incomes result in banks having lower core earnings to guard against rises in credit costs. Capital buffers are also problems for some major banks struggling to comply with Basel II requirements, S&P added.

On the other hand, assessment of funding and liquidity has not changed materially as a result of the coronavirus, the report said. S&P believes that the SBV will continue to provide liquidity to the system as directed by the government, it concluded.

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