Banking in 2009: challenges in the offing

Banks which did not aim at hot credit growth, but focused on restructuring loaning and trying to reduce bad debts in 2008, will meet less difficulties in 2009, experts say.

Credit not the biggest earner

According to the State Bank of Viet Nam, total outstanding loans in 2008 only rose by 21-22% over the end of 2007, while the allowed level was 30%. Only small banks relied on credit, while bigger banks have been seeking income from diversified sources.

When the capital mobilisation cost soared, a lot of banks incurred losses from loaning. As exporters could not borrow money from banks in US$, banks had to rack their brains to find ways to boost credit. Eximbank then announced it would lend to businesses in VND at the interest rates applied for US$ loans, if exporters committed to sell dollars to the bank at negotiated prices.

Many banks reaped big profit from foreign exchange trading in the market. The interbank exchange rate increased by 5.4%, and the commercial banks’ transaction exchange rate rose by 8-9% in comparison with the end of 2007.

According to HSC Securities Company, the income from foreign currency trading activities of Asia Commercial Bank in 2008 brought in 40% of total income.

As for the Military Bank, the income from foreign currency trading in the first half of 2008 alone was four times higher than that of 2007 as a whole.

The capital of VND7,610bil pumped by foreign strategic partners in May-July helped the input capital cost of Eximbank become more competitive than other rivals. According to Dao Hong Chau, Deputy General Director of Eximbank, the bank’s main sources of income came from foreign currency trading and foreign currency loaning.

The bond market brought a considerable sum of income to banks. The banks which bought cheap bonds in May could earn the profit of up to 30-40%.

Regarding other services, despite big efforts, banks could not make big changes in diversifying services with income from services accounting for only 5-7% of total income. Even East Asia Bank (EAB), a well known overseas remittance and card service provider, only saw fees accounting for 10% of total income.

Challenges on the horizon in 2009

With the sharp falls of the real estate market, the bad debt of the banking sector had reached VND43,500bil by the end of the year, or 3.5% of total outstanding loans.

Analysts say that an increase of bad debt ratio in 2009 is possible.

They say that banks will still face a lot of difficulties in 2009 caused by the adjustments in the monetary policies of the State Bank of Vietnam which aim to push up production and business, and prevent economic slowdown.

The central bank is believed will control credit quality more strictly making it difficult for credit to become as hot as it was in 2007.

In the immediate time, the interest rates are expected to go down as per instruction of the Prime Minister. This will make bank interest rates become less attractive in the eyes of investors in comparison with stock and gold investments. Therefore, banks will have to seek solutions to retain clients.

In 2009, domestic banks will have to officially enter into fierce competition with 100% foreign-owned banks, which will force them to expand their networks, improve technology, diversify services.

Therefore, analysts have every reason to believe that 2009 will be the year that ‘filters’ banks. (Saigon Tiep Thi)