Vietnamese commercial bank earnings may drop after the central bank ordered lenders to reduce interest rates on existing loans to help companies cope with an economic slowdown.
Lenders must cut rates on existing loans to below 15 percent "right after today's conference," Governor Nguyen Van Binh told banks at a conference in Hanoi on July 7. Banks paid dong depositors about 14 percent to lure funds at the start of the year, according to the central bank.
"This is really bad for banks," Nguyen Quang Thai, finance and accounting chief at Vietnam Bank for Agriculture & Rural Development, the nation's biggest bank, said by phone Monday. "It will cut into our profit margin since we had to raise funds at high interest rates previously." He declined to give an estimate of how much profit might drop.
Vietnam is trying to boost an economy that expanded 4.66 percent in the three months ending June from a year earlier. Deputy Prime Minister Vu Van Ninh said on July 7 that Vietnam may miss its 6 percent growth target this year. Credit expansion slowed to 0.76 percent as of June 30, compared with a government target of 14 percent to 15 percent for the full year.
The State Bank of Vietnam cut policy interest rates on June 29 for the fifth time this year to spur growth. Vietnam will accelerate state spending and instruct banks to boost lending to bolster the economy, Deputy Prime Minister Nguyen Xuan Phuc told the National Assembly on June 15. It also cut some corporate taxes and deferred sales tax payments to help businesses, he said.
The central bank needs to "quickly implement drastic measures" to tackle bad debt in the banking system and overhaul weak banks, Prime Minister Nguyen Tan Dung said in a statement on the government's website on Monday. It requested ministries and the central bank to focus on helping companies the rest of the year. The central bank needs to continue lowering lending rates to boost businesses and spur credit growth, Dung said in the statement.
"We will have to accept some profit declines in order to help companies overcome difficulties and keep their business running, otherwise we won't get any money back if they go bust," Phan Thi Chinh, deputy chief executive officer at the Bank for Investment and Development of Vietnam, the country's second-largest lender, said by phone Monday. "Some small banks that raised funds at high very interest rates previously may suffer losses now."
Lenders will have difficulties cutting rates on existing loans immediately because the central bank has reduced borrowing costs faster than expected, Le Hung Dung, chairman of Vietnam Export-Import Commercial Joint-Stock Bank, said at the conference in response to the governor's instruction. "Banks are also companies which have to ensure profitability for its investors."
Banks' bad debts accounted for 4.47 percent of total lending at the end of May, the central bank said July 7. Bad debts have increased in the banking system because companies' unsold inventories swelled amid slowing demand, according to a statement on the government's website. Banks have set aside 67 trillion dong of provisions for bad loans, it said.
The Southeast Asian nation has entered a period of sluggish growth, the World Bank said in a report last month that cited the slow pace of structural reforms and inefficiencies in state- owned companies, banks and public investments.
"In addition to a slowdown in export markets, there is a risk that pressures on prices and the exchange rate could resurface, if the authorities' commitment to stabilizing the economy and safeguarding the financial sector is perceived as waning," the International Monetary Fund said in a note last week.