VIS Rating: Banks’ asset risk stable in 9M

Banks’ asset risk remained stable in the first nine months of 2024, with limited impact from Typhoon Yagi, particularly for State-owned commercial banks (SOCBs) and large banks, according to the latest report from VIS Rating.

The sector’s return on average assets (ROAA) fell slightly to 1.5 per cent in the nine-month period, from 1.6 per cent in the first half of the year, with small banks most affected by lower net interest margins (NIM) and higher credit costs.

Liquidity risks for small and mid-sized banks increased, driven by higher use of short-term market funds amid sluggish deposit growth, and recent surges in interbank rates.

“By end-2024, we expect that the increasing pace of high-yield mortgage growth and slower overdue loan formation will drive stable profits and asset quality for banks,” VIS Rating said.

Banks were broadly shielded from typhoon-related losses due to limited exposure to affected northern provinces. Bank credit to typhoon-hit borrowers was around 1 per cent of total credit exposures on average for the sector, mainly extended by SOCBs with operations in the affected provinces. Relief measures introduced by the State Bank of Vietnam to restructure debt and offer low-interest rate loans to affected borrowers will provide some reprieve on debt servicing.

Overall, the sector’s problem loan ratio remained somewhat flat from the earlier quarter, at 2.4 per cent. Large banks, including SOCBs, experienced slower overdue loan formation rates, supported by sizable recovery of bad debt as well as tighter credit underwriting, particularly for new consumer finance loans. This was offset by the continued rise in delinquencies among retail- and small and medium-sized enterprise (SME)-focused banks.

“We assess that around 30 per cent of banks have weak asset risk profiles, up from 22 per cent in 2023,” VIS Rating said. “For full-year 2024, we expect the sector’s problem loan ratio to stabilize at 2.3-2.4 per cent as banks complete their loan write-offs in the fourth quarter.”

The sector’s profit growth slowed from narrower NIM, and small banks were hit additionally by high credit costs. The majority of banks recorded lower ROAA and NIM quarter-on-quarter, while small banks experienced the most significant profit decline due to higher deposit costs amid keen competition. These banks and some mid-sized banks also experienced asset quality deterioration and high credit costs. The profit trends for large banks were mixed; some were hit by lower bancassurance, foreign exchanges, and investment income, while others benefited from earlier de-risking efforts and steep declines in credit costs and improved debt recovery.

“We expect the majority of the 25 banks in our analysis to be on track to meet their full-year profit targets, especially SOCBs and large banks with strong growth in corporate lending,” VIS Rating continued. “Given the increasing pace of loan growth, we expect ROAA to improve to 1.6 per cent for the full-year 2024 from 1.5 per cent in the prior year.”

The report also reveals that loss absorption buffers remained weak. As of September, the sector’s tangible common equity / tangible assets ratio (TCE/TA) was flat quarter-on-quarter at 8.8 per cent due to slow profit growth.

Liquidity risk is rising as banks increase reliance on short-term market funds and interbank rates surged, according to the report. Since mid-October, interbank overnight rates have risen by 3.5-6 per cent on average, alongside currency pressure and tighter market liquidity. High interbank rates, if they persist in the periods to come, will increase liquidity risk for small and mid-sized banks.