Despite Rate Cut, Banks Fear Low Credit Demand

Despite the recent cut in lending interest rates, many banks still worry that there will not be many borrowers. As credit operations contribute a large proportion of revenues and profits, many banks are facing earnings shrinkage this year.

 

As usual, the biggest banks like Vietcombank, BIDV, Vietinbank and Agribank are the first to announce rate cuts in Vietnamese dong loans. Vietcombank and Agribank are offering the lowest lending interest rate of only 14.5 percent a year, for borrowers operating in agricultural, rural, and export sectors. The two top-tier banks have set a new trend for other commercial banks such as ACB, VIB, and HDBank to cut their rates.

 

Mr Nguyen Ngoc Bao, Chairman of the Board of Members of Agribank, said: Agribank’s outstanding credit in 2012 increases by some VND54 trillion, including VND10 trillion of medium and long-term capital and VND44 trillion of short-term capital. However, the biggest lender in Vietnam by assets did not specify the amount of “soft loans” in the year. Prioritised fields for preferential loans include long-term projects, agriculture, manufacturing, agricultural processing, and animal husbandry.

 

Likewise, Mr Nguyen Phuoc Thanh, General Director of Vietcombank, said exporters will be offered the lowest lending rate of 14.5 percent per annum. “Customers are free to ask for loans, without any limit to value,” he said. Vietcombank’s current outstanding loans top VND200 trillion. If customers pay due debts, they can take out new ones with the new interest rates. With the credit growth of 17 percent given by the State Bank of Vietnam (SBV), the Hanoi-based lender will have an additional VND40 trillion for lending.

 

Vietnam International Joint Stock Bank (VIB) will apply a preferential interest rate 1.5 percent lower than the average rate for manufacturers and exporters. The value of preferential loans is VND4,000 billion. HDBank General Director Nguyen Huu Dang noted that his bank plans to give soft loans of VND1.5 trillion to agricultural and rural customers. But, the amount may be changed to fit new circumstances.

 

Despite lower interest rates, many banks fear low credit demand. Nguyen Phuoc Thanh of Vietcombank said although his bank is allocated credit growth limit of 17 percent this year, his bank is confident enough to set the growth target of 15 percent. The main reason is that local businesses will continue to face challenges this year. In 2011, Vietcombank focused most of its credit on the export sector, but many borrowers fell into a tough spot by the end of last year, and it continued to be on the downward trend from the beginning of 2012. Rice, seafood, cashews, and peppers had their prices reduced on the global market while purchasing power declined. Businesses borrowing Vietcombank’s capital are struggling to find customers. If unable to sell goods, they will not dare to borrow more money even with the lower interest rate.

 

“The low margin between deposit rates and lending rates and rising nonperforming loans force banks to increase risk provisions. Vietcombank does not place much hope on profits from credit operations. We have to increase incomes from various sources to offset. But, we fear that the full-year profit is likely to be affected,” said Mr Thanh.

 

Profit pressures on the shoulders of joint stock commercial banks are heavier. A director of a Ho Chi Minh City-based lender said his bank has been mobilising deposits at exorbitant interest rates while the reduction is insignificant. Since large banks, mostly State-owned, are not under high profit pressure, they can easily cut the rates. But, this move will force smaller lenders to follow suit. This race along with rising input costs will dent their earnings this year. “We plan to submit a revised earnings plan to our general shareholder meeting in March,” he added.

 

Mr Nguyen Ngoc Bao of Agribank said his bank will have to review personnel and operations from March to cut costs, while stepping up debt restructuring and rescheduling to balance capital sources to ensure the profit target in this tough year.