Vietnamese banks hit the credit brakes

Inflation is out of control so the The State Bank of Vietnam has limited credit growth of banks to 20% in 2011.

The regulation is credit positive for Vietnamese banks because a slower pace of credit expansion will help control inflation, benefiting banks’ funding and asset quality in the long term.

Vietnam is suffering from high inflation. The May CPI showed a year-on-year increase of 19.8%, the highest rise since mid-2008. While the price increase is partly because of a weak local currency and high commodity prices, rapid credit growth in the past few years is also a contributing factor. Loan growth was 38% in 2009 and 28% in 2010. By comparison, GDP grew 5%-7% during these two years.

Reduced credit growth benefits Vietnamese banks in two ways. First, monetary tightening helps control inflation, which is necessary to restore the public’s confidence in the local currency, and in turn help banks raise deposits. At the end of April, banking system deposits had declined 0.5%17 from the end of 2010. Moreover, given the difficulty banks have in growing customer deposits, limiting credit growth will curb banks’ reliance on wholesale funding. Limiting market-sensitive wholesale funds are particularly important for small banks lacking established deposit franchise.

Second, while tighter credit will lead to rising non-performing loans this year and possibly next year, lower credit growth will encourage banks to focus on better borrowers, which will improve asset quality in the long term. Vietnamese banks have generally overemphasized loan growth. Without the SBV directive, most would have likely grown loans at over 30% this year.

In fact, rapid loan growth has already taken its toll. While only four banks18 - Vietnam Joint Stock Commercial Bank for Industry and Trade, Vietnam Technological and Commercial Joint Stock Bank, Hanoi Building Commercial Joint-Stock Bank and Sacombank - have published their 2010 annual reports in English as of 29 May 2011, all four have booked a higher value of non-performing loans (NPLs) at end-2010 compared with a year ago.

We believe the other banks had similar experiences and this trend is continuing. The increase reflected weakening corporate cash flows as a result of lower profits owing to rising costs and higher debt service burdens because of rising interest rates.

If bank loans continued to grow at the rates seen in 2009-10, stressed corporates would find it easier to avoid default. But easy credit would only delay the surfacing of problems as it encourages excessive corporate expansion and leverage. An example is shipbuilder Vinashin, which before it ran into financial difficulty in late 2010 owned around 200 subsidiaries, many of which were non-core businesses.