Saturday, September 26 2020


Can interest rate cuts on loans be sustained?

Update: July, 24/2017 - 09:00
Soon after the State Bank of Viet Nam cut the reference rate by 0.25 percentage points, several banks have followed suit, lowering interest rates on loans to enterprises in five priority sectors. — Photo

Soon after the State Bank of Việt Nam cut the reference rate by 0.25 percentage points, several banks have followed suit, lowering interest rates on loans to enterprises in five priority sectors.

They have cut the rates on short-term loans by up to 1 percentage point, which have thus fallen from 7 per cent to 6.5 per cent and even 6 per cent.

Some are also offering the lower rates to businesses not in the list of priority sectors.

The reduction in the rates despite the cost of capital remaining unchanged shows that the banking sector has actively responded to the Government’s policy.

Analysts estimate that loans to the priority sectors now account for 40 per cent of the total outstanding loans of VNĐ6 quadrillion ($264.4 billion).

The rate cuts are expected to incentivise businesses into expanding their activities by lowering costs.

Most banks have cut their loan interest rates but kept their deposit interest rates unchanged.

In the event, it is hard to see how they can reduce credit interest rates any further, which means the central bank’s rate cuts may not achieve their full intent.

Besides, it will have a big impact on their incomes unless they manage to seriously increase lending.

Most Vietnamese lenders have modest finances, and many still face intense pressure from bad debts.

So analysts want the central bank to come up with other measures like reducing deposit interest rates and lowering its current open market operation (OMO) lending interest rate from the current 5 per cent.

This will help banks mobilise cash at cheaper rates on the market.

Lenders’ fat profits go down bad-debt drain

When the second quarter ended, many banks gleefully reported high profits running into tens of thousands of billion đồng.

Vietcombank achieved pre-tax profit of VNĐ5.054 trillion ($222.64 million) for the first six months of the year, a year-on-year increase of 20.5 per cent.

It expects record profit of VNĐ10 trillion this year.

Other major banks like BIDV, Vietinbank, MB, VPBank and Techcombank are also forecast to have encouraging first half results.

As are most small- and medium-sized lenders.

LienVietPostBank, for instance, reported pre-tax profits of nearly VNĐ900 billion ($33.65 million), double the figure of the same period last year (VNĐ467 billion). SHB made VNĐ800 billion worth of profits.

Industry insiders attributed the high profits to several reasons, including the strong credit growth estimated at over 7.5 per cent during the period, a six-year high.

In fact, many have almost used up their full-year credit growth quotas assigned by the State Bank of Việt Nam (SBV).

A recent survey by the SBV found over 90 per cent of lenders expecting their profits this year to grow at a level higher than the rates in 2016.

Sixty per cent of those polled said business was better in the second quarter than the first, and expected the improvement to continue for the rest of this year.

But analysts said the results do not accurately represent the banking industry’s health.

For instance, Vietinbank achieved a pre-tax profit of VNĐ4.7 trillion ($207 million) in the first half but has to settle its bad debts at the Việt Nam Assets Management Company (VAMC) this year.

The profits will disappear and the bank will be left with a significant loss.

The sector’s bad debts now total VNĐ600 trillion ($207.05 million), and will be a drain on its profits.

Some analysts also pointed out that the sector’s profits are not commensurate with the size of their capital, and profitability is much less than in many other sectors.

Last year, the sector’s return on equity (ROE) was under 7 per cent, which was equivalent to the deposit interest rates and less than the average level in neighbouring countries.

Though loans, still the banking sector’s main profit earner, grew sharply, they were quite risky since a considerable amount of money has been lent high-risk industries such as transport and real estate. 

An unsustainable recovery in the business sector and the economy, as well as Việt Nam’s adoption of Basel II banking capitalisation norms are also factors that are expected to affect the banks’ profits from now to year-end.

Basel II is an international business standard that requires financial institutions to maintain enough capital to cover risks.

The Basel accords are a series of recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision (BSBS).

In addition, most Vietnamese lenders only pay attention to credit risk management and not operational risk management.

Experts consider this a problem that has led to weaknesses at many banks in the past.

They however expect the adoption of Basel II standards to help the banks mitigate this, but say it will also affect the resources available for lending.

Banks should not only hanker after profit growth but also have to focus their resources on settling bad debts and manage risks, they say.

Footwear sector automates in earnest

The footwear industry is seeing dramatic progress towards automation.

Many footwear businesses have begun to invest in machinery and modern technologies to automate production to improve productivity and save time.

They have started using robots for some simple and repetitive jobs like sewing, cutting and gluing.

Việt Á Châu Investment and Development Corporation (VITACO) has installed scanners and 3D printers for production of shoe moulds.

With this, the company can complete a product sample in less than one hour compared to 10 days earlier.

According to the Việt Nam Leather and Footwear Industry (Lefaso), the footwear industry’s exports were worth US$16 billion last year and are forecast to hit $20 billion in 2020.

Data from the General Statistics office shows that in the first five months of this year, footwear remained a key export earner for Việt Nam with revenues growing by 10.5 per cent over the same period last year to $5.6 billion.

Việt Nam is the third largest footwear producer and exporter behind China and India, and ships more than one billion pairs a year.

Analysts said the Fourth Industrial Revolution has already begun in Việt Nam and local firms including footwear makers have had to change their mindset to invest in automation despite the high costs involved.

Automation is inevitable as it helps reduce labour cost, improve product quality and ensure consistency, but it also threatens to increase unemployment.

An estimated 86 per cent of footwear workers could be replaced by machines.

But the leaders of some footwear and fashion companies reject the apprehension saying the tremendous impact on productivity notwithstanding machines cannot always replace people.

Robots can only do around 30 per cent of jobs in the footwear and textile and garment sectors, they said. VNS








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