Banking credit seen growing 13-15% in 2015

Update: February, 09/2015 - 07:45

Banking credit is expected to grow by 13-15 per cent this year, 1 per cent higher than last year. — File Photo

by Compiled by Thien Ly

Banking credit is expected to grow by 13-15 per cent this year, 1 per cent higher than last year.

The target is based on this year's GDP target of 6.2 per cent.

Normally credit growth is 2-2.5 times that of GDP growth. In other words, to ensure the economy grows at 6.2 per cent, credit growth must reach 14-15 per cent this year.

Analysts said the credit target is feasible in the current economic context, but it comes with both enabling factors and challenges.

The inflation rate this year is expected to be around 3 per cent, and 3.3 per cent at maximum. This means the banking sector will have an opportunity to further lower both deposit and lending interest rates to accelerate credit activities.

But the interest rate is not the biggest hurdle to lending; it is the business situation, which has yet to recover significantly.

Last year, for instance, more than 67,800 businesses shut down, 14.6 per cent more than in 2013. This means that companies are still struggling, which limits their ability to absorb capital.

The banking sector has in fact made great efforts to cut rates, but without a commensurate growth in credit.

Analysts believe that high inventory levels have dragged back funding demand among domestic firms. Bad debts are also a big hurdle preventing companies from borrowing from banks.

In light of the situation, they believe that the most important measure now is to stimulate market demand to boost credit growth.

To do this, the Government has to stabilise inflation, the economy and money supply, they say.

Further cuts in interest rates are also key to boosting bank credit.

The current gap between deposit and loan interest rates remains too large, with the latter being 4 or even 6 per cent higher, the analysts point out.

Besides, the Government needs to create a proper legal framework to help lenders easily liquidate collateral backing bad debts, and foreign investors should be encouraged to participate in trading of bad debts, they say.

Once their bad debts are settled companies too will have the opportunity to borrow again.

Rights issuance

Last week Kinh Bac City Development Holding Corporation (KBC) sold 80 million shares for VND1.2 trillion (US$56.48 million), mainly for repaying debts.

Six people were ready to pay billions of dong to buy KBC's shares though the price of converting bonds into shares could not be lower than the bonds' face value of VND15,000.

On January 28, Huy Hoang Investment Services Joint Stock Company (HHS) also approved the issue of new shares worth VND1.11 trillion ($51.87 million) to increase its charter capital.

The money raised is likely to be used for investing in automobile trading, which now is the company's most profitable business.

KBC and HHS are among several listed companies that have recently issued shares to raise new capital to expand their business.

Though the securities markets are not yet in the pink of health, the shares of many companies, especially those in production and trading, are pretty stable and pay high dividends to attract investors' attention.

Thus, almost all existing shareholders of KBC and HHS were ready to subscribe to their new share issue.

Many companies are therefore opting for the rights-issue route to raise funds.

But analysts are warning that though the deposit interest rates have fallen very low, and the gold and forex markets are not volatile – thus not offering investors the possible chance of making profits – the securities market is not attracting many new investors because there is not enough confidence in its recovery yet.

They call for caution amid the slight euphoria since many companies remain inefficient but come out with very attractive financials to pull the wool over investors' eyes.

The Viet An Seafood Joint Stock Company (AVF) is one such, they point out.

In 2014 the company completed a rights issuance worth VND150 billion ($7 million) to existing shareholders. Recently the company announced results for the third quarter of 2014, with losses climbing to VND763 billion ($35.65 million). The company is now in danger of ending up with its shares not listed on the exchange.

Many people who bought the shares are now futilely trying to sell them.

Loans for real estate

After its annual shareholders meeting, Vietinbank saw many changes to its personnel, business strategies and risk management. But the most significant was a slew of agreements it signed with private property companies.

The bank promises large loans for housing projects.

Last July, according to Tai chinh & Ngan hang (Finance &Banking) newspaper, Vietinbank signed an agreement with the LFC Group for financial support estimated at VND20 trillion (nearly US$1 billion) for the company's projects, or triple prescribed capital at that time.

Six months later Vietinbank signed a similar deal with Dat Xanh Real Estate Service and Construction Corporation, also for VND20 trillion ($934.57 million) credit by 2020.

Elsewhere, HDBank recently signed an agreement with Cotec Asia of the Cotec Group to lend VND300 billion ($14.12 million) for its Blue Sapphire Resort Vung Tau project.

The bank will also offer loans at an interest rate of 3.8 per cent for the first six months to customers buying villas and luxury apartments at the project.

Meanwhile, the number of banks participating in the Government's VND30 trillion ($1.42 billion) housing stimulus package has increased from five to eight.

This is not a new phenomenon though.

Banks are also looking elsewhere to invest since government bond rates are low while securities and other asset classes have yet to recover to any great extent.

The many regulatory and legal changes made recently by the Government have made it conducive for banks to invest in property.

The State Bank of Viet Nam has issued Circular 36 which allows banks to use up to 60 per cent of their short-term deposits for long- and medium-term loans.

The National Assembly has finally allowed foreigners and overseas Vietnamese to buy houses in the country.

Most importantly, the banks recognise that the real estate market is on the way to a strong recovery. A seven-year slump has allowed the housing market to separate the wheat from the chaff, with professional companies with sound finances surviving and those with bad business habits struggling.

The banks'active co-operation has ushered in positive changes to the property market, one of which is a 40 per cent fall in housing inventories.

But analysts caution against the threat of bad debts, saying most housing projects are still developed with bank credit and money raised from customers, while bad debts in the sector have yet to be cleared. — VNS