Benefiting from Low Deposit Rates
In the first half of 2024, despite slower credit growth compared to the market average, the Big 4 banks in Vietnam—Agribank, VietinBank, BIDV, and Vietcombank—reported robust net interest income (NII). Agribank led the pack with a net interest income of VND 30,832 billion, a 3.8% increase year-on-year. VietinBank followed closely with VND 30,513 billion, a 20% increase from the same period last year. BIDV recorded a 3.3% growth to VND 28,379 billion, placing it third, while Vietcombank, despite a 0.8% decrease in NII to VND 27,986 billion, remained fourth among the top 10 banks by NII.
Among joint-stock commercial banks, VPBank stood out with VND 23,732 billion in NII, up 29.7% year-on-year, followed by Techcombank with VND 17,977 billion, a 40.2% increase. Meanwhile, Military Bank (MB) saw a slight decrease of 0.6% in NII to VND 19,593 billion but still secured the sixth position in the rankings.
Several banks experienced significant leaps in NII growth. For example, HDBank saw a 51.9% increase, reaching VND 14,880 billion, placing it eighth in the top 10. Techcombank’s 40.2% growth also pushed it to the seventh spot. Smaller banks, including KienlongBank (up 47.3%), SeABank (up 43.6%), Bac A Bank (up 42.3%), LPBank (up 36.1%), and Vietbank (up 36%), also recorded substantial gains. Out of 29 banks that published financial reports, only six saw declines in NII growth, despite the sluggish credit expansion.
In essence, while the interest earned from loans decreased in the first half of the year, banks managed to maintain solid profits due to a faster reduction in deposit rates compared to lending rates, allowing them to benefit from the interest rate differential.
Looming Challenges Ahead
Although the first half of the year brought positive NII figures, challenges are becoming more apparent for the remainder of 2024. Non-interest income (NII) from services saw a modest increase of 9.5%, totaling VND 34,996 billion across 29 listed banks. However, this segment only contributed around 12% of total income, and 13 out of 29 banks reported declines in service income growth. As a result, the contribution of service income to overall bank profits in the first half of 2024 was minimal, and it is unlikely that this sector will experience significant breakthroughs in the latter half of the year.
On the interest income side, deposit rates have been rising, with some banks exceeding 6% per year. According to experts from Fiingroup, this upward trend in deposit rates is expected to put pressure on banks' net interest margin (NIM), especially for state-owned commercial banks. In the coming quarters, due to weak credit demand and the government’s ongoing policy of maintaining low lending rates to support economic growth, banks may find it increasingly difficult to balance profitability.
Following the impact of Typhoon No. 3, several banks introduced supportive measures for affected customers from September 6, 2024, until the end of the year, primarily in the form of reduced lending rates. Agribank, for instance, reduced interest rates by 0.5% to 2% per year and waived all overdue and late payment interest. Vietcombank also offered a 0.5% per year reduction in lending rates for customers impacted by the typhoon, covering a total debt of approximately VND 130,000 billion. Many other banks are implementing similar programs.
The State Bank of Vietnam (SBV) has also called on banks to continue lowering interest rates for existing loans affected by natural disasters, as well as new loans. In this context, the NII for the banking sector in the second half of 2024 is expected to face significant challenges. Recent reports also forecast that the NIM for the sector may decrease slightly in the fourth quarter of 2024.
Compounding the issue is the increasing burden of non-performing loans (NPLs). As of June 30, 2024, the total NPL balance for 29 banks stood at VND 271,461 billion, a rise of VND 46,719 billion or 20.8% compared to the end of 2023. According to the SBV, the internal NPL ratio of banks reached 4.94% at the end of May 2024, up from 4.55% at the end of 2023. The main driver behind this increase continues to be the stagnant real estate market, with unresolved bad debts weighing heavily on banks.
As the year progresses, banks will face growing pressure to reduce lending rates and introduce support packages for customers in disaster-affected areas, in line with government policies. At the same time, they must set aside provisions to prepare for the resolution of bad debts in 2025-2026. This dual challenge will likely result in diminished profits for the banking sector in the second half of 2024.
The risk provisioning buffers for the entire banking sector have also thinned considerably in recent periods, necessitating additional provisions to ensure safety. Should Circular 02 expire, the profitability of banks in the latter half of 2024 and into early 2025 could be further eroded. Banks will need to balance the need to generate income with the obligation to set aside provisions to handle future risks.
In conclusion, while the first half of 2024 brought strong NII growth for many banks, the second half of the year presents significant headwinds. Rising deposit rates, stagnant credit demand, increasing NPLs, and the need to set aside provisions for bad debts will all weigh heavily on profitability. Banks will likely need to navigate these challenges carefully to avoid a sharp decline in their earnings as the year progresses.
