Rapid Credit Growth May Pose New Risks to Vietnam’s Banking Sector: HSBC

Tuan Minh

10:42 12/09/2017

BizLIVE - HSBC has warned of risks from the Vietnamese government's revised target to boost credit growth to 22% this year.

Rapid Credit Growth May Pose New Risks to Vietnam’s Banking Sector: HSBC

Rapid credit growth would bring along risks for the Vietnamese banking system. Photo: Internet

The Vietnamese government’s plan to rev up lending may create new risks for the banking industry, especially if new credit is placed in less productive industries, HSBC has said in its latest update on Vietnam’s economy.
At a recent monthly cabinet meeting, Vietnamese Prime Minister Nguyen Xuan Phuc called for an increase in the credit growth target from 18% to 21% for 2017 while emphasizing the need to hit the country’s 6.7% GDP growth target.
“We believe Vietnam could easily reach a 21% credit growth rate by the end of the year, but this may pose considerable risks to the economy given the slow resolution of legacy non-performing loans (NPLs) and the quality of credit that could be created in reaching the new target,” said Noelan Arbis, economist, ASEAN, HSBC.
The State Bank of Vietnam’s (SBV), the country’s central bank, surprise rate cut in July provided clear indication to us that the Vietnamese government aims to achieve its 6.7% GDP growth target for 2017 via the credit channel.
The pace of credit growth in Vietnam has continually increased in recent years, with credit growth rate in 1H17 reaching its fastest pace in six years.
“We expect the pace of credit growth to pick up further in 4Q17 and to easily match the 18.3% growth in 2016. Assuming credit growth for the remainder of the year remains exactly in line with last year’s pace, credit growth should reach 19.3% by year-end,” says the report.
Meanwhile, the SBV’s rate cut in July should also help push up the pace of credit growth and make it easier for the government to achieve the prime minister’s suggested new target of 21%.
The economist pointed out that real-estate related sectors still appear to be contributing the most to total credit growth, despite their declining contribution in recent months. The country’s real estate sector, which sank after a bubble period in 2006-2008, was one of the primary reasons for a rise in NPLs and the country’s banking sector crisis in 2011.
The report noted that the allocation of credit is important, as Vietnamese small- and medium enterprises (SMEs) compete for funding with SOEs and other large private corporations.
Moreover, both the IMF and World Bank have noted in recent studies that SOEs are absorbing a disproportionate amount of credit in the Vietnamese economy at the expense of SMEs.
The data suggest that high credit growth alone is not enough to lift Vietnam’s economic growth. The misallocation of credit and crowding out of private investments may weigh on GDP growth and increase the risk of future NPLs, if left unchecked, the report added.
In addition, the decline of NPL-to-total-loan ratio in recent years somewhat belies the true level of problematic loans in the economy. Part of the reduction in NPLs is due to transfers to the Vietnam Asset Management Company (VAMC), where the underlying credit risks of such loans have not been fully eliminated.
Supporting economic growth through the credit channel is a reasonable strategy given the rising role of private consumption and non-state investments. Moreover, rising public debt may be an impediment to increased government spending in the future.
“However, the quality and allocation of credit, in addition to resolving existing NPL issues, are crucial to ensuring that increased credit growth translates to higher and more sustainable growth in the future,” HSBC recommended.