Prospects of the banking sector

Large room to stabilise exchange rates, interest rates

According to the macroeconomic report 2018 and prospects for 2019 released by the Vietnam Brokerage and Investment Banking (MBS), the monetary policy in 2018 was operated in a more cautious manner as the State Bank of Vietnam (SBV) actively controlled the credit growth rate and money supply. Interest rates tended to increase slightly at the end of the year but the rise was negligible. The monetary policy in 2019 is anticipated to follow the cautious trend in 2018.

"We expect that the positive economic growth trend will continue to be maintained in 2019. The macroeconomy will be kept stable in addition to the stability of inflation, interest rates and exchange rates, while the surplus in the balance of payments will support the increase in foreign exchange reserves," MBS stated.

According to MBS, foreign exchange reserves were consolidated and maintained at a fairly high level of US$63.5 billion as the SBV bought US$11 billion in 2018, thus creating conditions to stabilise exchange rates. In 2019, the SBV has good conditions to actively manage flexible exchange rates within the safe margin thanks to an abundant supply of the US dollar and a stable macroeconomy.

"The SBV still regulates 0% interest rate for US dollar deposits for both individual and organisation customers. Meanwhile, the deposit interest rate for Vietnamese dong has been kept stable since the beginning of the year. The difference in the US dollar and Vietnamese dong deposits interest rates are quite high in the context of reasonably curbed inflation, which makes people tend to sell the US dollar and hold Vietnamese dong, creating conditions for the SBV to have more room to maintain a reasonable VND/USD exchange rate”, MBS said.

MBS predicted that the SBV will only increase the exchange rate slightly by 1.5 to 2%in 2019 in order to balance the two objectives of stabilising the macroeconomy and supporting exports. Vietnam's trade balance will continue to enjoy a surplus of US$7.2 billion in 2018, creating more room for exchange rate stability.

Meanwhile, according to the latest survey results of the Monetary Forecasting and Statistics Department under the SBV, the business environment of credit institutions has continued to be improved. Demand for banking products and services increased rapidly in 2018 and are expected to continue to grow faster in 2019, in which demand for loans is anticipated to see the highest growth. 77.6% of credit institutions expect higher customer demand for banking services in 2019 against 2018, including the demand for loans, deposits and payment services. A majority of credit institutions also expect positive liquidity of the entire banking system in 2019 for both Vietnamese dong and foreign currencies and decreases in non-performing loans.

Profit breakthroughs

Besides positive expectations concerning liquidity, exchange rates and interest rates, 86% of credit institutions said their business situation was improved in 2018 compared to the end of 2017, while 88% of credit institutions expected a better business situation in 2019 compared to 2018.

The optimism about the business prospects of credit institutions was partly attributed to the breakthrough in profits of many commercial banks. Almost all credit institutions met or exceeded their set profit targets. Vietcombank's profit reached a record high of more than VND18 trillion (US$774 million) in 2018, up 63.5% over 2017, fulfilling 120.1% of the plan. BIDV also posted a pre-tax profit of more than VND8.95 trillion (US$384.85 million), up 6.8% over the previous year.

Notably, 2018 also witnessed a spectacular breakthrough in the profits of joint stock commercial banks. Accordingly, Techcombank achieved a pre-tax profit of nearly VND 10.7 trillion (US$460.1 million), an increase of 31% compared to 2017 and exceeding 6.61% of the yearly plan, which was only behind Vietcombank. VPBank also reported an impressive business results with pre-tax profit of nearly VND9.2 trillion (US$395.6 million), a year-on-year increase of 13%.

The high profit growth in 2018 is bringing about many opportunities for the business operation of banks in 2019 associated with significant pressure and challenges. In the context of prudent monetary policy and credit growth curbed at 14% (the lowest level in the past five years), revenue and the profit of credit institutions will be affected as credit contributes over 70% to the total revenue of banks. Therefore, to maintain high profit, banks should work out strong solutions such as restructuring the loan portfolio to improve profitability and boosting the development of banking services to reduce the dependence on credit and others.