Vietnam banks buck the trend as regional lenders struggle with profit risks

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Signs for two lenders - Techcombank and Bac A Bank - festoon a busy street in Hanoi.
JULY 30, 2020 - 11:19 AM

WHILE the coronavirus pandemic poses a threat to many regional banks, Vietnam’s finance sector has been sheltered so far by income growth and a younger population.

Other Asia-Pacific economies, such as the Philippines, Malaysia and Indonesia, are also tipped to clock growth in “prime-age populations” in the next decade.

But Vietnam, in particular, has been lifted by a mix of this favourable demographic structure as well as income growth, according to a report by Moody’s Investors Service.

Still, Moody’s also noted that the continued profitability of Asia-Pacific banks will depend on whether they can adapt their business models in line with changing demographics.

That’s as regional banks’ profitability is expected to take a hit in the next few years from low interest rates, rising credit costs and operating expenses.

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For instance, weaker asset quality will likely drive up credit costs, while a shift towards digital banking services comes with a heftier price tag for operating expenses.

Return on assets was on the decline between 2014 and 2019 in 12 out of the 17 regional banking systems tracked by Moody’s, on a drop in net interest income as a share of assets.

Yet Vietnam was an outlier, as profitability “improved significantly” in this period - which Moody’s attributed in part to “robust economic growth and the expansion of the middle class”.

Credit growth was “buoyed by its young and urbanising population with steadily increasing wages, as well as increasing use of credit by consumers to make purchases”, Moody’s added.

Its data also placed Vietnam among the few Asia-Pacific markets where banks’ cost-to-income ratio has decreased from 2014 to 2019, coming down by about 10 points to roughly 45 per cent.

Meanwhile, Moody’s suggested that banks in Asia pursue other revenue streams and expand overseas to cut down on a reliance on net interest income from domestic markets.

Moody’s also urged lenders to forge ahead with digitalisation, since the ability to offer products and services digitally will let banks overcome geographical barriers to reach new customers.

“However, these options have their own challenges, especially for laggard banks that lack the vision or resources to overhaul their business models,” the report added.

It also noted that efficiency gains from digitalisation could be limited in the near term, as banks  may opt to reinvest the cost savings in technology development.