Typhoon Yagi debt relief measures could impact bank profitability in Vietnam

The State Bank of Vietnam (SBV) has instructed banks to offer loan assistance to individuals and businesses devastated by typhoon Yagi, which caused widespread devastation this month, causing significant material damage and deaths, especially in northern regions.

In response, banks are expected to reduce loan rates by 0.5% to 2% for both new and existing borrowers by the end of 2024. The extent of assistance provided will depend on the severity of the damage faced by debtors.

S&P Global Ratings’ report stated that this debt relief effort comes at a time when banks in Vietnam are already struggling with declining returns on assets.

The banking industry is competing aggressively to extend loans to high-quality borrowers as part of efforts to meet the SBV’s 15% loan growth target as loan demand slows. The contraction in domestic consumption further affected credit demand; many banks are already facing shrinking margins.

It was stated that reducing interest rates within the scope of debt relief measures will increase the pressure on banks’ profitability.

According to the SBV, banks are preparing to offer concessional loans of up to VND405 trillion (US$16.2 billion) at discounted interest rates, representing about 3% of the sector’s total outstanding loans.

State-owned commercial banks (SOCBs) are expected to be the most affected by these relief measures, due to their extensive networks in the northern regions where the damage from Typhoon Yagi was most severe.

For example, Vietcombank, one of the four SOCBs, has an estimated VND160 trillion in outstanding loans eligible for debt relief. This represents approximately 12% of the bank’s total loan portfolio, well above the industry-wide average of 3%.

However, it is believed that Vietcombank will manage this impact well thanks to its strong profitability. The bank reported a 1.73% annualized return on assets in the second quarter of 2024, positioning it as the most profitable SOCB in the country.

Privately owned commercial banks also offer debt relief but on a smaller scale than SOCBs, given their relatively small loan books.

According to S&P Global Ratings, next year will be a critical test for the asset quality of Vietnamese banks. Debt relief may temporarily ease the repayment burden for borrowers and help keep non-performing loan (NPL) rates stable, but may create difficulties when the relief period and the Circular 02 credit restructuring policy ends at the end of 2024.

The increase in non-performing loans after the end of these measures may cause banks to allocate additional provisions, which may further affect the profitability of the sector. While the domestic real estate market is still recovering, the full effects of this crisis on the banking system have not yet been seen.

Typhoon Yagi, Asia’s strongest storm this year, caused damage in northern Vietnam estimated at VND81.5 trillion (US$3.31 billion), or twice previous estimates, state media said on Saturday.