Lending rates in Vietnam are driven chiefly by credit demand since its supply is pre-determined by SBV's annual quota. Meanwhile, deposit rates are influenced by the need to fund these assets, and are sensitive to depositors' expectations on inflation.
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Fitch Economists Point out the Impacts of Rising Interest Rates on Vietnam’s Banks

Monetary Stance Points to Only Mildly Higher Interest Rates

Capital account restrictions largely insulate interest rates in Vietnam from global monetary tightening. Annual credit targeting remains a centrepiece of the State Bank of Vietnam's (SBV) monetary policy framework, and the refinancing rate is not a primary policy lever. Moreover, strong foreign investment inflows underpin the dong's resilience, which has depreciated by only 2% YTD by end-July 2022, making it the second-best performing currency in APAC behind only the Hong Kong dollar. We expect the policy rate to rise 50bp to 4.5% by end-2023.

Local Rates Driven Chiefly by Economic Activity and Inflation

Lending rates in Vietnam are driven chiefly by credit demand since its supply is pre-determined by SBV's annual quota. Meanwhile, deposit rates are influenced by the need to fund these assets, and are sensitive to depositors' expectations on inflation. Interest rates are therefore edging up as economic activity and inflation quicken, but are little correlated with the US Fed's inclinations. Price pressures have intensified in recent months, but are manageable relative to other regional EMs and remain under the government's target of 4% for the year.

NIMs Buoyed by New Credit Demand Rather than Higher Rates

Vietnam's economic rebound and the SBV's guidance for banks to support the economy has caused loan growth to accelerate in 1H22 and the system loan/deposit ratio to race towards 100%.

Banks have been raising deposit rates in recent months to fund growth, while yields are also rising but partly constrained by social pressure to keep lending rates low to aid borrowers trying to get back on their feet after the pandemic. Nominal lending spreads are therefore little changed, but higher balance-sheet leverage is nevertheless lifting banks' NIMs.

Rapid Loan Growth and High Credit Intensity Key Asset-Quality Risks

System loans have grown by a CAGR of 14% in the past five years, and continue to outpace nominal GDP growth. This has pushed up the credit/GDP ratio further, which was already one of the highest among 'BB' rated markets. High and rising system leverage is a structural risk in the banking sector, with much hinging on the economy continuing to perform strongly. Corporate leverage is high and interest-rate hedges are uncommon, making borrowers vulnerable to any unexpected spike in interest rates.

Credit Reserves Improve, But Capitalisation Buffers Remain Thin

The rapid pace of credit expansion during the sharp economic slowdown of the past two years could contain latent impairment risks. Some of these risks may loom as pandemic debt relief has recently expired. SBV's Circular 3/2021 requires banks to provision for restructured loans in advance, and this is reflected in banks' significantly improved loan-loss reserves. However, capital ratios remain thin due to persistently high loan growth, which could leave banks vulnerable to any new economic shocks.

Diep Nguyen