Notable Banking And Financial Trends

Although there are some positive signs in the world situation compared to the initial forecast of international organisations, overall, the global economy is still facing difficult challenges, and Vietnam is no exception. The article Notable Banking and Financial Trends in 2023 below will give readers an overview of the highlights of the banking and finance industry in Vietnam in the past year.

1. Notable financial trends in 2023

• Effective management of extended financial policy

In 2023, Vietnam is facing numerous difficulties and challenges. In this context, several support policies have been implemented, particularly financial measures aimed at assisting the public and businesses. This marks the fourth consecutive year that the Ministry of Finance has introduced and implemented support policies with a total scale of around 200 trillion Vietnam dong.

Prominent financial support measures include a 2% reduction in the value-added tax (VAT) rate from 1 July 2023 to 31 December 2023 for the majority of items with a 10% VAT rate. The estimated amount of tax reduction is around 24 trillion Vietnam dong. Additionally, the Government has extended the deadline for payment of VAT, corporate income tax (CIT), personal income tax (PIT), and land rent in 2023 for businesses and individual business owners, with the anticipated reviewed extension amount exceeding 110 trillion Vietnam dong. Furthermore, Decree No. 36/2023/ND-CP dated 21 June 2023, also extends the deadline for special consumption tax (SCT) payment for domestically produced and assembled cars, with the estimated extended tax payment amount ranging from approximately 10,4 trillion to 11,2 trillion Vietnam dong.

• Digital transformation towards intelligent financial systems

In 2023, the Ministry of Finance continues to maintain its leading position in the Public Administration Reform (PAR) Index with an achievement rate of 89,76%, marking the ninth consecutive year from 2014 to 2022. The Ministry of Finance is also among the top performers in the index of financial public administration reform, with a rate exceeding 96%. The government has set the goal of “accelerating modernisation and developing a digital financial platform” in the Financial Development Strategy until 2030.

The Ministry of Finance is focusing on the effective implementation of large-scale information systems, primarily in the areas of tax, customs, and treasury, closely integrating with the national digital transformation program. The nationwide Electronic Invoice system has received and processed nearly 6,1 billion invoices, including 1,7 billion coded invoices and over 4,4 billion uncoded invoices. The Ministry of Finance has also initiated several new projects, such as the digital map of business households, the Big Data analysis system, and Artificial Intelligence (AI) to manage electronic invoices.

Additionally, the General Department of Taxation under the Ministry of Finance has been recognised by the Ministry of Information and Communications as one of the four outstanding online public services, particularly for the “VAT declaration service with deduction method for production and business activities”. The Ministry of Finance has also extensively implemented automatic payment processes for electricity, water, and telecommunication services on behalf of budget-using units.

• Fitch ratings upgrades Vietnam’s long-term national credit rating to BB+ with a stable outlook

On 8 December 2023, Fitch Ratings upgraded Vietnam’s long-term national credit rating to BB+, with a “Stable” outlook. Fitch’s decision to raise Vietnam’s national credit rating comes amid global challenges of slowing growth, economic and trade uncertainties, as well as increasing financial risks in many countries. This upgrade reflects the highly positive assessment from the international community regarding the proactive efforts of the Vietnamese Party, National Assembly, and Government in macroeconomic stabilisation and economic recovery. It also acknowledges the commitment of the Ministry of Finance and relevant ministries and sectors to regularly update and convey information about Vietnam’s economic and social development achievements and results to credit rating agencies and the investor community. Financial markets continue to be strengthened, addressing difficulties promptly to promote healthy, transparent, and open development.

• Stringent and efficient public debt management

By the end of 2023, Vietnam’s public debt is estimated to be around 37% of GDP, significantly lower than the parliamentary ceiling of 60%. Government debt is approximately 34% of GDP, also well below the set limit of 50%. This debt level is even much lower than the 2023 average for countries rated BB (52,8% of GDP) and BBB (54,9% of GDP).

Vietnam’s debt structure is positively evaluated, with domestic debt increasing and accounting for about 71% of government debt, helping to minimise risks from exchange rate fluctuations. Domestic debt primarily consists of long-term maturity issuance, such as delayed payment promissory notes, helping to reduce risks from debt rollovers. On the other hand, external debt is gradually decreasing in the government’s borrowing structure, with the external debt portfolio mainly comprising long-term and preferential interest rate loans. This contributes to enhancing sustainability against global fluctuations in foreign exchange rates.

• National Assembly adopts resolution on global minimum tax

In order to safeguard Vietnam’s legal rights and interests and foster trust among multinational corporations for continued investment expansion in Vietnam, the Ministry of Finance has tasked the General Department of Taxation with leading a study to assess the impacts and draw on international experiences to formulate a global minimum tax policy.

On 29 November 2023, during the 6^th session of the 15^th National Assembly, Resolution No. 107/2023/QH15 on global minimum tax was officially adopted. This is a necessary step, and with its implementation starting from 1 January 2024, Vietnam affirms its position and tax authority as a nation. This move contributes to increasing revenue for the state budget through additional tax collections, enhancing international integration, and reforming the tax system in accordance with international practices.

2. Notable banking trends in 2023

• The State Bank of Vietnam lowers policy interest rates four times – record-low deposit rates

Vietnam’s monetary policy has faced pressure from the continuous interest rate hikes by the U.S. Federal Reserve System (FED) and many other major central banks worldwide in 2023. However, to support economic growth, the State Bank of Vietnam has implemented measures to reduce interest rates, adopting a divergent policy by consistently lowering the policy rate in four consecutive cuts, occurring on 15 March, 3 April, 25 May, and 19 June.

As a result, the reduction in the policy interest rate has been in the range of 0,5-2% per year. Currently, the refinancing rate has decreased to 4,5% per year, and the discount rate is 3% per year. The ceiling interest rate for fixed-term deposits from 1 month to less than 6 months is 4,75% per year.

Contrary to the liquidity tension that led to high deposit interest rates at the end of 2022, a strong reversal has taken place since the second quarter of 2023. Compared to the initial interest rates of around 9-10% per year, current interest rates are now only around 5% per year for a 12-month term. Despite the deposit interest rates at major banks reaching historic lows, people continue to deposit money actively, reaching nearly 6,5 quadrillion Vietnam dong by the end of September 2023, an increase of 9,95% compared to the beginning of the year.

For short-term deposits of less than 6 months, current deposit interest rates are also much lower than the prescribed ceiling. For instance, at Vietcombank, the interest rate for a 1-month term is only 1,9% per year, and for a 3-month term, it is 2,2% per year.

• Excess liquidity in banks – credit growth limited to 11%

Leadership at the State Bank of Vietnam has repeatedly emphasised that 2023 poses unprecedented challenges in terms of management. The global economic situation, coupled with domestic difficulties, has significantly reduced the demand for loans from both individuals and businesses. Despite the banking sector’s efforts to boost capital supply into the economy, credit growth has remained very low. According to the latest data as of December 20, total credit to the entire economy has increased by only 10,85% compared to the beginning of the year. Although there has been a notable improvement in the late stages of the year, it still falls short of the 14% growth target set by the State Bank for the system.

To stimulate credit growth, the State Bank of Vietnam implemented adjustments to the credit limits at the end of November, creating favorable conditions for banks with the capability of achieving stronger growth.

The slow credit growth has also led to a significant excess liquidity situation within the system. Interest rates in the interbank market and deposit rates have both decreased significantly over the past year. While lending rates have also seen reductions, with a delay, the average lending rate for both new and existing loans still remains in the range of 8,3-10,5% per year. The average short-term lending rate for priority sectors is around 3,8% per year.

• Business downsising plan, sharp increase in bad debt

The business outcomes of banks are currently experiencing divergence, yet an overall “grey” trend seems to prevail. Statistics for the first 9 months of 2023 reveal that 16 out of 28 banks have reported a decline in profits compared to the same period in 2022.

State-owned banks such as Vietcombank, VietinBank, and BIDV have seen positive profit growth. Conversely, some major private banks like Techcombank and VPBank have reported lower profits compared to the same period. Simultaneously, numerous smaller banks like ABBank, VietABank, BacABank, and some mid-sized banks such as TPBank, SeAbank, and Eximbank have experienced a decrease in profits.

A notable point is the sharp resurgence of bad debts due to customers’ reduced repayment capacity, notwithstanding measures such as debt restructuring that have been implemented. By the end of September 2023, only one bank on the stock exchange maintained a non-performing loan ratio below 1%, which is BacABank. Conversely, the non-performing loan ratios at leading banks in asset quality, such as ACB, Techcombank, and Vietcombank, which had been below 1% for many years, have surpassed this threshold in 2023. Additionally, most banks have reported a decrease in the ratio of provisions covering bad debts this year.

• Tightening short-term capital ratios, extending medium to long-term loans to 30%

The new regulations under Circular 08/2020/TT-NHNN, issued by the State Bank of Vietnam and effective from 1 October, have adjusted the maximum short-term capital ratio for medium and long-term loans of banks from 34% to 30%. This will have significant implications for the operations of banks.

These regulations will exert pressure on the demand for mobilising long-term capital, increase the cost of capital, and create pressure to narrow the Net Interest Margin (NIM) for banks. However, in the long term, this policy aims to support the soundness of credit activities and ensure liquidity for the system.

Analysts believe that these new regulations will also impact real estate businesses and banks specialising in providing capital for this sector, given the nature of long-term loans. Therefore, banks will need to explore solutions to enhance long-term capital sources, possibly through issuing bonds or seeking funding from the international market.

• The State Bank of Vietnam strives to stablilise exchange rates

After a relatively stable period in the first half of the year, the USD/VND exchange rate experienced significant fluctuations in the third quarter and early fourth quarter. By the end of November, the USD price at many banks reached 24,750 Vietnam dong when sold, a 4,3% increase compared to the beginning of the year and only 0,6% below the peak set in the fourth quarter of 2022.

The domestic USD/VND exchange rate is facing significant pressure due to the DXY index – a measure of the strength of the greenback – experiencing its longest winning streak in nearly a decade, reaching 107 in the early fourth quarter after the FED demonstrated toughness in its September policy meeting.

In addition to pressure from the international market, factors related to short-term USD supply and demand and the USD-VND interest rate differential are considered the main reasons for the sharp increase in the exchange rate. To alleviate this pressure, the State Bank of Vietnam reopened the channel to absorb money through treasury bills on 21 September, after a temporary suspension of more than 6 months. This move aims to adjust short-term liquidity in the system and at the same time boost the interbank VND interest rate, reducing the interest rate differential between USD and VND.

With the cooling down of the exchange rate, the State Bank decided to stop issuing new treasury bills from early December and proceed to inject liquidity back into the VND that had been absorbed in the previous period. This action demonstrates the flexibility and adjustment of the State Bank’s policies, aligning with market conditions at each stage.

• Accelerating digital transformation

Many banks conduct over 90% of customer transactions through digital channels; numerous financial institutions operate more efficiently through active digital transformation, reducing the Cost-to-Income Ratio (CIR) to around 30%, approaching the ratio that many regional and international banks are striving for in their digital transformation efforts. Approximately 74,63% of adults have a bank account, and 3,71 million Mobile-Money accounts have been opened, with over 70% established in rural, remote, and underserved areas.

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