HSBC, ANZ reports not confident in credit growth

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“While this move signals the central bank’s effort to spur credit growth, we do not think it will substantially alter credit conditions,” said Trinh Nguyen, an HSBC economist.

The bank said interest rates were not the issue as they are already attractive and there is a surplus of dong available. The elephant in the room is Vietnam’s bad debts, which remain largely unaddressed.

From March 18 the State Bank cut the deposit cap on maturities of less than six months by 100 basis points to 6 per cent. The policy refinancing rate was cut by 50 basis points to 6.5 per cent.

The discount rate was cut from 5 to 4.5 per cent and the repurchase rate was lowered to 5 from 5.5 per cent, said the central bank.

The move, according to governor Nguyen Dong Tien, is to spur credit growth, which has actually shrunk in the first quarter this year.

As of March 13, the lending rate dropped 1.05 per cent against the end of 2013, but the State Bank has maintained its target of 12-14 per cent lending growth this year.

Pham Hong Hai, deputy managing director at HSBC Vietnam also said the rate cut was concurrent with the State Bank’s affirmation in late 2013 that it would continue cutting the lending rate.

 “The rate cut was supported by factors including curbed inflation and low demand for loans, and therefore a lower rate is expected to stimulate demand,” said Hai.

Negative credit growth so far this year suggests Vietnam’s banking system will likely remain frozen unless significant reforms are implemented to resolve bad debt issues. Excess dong in the financial system reflects low risk appetite, said HSBC in a report.

But the report added that a lower deposit cap will likely motivate savers to pursue other assets with higher yields.

ANZ, in a similar report, also expressed concern about the issue of bad debts in Vietnam’s banking system. It noted that high performing loans continue to plague banks’ balance sheets with various estimates ranging from the official number of 3.79 per cent to Moody’s estimate of 15 per cent.