Profuse real estate lending on alert

illustration photo, source: freepik.com

Non-performing loans (NPLs) stemming from build-operate-transfer (BOT) projects are another roadblock for lenders and the domestic economy, according to National Assembly (NA) Chairman Vuong Dinh Hue at last week’s NA Standing Committee meeting.

“The NPLs from the BOT credit package for the National Highway No.1A are a formidable obstacle,” Hue said. “According to the latest data, the NPL ratio exceeds 2 per cent, mainly because the new regulations have offered favourable conditions for banks to reschedule, reclassify, and restructure debts. When the State Bank of Vietnam’s (SBV) Circular No.03/2021/TT-NHNN, on additional conditions for debt restructuring and extending the roadmap for restructuring debts provisions until 2023 expires, the NPL ratio will be higher.”

Hue also questioned the SBV about the issue at the meeting. “BOT highway projects will need more than VND300 trillion ($13 billion) of capital in 2022. Where will this money come from?” he asked.

According to Michael Kokalari, chief economist of VinaCapital, infrastructure spending surged by 35 per cent in 2020 to $20 billion or 6 per cent of GDP, and likely grew by a further 16 per cent on-year in the first half of 2021.

Next month, the Vietnamese government is set to formalise a plan to increase its infrastructure spending over the next five years by 38 per cent to $120 billion, compared with its aggregate infrastructure spending over the 2016-2020 period.

Meanwhile, Vietnam’s policymakers have been keeping a keen eye on the real estate sector in recent years, with activity accounting for 5-15 per cent of GDP in Southeast Asia, and 8 per cent in Vietnam, according to HSBC.

“The memory of the housing bubble in the 2007-2012 period, which ultimately led to a prolonged banking crisis, looms large in the collective conscience,” noted Yun Liu, economist at HSBC. “Even after a gradual recovery, real estate loans continue to account for a large proportion of bank balance sheets. While some banks do not have a specific classification of loans to the real estate sector, balance sheets of the four largest state-owned banks (Agribank, Vietcombank, VietinBank, and BIDV) reveal a key linkage with the associated construction sector.”

At the 10 largest banks in Vietnam, real estate loans account for roughly 70 per cent of the total value of collateral-based loans.

At Agribank and ACB, real estate collateral loans make up for 89 and 94 per cent, respectively. While lower than at other private banks, property-backed loans are also at high level, making up 69, 66, 68, and 84 per cent of the loan portfolios of VietinBank, Vietcombank, BIDV, and Sacombank.

The increasing appetite for the property sector is driven by an accommodative monetary policy that offers low interest rates and abundant liquidity.

Meanwhile, it is also driven by a sharp rise in the price of luxury condos, growing 9 per cent on-year in 2020 versus a 4-5 per cent on-year price increase in the mid-end and affordable segments.

Liu of HSBC also added that demand for luxury and high-end properties remains elevated, with their market share increasing from less than 30 per cent of total units sold in 2019 to more than 70 per cent in 2020. Foreign direct investment data reveals that even though new inflows into the real estate sector increased more than 200 per cent on-year as of May, such investment was largely concentrated in manufacturing.

Meanwhile, market watchdogs cautioned that property-backed credit is among the riskiest segments. The rapid growth of credit since the beginning of 2021 was cited as the main reason. By mid-April, total credit growth reached more than 15 per cent on-year.

“This is not the first time that the central bank has tightened its control over the property market to mitigate risks. The SBV has historically preferred to use macro-prudential policies to curb credit lending to the sector, targeting real estate developers rather than mortgage borrowers, as Vietnam still has a low mortgage penetration rate in ASEAN,” Liu explained.

Mortgages account for 40-90 per cent and of total household debt in the region, but the ratio is only about 25 per cent in Vietnam, according to the International Monetary Fund. Evidently, tightening the ratio of short-term funds that banks could use to fund medium- to long-term projects is one of the main tools.

The SBV is facing a delicate balance of curtailing excessive credit lending to real estate developers while reducing imminent COVID-19 risks to the sector, with it also being an increasing source of growth. Last year, the SBV delayed a roadmap to tighten capital requirements for an additional year.