Understanding bank profit trends and cost structures

In the early months of 2024, banks with a high proportion of corporate loans such as LPBank, Techcombank, and HDBank maintained stable credit growth rates. On the other hand, state-owned banks (which hold nearly half of bank credit) and other banks specialising in retail loans reported much lower growth.

Understanding bank profit trends and cost structures, illustration photo/ Source: freepik.com

According to reports of 27 listed commercial banks for Q1 2024, total income from lending, services, and securities decreased by approximately 2.6 per cent compared to Q4 2023. However, banking earnings still showed a growth of 9.6 per cent compared to the previous quarter due to better operational cost management scheme implemented with different strategies from commercial banks.

Commercial banks specialising in corporate lending such as Techcombank, VP Bank, SHB, and MSB all recorded superior profit growth compared to the average. In contrast, state-owned banks and those focusing on retail lending such as ACB, VIB, Sacombank, and STB faced challenges in profit growth due to weak consumer borrowing demand. The profitability growth trends of these banks in subsequent quarters will vary, depending on their cost structure and business characteristics.

In terms of the impact of cost structure on bank profits, banks always aim to optimise costs and their existing customer network to achieve good profitability, especially in the context of low interest rates. Therefore, to evaluate profit prospects, it is crucial to understand the cost structure of each bank.

State-owned banks consistently belong to the group with the lowest proportion of interest costs in the industry. Their reputation and the important position in the banking industry help engage significant transaction deposits, maintaining current account saving account (CASA) ratios ranging from 20 to over 30 per cent, which greatly supports reducing interest costs.

Banks specialising in corporate lending, such as Techcombank and MBBank, have the lowest proportion of interest costs due to the efficient CASA ratio. Effective service to existing customers and a focus on corporate lending are key to the CASA strategy. This strategy requires technological systems, data analysis of customer needs, and skilled financial advisory staff.

Banks like ACB and Sacombank focus on retail loans, resulting in higher cost of deposits, mainly paid for individual saving deposits. Meanwhile, operational and service costs are also higher to maintain extensive branch networks and staff serving individual customers and smaller businesses.

Smaller-scale banks have the highest deposit interest rates among bank groups, the cost of deposits accounting for around 70-80 per cent of their cost structure. These banks maintain deposit interest rates, especially for 12-month periods, that are 1-1.5 per cent higher than state-owned banks. High funding costs and a low CASA ratio result in very high interest costs for these banks, thereby limiting resources for infrastructure expenses and workforce recruitment.

In the banking sector, banks also need to make provisions for credit risks. Credit provisioning costs are more unpredictable compared to other expenses and directly impact the profitability of banks. However, managing these provisions is challenging due to external factors such as economic fluctuations and the financial health of borrowers.

A notable point in the current financial results of banks is that most have reduced provision expenses for credit losses compared to the previous quarter, showing differentiation among banks. State-owned banks significantly increased provisions in this quarter, despite slower growth in non-performing loans (NPLs).

For commercial banks specialising in corporate lending, most showed a decline in provisions in Q1 2024. Regarding the scale of non-performing loans, only OCB and SHB decreased compared to the previous quarter. Techcombank also improved its ratio, driven by faster loan growth relative to the increase in NPLs.

Among banks specialising in personal loans, ACB and Sacombank increased provisions compared to the previous quarter. Meanwhile, VIB and VPBank, which had a high proportion of household consumer loans, faced pressures in increasing provisions when coverage ratios were around 50 per cent with relatively high NPL ratios exceeding 3 per cent.

For other commercial banks, significant portions of their expenses were allocated to interest costs, necessitating correspondingly higher lending rates to achieve profits.

When the continued extension of Circular No.02/2023/TT-NHNN, banks specialising in corporate lending and small-scale banks may gain advantages in profit growth by reducing provision for credit losses compared to the other two banking groups. Particularly for banks focusing on corporate lending, aggressive credit growth promotion could help improve their CASA ratio and deposit costs, thereby positively impacting profitability.

The remaining two groups – state-owned banks and retail banks – may struggle to maintain profitability as they continue to keep low lending interest rates to stimulate market demand when consumer credit demand is low.

Retail segment brightens bank profit picture Many banks have unveiled their third-quarter business results, showing a spike in their profits, leveraging well-conceived retail lending development strategy amid restricted credit line.

Factors affecting bank profit outlook this year Although the profit picture of most banks was upbeat in the first half of this year, the factors that have a key impact on bank performance in the second half are forecast to change.

(*) Le Hoai An, chartered financial analyst