10:33 | 29/04/2014 Finance - Banking
(VEN) - Although the securities market improved somewhat in 2013, bank shares remained unattractive to investors. The macroeconomic situation in general and the securities market in particular however are expected to see positive changes in 2014. In the first quarter of this year, despite improvement in bank share valuations, it is likely the shares will not recover their former luster in the near future.
2014 is forecast to continue to be a challenging year for the economy, with major targets of maintaining macroeconomic stability, controlling inflation and achieving a reasonable growth. Many expect that the economy will grow well in 2014. Securities are expected to become more attractive than other investment channels this year. Gold might become less attractive for investment as the State Bank continues to regulate gold prices through auctions and gold prices abroad have tended to decrease. Interest rates are expected to be similar to or lower than those in 2013 so savings are unlikely to offer an attractive investment channel. The foreign exchange rate is forecast to remain stable and changed by no more than two percent, so currency speculation and hoarding is unlikely, while real estate lacks appeal. Therefore, securities are expected to become a major investment channel in 2014.
Compared with other countries in the region, reasonable share prices could help bolster the Vietnamese securities market’s development. The political instability in some countries might also provide an opportunity for Vietnam's securities market to attract more capital flows from both domestic and foreign investors in 2014.
However, experts said that there wouldn’t be many opportunities for bank shares to significantly develop in 2014, mostly due to difficulties of the banking sector.
It’s hard to improve net interest margin (NIM)
Vietcombank Securities (VCBS)’s statistics showed that the NIM of banks decreased to 2-3 percent in 2013, as new loans were applied to a low interest rate of 7-11 percent per year. Meanwhile, credit didn’t grow strongly enough to offset the decline in the NIM. Data announced in early February showed that leading banks almost reached their 2013 targets.
According to a VCBS report, the economy is expected to rebound in 2014 so credit operations are forecast to improve. Therefore, the 12-14 percent loan growth target set by the State Bank is feasible and the banking sector is expected to reach a credit growth of 13-15 percent. With a forecast inflation rate of 5.5-6 percent for 2014, interest rates might be similar to those in the second half of 2013. The State Bank issued documents providing guidelines for organizations to run efficiently and reduce costs to lower loan interest rates. VBSC says that lower interest rates will mainly be applied to existing loans, and interest rates subject to new loans are already low so they are unlikely to decrease considerably.
VCBS assessed that the NIM will hardly be improved in 2014. The trend of promoting credit through the application of preferential interest rate policies will continue in the coming year.
"The banks continue to invest in government bonds although the interest rates are not as attractive as they were in 2013. However, considering the safety and liquidity of government bonds as well as interbank interest rate conditions, the banks will continue to choose investing in government bonds to maximize their capital efficiency, according to VBSC.
A hard journey
Bank share prices increased less than one percent in 2013, while the restructuring of the sector will continue to be promoted in 2014. Many banks will have to concentrate their resources on restructuring, which could affect profits. So, this will continue to be a challenging year for bank shares as there are likely only modest gains to be made, despite the security of no sharp decreases in valuations.
According to Standard & Poor’s Vietnam banking sector outlook in 2014, Vietnamese banks will continue to face challenges related to the quality of assets, low profits and weak capital capacity in the next 12 months; the profits of the banks will remain low and their return on assets (ROA) is forecast at 0.8-1 percent in 2014 because loan interest rates, especially those for prioritized fields and projects, have reduced faster than deposit interest rates, making the difference between loan and deposit interest rates considerably narrower.
VCBS said that bad debt and restructuring remain two key issues to be resolved in 2014. The bad debt ratio may rise after the application of Circular 02 but the increase could be small thanks to specific changes in the circular and bank efforts in easing bad debts. The State Bank said that Circular 02 will officially take effect from on June 1, 2014.
Some amendments will be made to satisfy the banking sector’s actual development needs. After the amendments are made, the banks would not be required to use the classification results of the Credit Information Center (CIC) to classify the debt until January 1, 2015, and debts that are incompliant with laws of Vietnam or credit institution regulations would be classified as bad debts. Apart from the regulation on corporate bond classification, these potential amendments are expected to be the most difficult points of Circular 02. The amendments are expected to help significantly reduce the pressure of bad debts on the banks.
VCBS said that bank share prices would improve slightly compared with the previous year, but will hardly register a breakthrough because the banking sector’s profits will continue to be affected by bad debts and the decreased NIM.
Some said that banks shares are caught in a vicious circle. Rising bad debts affect profits and decreased profits affect bank capital reserves. Therefore, more and more banks have issued shares to increase their capital. However, the supply of bank shares has exceeded demand so it will be difficult to attract buyers. This makes it difficult for the banks to increase capital to avoid risks, and potential risks will make bank shares unattractive./.
Unofficial statistics show that there are about 30 banks that haven’t listed their shares; instead their shares are traded at VND4,500-15,000 per share on the over-the-counter (OTC) market, which are lower than their accounting book value. Explicit information and basic values will help bank shares attract investors.
By Nguyen Thi Thanh Hang, the Banking Academy