10:03 | 05/10/2015 Finance - Banking
(VEN) - Credit has increased but profitability has reduced with banks accepting lower profits in order to pump more capital into the economy.
VPBank increased its risk provision funding in the second quarter of this year by almost seven-fold against a year ago
Credit has increased to its highest level for four years
According to the State Bank of Vietnam’s Department of Credit for Economic Sectors, by August 25, 2015, credit had increased by 9.54 percent from the end of 2014, compared with 4.33 percent in the same period last year. This also marked a four-year high.
Credit flows have poured strongly into prioritized areas. Specifically, credit for agricultural and rural development reached almost VND811.64 trillion by the end of August, a nine percent increase from the end of last year. The balance of outstanding loans for four remaining areas had also increased sharply by the end of June including almost VND184.6 trillion for exporters, an increase of 4.99 percent against the end of last year, more than VND25.61 trillion for businesses applying new technologies, an increase of 29.12 percent, VND110.62 trillion for support industries, an increase of 3.2 percent, and almost VND976.73 trillion for medium to small-sized enterprises, an increase of 4.07 percent.
With flexible credit policies, since the beginning of the year, banks have provided a full range of loan programs, rather than sitting and waiting for corporate borrowers.
The credit growth reflected the current economic recovery and that the loans had greatly facilitated production and trading.
However bank profitability has fallen as part of the efforts by the state bank to curb bad debts in the sector to less than three percent by the end of September 2015. Banks have been compelled to bolster their risk prevention funds.
Risk prevention funding at banks soared suddenly in the first quarter of this year. For example, Techcombank set aside almost VND1.39 trillion for its risk fund, accounting for 60 percent of its risk prevention funding in 2014; BIDV earmarked more than VND980 billion, an increase of 41 percent from a year ago; and VPBank allocated more than VND800 billion, an increase of 82 percent. Although credit and profits continued to increase rapidly in the second quarter of the year, bank net profits fell after risk provisioning. BIDV increased its raised capital by 16 percent and loans by 21 percent, while watching its profits fall seven percent after setting aside almost VND2.59 trillion to cover its risks, accounting for 66 percent of its total net profit. VIBank also increased its risk prevention funding in the second quarter of this year by almost seven-fold from a year ago to VND860 billion.
Increased credit and reduced profit were predicted since banks were determined to reduce the ratio of bad debts and increase their risk provisions understanding that safely controlling capital flows would help them grow in a more stable manner in the time to come.
With a four-year record high in credit growth in the first eight months of this year, the State Bank of Vietnam remains optimistic about achieving a credit growth rate of 17 percent by the end of the year.