Interest rate cuts seen eating into banks’ profits

HCMC – The chief economist of the Bank for Investment and Development of Vietnam (BIDV), Can Van Luc, has predicted the banking system may earn lower profits in 2023 than in previous years due to falling interest rates, the Vietnam News Agency reported.

The State Bank of Vietnam (SBV) has lowered policy interest rates four times this year, leading to commercial banks cutting deposit and lending rates, as the economy has showed signs of attaining slower growth in the first nine months of the year, Luc was quoted by the news agency as saying.

He added the rate cuts have eroded the profitability of banks.

The BIDV Training and Research Institute has projected GDP would expand a mild 5-5.5% this year, below the National Assembly-approved target of 6.5%.

Banks have grown cautious about lowering deposit rates further for fear that depositors may withdraw cash from banks to find alternative investment avenues.

The net interest margin (NIM) in the banking system has narrowed from 3.3% in 2022 to an estimated 3% this year, resulting in an unfavorable profit outlook for banks.

Luc said that banks are increasingly focusing on digital transformation as a potential area for growth. Cutting-edge technologies like blockchain, artificial intelligence, and big data analytics are gaining traction among financial institutions.

The SBV has estimated bad debt at around 5% of total outstanding loans, up from 4.5% at the end of 2022.

Major banks like VPBank, Techcombank, and SeABank have already reported negative profit growth in the first quarter of this year.

Luc predicted that the banking sector’s profits in all of 2023 may grow at a significantly lower rate than in 2022, at 13-15%. This trend is expected to continue into the next few years.

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