Vietnam Commercial Banking Report Q1 2011

Weak Credit Growth To Depress Banking Sector Profits We believe credit growth in Vietnam will miss the government's target of 25.0% for 2010 as lending rates remain high at 13.0-14.0% as of July. Intense competition for deposits between commercial banks will also depress profit margins, further weakening banks' bottom lines in 2011.

However, we believe banks with greater exposure to the infrastructure sector and the consumer loans market will be in a better position to deal with the slowdown in 2010 and 2011. Vietnam's banking sector profits look set to be disappointing for full-year 2010 as credit growth is estimated to have already slowed to 10.5% year-on-year (y-o-y) in H110, compared to 17.0% in H109, according to the State Bank of Vietnam (SBV). The government is targeting credit growth of 25.0% in 2010 to support its real GDP growth target of 6.5% for the year. However, despite the government's pressure on commercial banks to lower lending rates to 12.0%, rates in July remained at 13.0-14.0%, according to local media reports.

Competition in the banking sector is also heating up as banks struggle to achieve their profit targets for the year. Inflationary Risks To Keep Lending Rates Elevated With consumer price inflation (CPI) coming in at 8.2% y-o-y in July 2010, banks are having trouble attracting funds without offering depositors higher returns. As such, deposit rates continue to remain elevated at 11.5% as commercial banks refrain from lowering their deposit rates due to intense competition for depositor funds. Banks have had to resort to offering gifts and bonus interest in order to attract funds.

This is putting them in a difficult situation in which slashing deposit rates risks driving depositors away, while keeping lending rates high discourages businesses from borrowing. The central bank has also been pressuring commercial banks to lower their lending rates, which means that profit margins for the banking sector will continue to be squeezed.