The central bank's back-to-back interest rate cuts this year has enabled banks to lower borrowing costs. This move is likely to highlight differences in net interest margin (NIM) in the last two quarters of the year.

Capital absorption capacity remains weak As of September 29, outstanding loans in the banking system totaled nearly VND12,700 trillion, a 6.92% increase compared to the end of 2022, according to Deputy Governor Pham Thanh Ha of the State Bank of Vietnam (SBV). The central bank has set a credit growth target of 14-15% for 2023. In late July, it determined a credit growth limit for each bank, aiming for a total rate of 14%. The modest credit growth can be attributed to various objective factors, including reduced demand for investment, production, business, and consumption. Additionally, certain customer groups in need of loans fail to meet lenders' criteria, particularly small- and medium-sized enterprises. Moreover, in a challenging economic environment that increases business risk levels, banks find it extremely hard to determine whether to lend or not, as they must maintain credit standards to ensure credit safety. In the first nine months of 2023, banks gradually lowered lending interest rates, with corporate borrowers seeing a common reduction of 1-3 percentage points per annum, and individuals enjoying a 1-2.5 percentage point decrease. Some banks even introduced preferential credit packages offering interest rates as low as 7-8% per year for terms ranging from six months to one year. With the gradual economic recovery and attractive lending rates, it is expected that credit growth will accelerate in the remaining months of 2023. NIM will not sharply narrow With the substantial reduction in lending rates, there is a question looming: will banks see a further narrowing of their net interest margin (NIM) in the near future? In the first half of the year, there was a noticeable discrepancy among banks regarding the evolution of NIM. Banks where the State holds a dominant stake maintained a stable NIM, benefiting from low borrowing costs. In contrast, most private joint stock banks experienced a decline in their NIM, particularly those with a significant portfolio of consumer and real estate loans. Small banks grappling with liquidity issues posted a more pronounced contraction in NIM, while those with current account savings account (CASA) and access to cost-effective capital faced less pressure. During the second quarter, the overall NIM of the banking system, consisting of the 25 largest listed banks, stood at 3.41%, a year-on-year loss of 32 basis points, with 19 out of the 25 lenders reporting a decline. The general outlook for 2023 suggests that banks heavily reliant on corporate borrowers, holding substantial volumes of corporate bonds financed primarily by customer deposits, will likely experience a more significant NIM reduction compared to the average. Conversely, banks focusing on retail lending with diverse sources of capital, including other banks and individual customers, along with a high CASA ratio, should be able to maintain a relatively stable NIM. The State Bank of Vietnam's continuous reduction of policy interest rates throughout 2023 has aided banks in reducing their borrowing costs. However, the primary objective of these rate cuts is to encourage banks to lower their lending rates, providing only marginal benefits to NIM. Capital costs are expected to decrease more significantly as the effects of the third and fourth policy rate cuts at the end of the second quarter start to take full effect in the second half of 2023, according to VNDirect Securities Corporation. Nevertheless, an immediate improvement in NIM is not anticipated, as the priority remains on reducing lending rates to stimulate economic activities. Discrepancies in NIM between banks are expected to persist in the last two quarters of the year. Notably, the reduction in lending interest rates may be less pronounced at state-run banks compared to their private counterparts, as the former lowered their lending rates earlier to support the economy. Therefore, state-run banks are expected to have an advantage in NIM in the final months of 2023, given the significant drop in borrowing costs, while the decrease in output interest rates has been more modest. Many experts share the view that although the banking system's profit outlook was dim in the first half of 2023, it will likely improve in the third quarter due to declining deposit rates and a rebound in CASA, gradually aiding NIM recovery.