Vietnam Banks Break Loan Rules to Meet Demand: Mortgages

Nguyen Thi Bich Ngoc, a hotel sales manager in Hanoi, is among Vietnamese buyers being lured back to the property market by lower interest rates and cheaper homes.

“Until recently I didn’t have any strong intention to buy a house,” says Ngoc, who borrowed four billion dong ($192,000) to purchase a three-story property about 1 kilometer south of Ho Chi Minh’s mausoleum. “Property prices are going down. Interest rates are good. The timing is very good.”

Home loan applications have jumped since March, with buyers lured by 500 basis points of interest rate cuts, price declines of as much as 15 percent, and smaller, more-affordable apartments being offered by developers. Banks are skirting rules and may risk a cash crunch to meet demand: all have violated the central bank’s 30 percent cap on the use of short-term funds for loans with terms longer than a year, State Bank of Vietnam Governor Nguyen Van Binh said July 20.

“If you increase your exposure to the mortgage market but still have a lot of short-term funding, you will end up with a massive funding mismatch,” said Fiachra MacCana, managing director of Ho Chi Minh City Securities Corp. (HCM) “The banks already have a massive funding mismatch, they can’t really push it too much out there.”

At Joint-Stock Commercial Bank for Foreign Trade of Vietnam, the country’s largest listed lender by market value known as Vietcombank, home loans rose more than 15 percent in the second quarter.

Ignoring Risk

Banks are ignoring the funding risk for now, betting mortgages are safer than commercial loans as businesses struggle with rising inventories and an economic downturn. Total credit expansion slowed to 0.93 percent in the first seven months from the end of 2011, the government said July 31, compared with its target of 14 percent to 15 percent for the full year.

“Banks now want to turn to mortgage loans because business loans are not going anywhere,” said Alan T. Pham, Chief Economist at VinaCapital Group in Ho Chi Minh City. “Banks are afraid of more non-performing loans, more bad debt from business, so they think that home owners are safer.”

Bad debt in the Vietnamese banking system remains on an “uptrend,” Vu Duc Dam, chairman of the Government Office, said at a July 31 press conference in Hanoi. Bad debts rose to 4.47 percent of total lending as of May 31, from 3.07 percent at the end of 2011, according to the country’s central bank.

Bad Debt

Non-performing loans are “significantly understated” and could be three or four times higher than the official estimates, Fitch Ratings said in a March report. Vietnam’s finance ministry will buy collateralized bad-debt from commercial banks to strengthen their balance sheets under a plan to overhaul the industry by 2015 approved by Prime Minister Nguyen Tan Dung in March.

Banking stocks are up as much as 54 percent this year on the monetary easing and plan to buy bad debt. Stocks may continue to climb as more details of government plans to remove bad-debt from banks’ balance sheets emerge, even as earnings are dented by credit provisions, said Michel Tosto, director for institutional sales and brokerage at Ho Chi Minh City-based Viet Capital Securities.

“From a trading perspective, they will probably do well in the next rally,” he said.

Still, banks’ ability to profit from the uptick in demand for loans is being hindered by the lack of a long-term bond market, MacCana said. Of 182.4 trillion dong of outstanding government bonds, 15-year debt accounts for around 0.5 percent of issuance, compared with 44 percent issued with a five-year tenor, according to data compiled by Bloomberg.

Lower Rates

Vietcombank, rated B+ by Standard & Poor’s, has set aside 2 trillion dong for home loans between May and September, with interest rates as low as 12 percent, according to Pham Thuy Nga, director of retail banking. The lowest rate offered before the central bank started its rate cuts was 18 percent, according to Nga. The lender is Vietnam’s fourth biggest bank by assets.

The State Bank of Vietnam has lowered its key refinance rate by 500 basis points since March to 10 percent, as annual inflation plunged back toward single digits from a high of 23 percent in August last year.

Vietnam Joint Stock Commercial Bank for Industry and Trade, the country’s third-largest lender by assets known as VietinBank, will allocate 5 trillion dong in the second half of this year for home loans, according to a July 30 e-mailed statement in response to questions from Bloomberg. The B+ rated lender will offer preferential annual interest rates of 12 percent on the loans.

Debut Sale

VietinBank, the second-largest lender by market value on the Ho Chi Minh City stock exchange, sold $250 million of U.S dollar-denominated bonds, the first issue by a Vietnamese commercial bank, according to data compiled by Bloomberg.

The 8 percent notes due in May 2017 yield 8.38 percent, according to prices from ING Bank NV. The notes pay the highest coupon of any U.S. dollar bond sold by a commercial bank in South East Asia in the last year and maturing within the next five years, Bloomberg data show.

The State Bank of Vietnam could provide an additional boost for home buyers before the end of 2012 by adding to its interest rate cuts as inflation continues to slow. Vietnam’s consumer prices rose 5.35 percent from a year earlier in July, the smallest increase since November 2009.

“People were deferring some of their investments, trying to understand where borrowing costs would go,” said Simon Morris, Chief Executive Officer of closely-held Vietnam Technological & Commercial Joint Stock Bank, or Techcombank, where mortgage applications have risen as much as 30 percent since the rate cutting started. “We’re now looking at things starting to take off.”

Economic Growth

Foreigners can invest in Vietnamese property and securities, subject to restrictions. The combined foreign holding in a domestic listed bank’s equity is capped at 30 percent of registered capital, with a single overseas investor’s stake limited to 20 percent.

Vietnam’s economic development accelerated after the government adopted its doi moi, or “renovation,” reforms in 1986. The shift to a “socialist-oriented market economy” replaced the central economic planning pursued by the country following formal reunification in 1976, a year after the last U.S. forces withdrew from Saigon, now Ho Chi Minh City.

The size of the economy more than doubled between 2005 and 2011 as foreign investors flocked to the nation, attracted by labor costs below China’s. Vietnam became the 150th member of the World Trade Organization on Jan. 11, 2007.

Sprawling Cities

Ho Chi Minh City and Hanoi, the two major cities, sprawled from their centers as the expansion lured workers from the countryside. High-rise towers and construction sites now interrupt paddy fields to the west of Hanoi as city officials seek to draw residents away from the capital’s labyrinthine neighborhoods struggling to house six million people.

Vietnam’s urban population is growing 3.4 percent annually, according to the World Bank, with growth fastest in and around the two biggest cities. Only about 5 percent of the population in the two largest cities is able to afford homes currently being produced by large developers, according to the lender.

Home prices in Ho Chi Minh City surged almost three-fold between 2004 and the first quarter of 2008, according to data from CBRE Group Inc. (CBG)’s local unit. Values then fell as the government raised interest rates and restricted lending for real estate and other so-called “non-productive” sectors, in a bid to tackle inflation.

New Buyers

Residential prices fell as much as 15 percent since the first quarter of 2011 in Hanoi, according to CBRE. Renewed demand from the nation’s growing professional class has prompted developers to build more-affordable housing, whose prices have fared better than luxury and high-end housing.

Ho Chi Minh City-based Nam Long Investment Corp. will Aug. 4 begin marketing the first 330 of 14,000 affordable units it plans to build in the next five years, the closely held company’s Chief Operating Officer Tran Nguyen said. The price for a typical 49 square meter unit will start at around $30,000.

“Seventy percent of buyers are first-time buyers, young couples,” he said, referring to 900 affordable units the company sold in a previous development. “The majority of them are able to make the 30 percent down payment and finance the rest from the bank.”

Prices Down

The average asking price for affordable condominiums in Ho Chi Minh City was $706 per square meter in the second quarter, the lowest since the fourth quarter of 2009, according to data from the Vietnam unit of CBRE. Prices for affordable units have fallen 1.9 percent since the first quarter of 2008, compared to the luxury segment, where average asking prices have fallen 30 percent, according to the property broker.

Home-buyer Ngoc’s loan of 4 billion dong equates to about 140 times last year’s per-capita gross domestic product of $1,374, according to International Monetary Fund figures.

Mortgage loans at Bank for Investment and Development of Vietnam, the country’s second-largest lender by assets, may increase 16 percent to 17 percent from a year earlier by the end of 2012, and increased 4.7 percent between March and June, the lender’s Deputy General Director Pham Quang Tung said. The bank processed more than 5,000 mortgage applications in the second quarter of this year, one and half times more than in the first three months of 2012.

Australia & New Zealand Banking Group Ltd. (ANZ)’s Vietnam unit has seen monthly applications increase as much as fourfold since March, said Duong Duc Hung, head of retail banking. The lender, which generates about 27 percent of its retail banking revenue in Vietnam from mortgages, forecasts at least 15 percent annual growth in the nation’s home-loan market in the next 3-to-5 years, he said.

“Property prices have been reduced to really affordable levels and, coupled with the reduction in pricing of the loans, it’s really an opportunity for individuals in Vietnam to buy,” Hung said.

--Nick Heath, Nguyen Kieu Giang and Diep Ngoc Pham in Hanoi, with assistance from Katrina Nicholas in Singapore. Editor: Malcolm Scott, Pierre Paulden, Rob Urban

To contact the reporters on this story: Nick Heath in Hanoi at nheath2@bloomberg.net; Nguyen Kieu Giang in Hanoi at giang1@bloomberg.net; Diep Ngoc Pham in Hanoi at dpham5@bloomberg.net

To contact the editor responsible for this story: Rob Urban at robprag@bloomberg.net

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