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Although real estate enterprises would like the banking industry to reconsider solutions such as rescheduling debts, reducing interest rates, and loosening monetary policy.

Real estate loans

Risk coefficient in loans for real estate businesses increased from 150 percent to 200 percent from 1 January 2020. Real estate businesses are now finding it difficult to access bank credit, and hence are focusing on mobilizing capital through the corporate bonds market. Recent data shows that capital is still flowing into this sector. Credit balance in the real estate sector by the end of 2022 was at VND2,580,000 bln, up by 24 percent compared to 2021, and the highest in the last five years.

In this, nearly 69 percent of loans were for consumption needs and loans for real estate businesses were up by 11.5 percent compared to the beginning of the year. In Ho Chi Minh City, credit to the real estate sector increased by 16 percent in 2022. This is the third consecutive year that credit growth has been higher than the general credit growth in this area.

Outstanding loans for the real estate sector still account for a large percentage in many banks. Mr. Nguyen Thanh Tung, General Director of Vietcombank, said that real estate credit increased by 17 percent in 2022, and real estate loans account for over 20 percent of total outstanding loans at Vietcombank, which include loans given to both businesses as well as individuals. A similar situation prevails at VietinBank where loans to real estate enterprises and individuals account for 21 percent of total outstanding loans at the bank.

At the Bank for Investment and Development of Vietnam (BIDV), real estate loans at the end of 2022 were at VND275,000 bln, accounting for 18 percent of all outstanding loans. At VPBank, loans for real estate businesses were at VND67,600 bln, an increase of nearly 59 percent compared to the beginning of the year, accounting for almost 15.4 percent of total outstanding loans.

Outstanding personal loans to buy houses were at VND82,922 bln, accounting for 18.9 percent. This is to say that real estate loans in general amounted to VND150,515 bln which is 34.3 percent of total outstanding loans. Although VietBank is small, it is also in the group with a high percentage of real estate loans at about 21 percent. With MB Bank, although real estate loans only account for 4.8 percent of total outstanding loans, the overall real estate loan balance in 2022 increased by 69 percent to about VND21,400 bln.

No lifeline from banks

Over the years, capital from banks was also lent from individuals to buy real estate. Statistics show that as of 30 June 2022, banks hold a portfolio of corporate bonds valued at VND284,000 bln. Currently, the amount of corporate bonds in banks has decreased after major shocks were experienced by many real estate enterprises. This shows that banks have to worry about capital pouring into real estate and corporate bonds as they are easy to turn into bad debts.

Vietnamese real estate enterprises are highly capital intensive, hence any decline in cash flow curtails their ability to pay back debts. This problem was forewarned for a long time and is now looming in front of our eyes. The State Bank of Vietnam has tightened credit in risky areas, the corporate bonds market has put on hold all issuances, and investors have lost confidence, which has affected cash flow.

Now the burden of the maturity date of corporate bonds is hovering over real estate enterprises. The maturity date is within the next two years and corporate bonds are estimated to reach VND230,860 bln. Mounting debts, lack of capital, and complicated administrative procedures have led to projects being stopped. The bad debts ratio in the real estate sector has increased from 1.67 percent at the end of 2021 to 1.81 percent at the end of 2022 and the risk continues to increase.

Real estate businesses have not yet been thrown any lifeline from banks and hence are implementing their own solutions to save themselves from debt extensions by converting loan packages with new interest rates, repurchasing bonds, and repaying bonds with real estate. But there are bondholders who do not agree with the settlement plan offered by real estate companies for overdue corporate bonds and have requested that the security property should be handled in accordance with the law.

When the terms of handling collateral of corporate bonds are activated, it will lead to risks for bank loans. Because real estate enterprises certainly mortgage to borrow from banks and mobilize capital from people through deposits made according to a project's ongoing progress. This methodology is very clearly known to banks.

Saigon Investment published an article recently that indicated that debts that are likely to lose capital at banks had skyrocketed at the end of 2022 due to the influence of debt restructuring to support businesses to recover after the Covid-19 pandemic. At the same time, the State Bank of Vietnam also noted the risk of bad debts increasing in 2023 due to difficulties in the economy.

The increase in bad debts has many consequences. In the immediate future, the cash flow does not return to the bank which affects the liquidity and makes it difficult for deposit interest rates to drop sharply. On the other hand, banks must keep lending interest rates from increasing sharply, and some areas even reduce interest rates as set by the State Bank of Vietnam. Hence the net profit margin of banks in 2023 is forecast to be narrow.

The crisis in the real estate market is mounting day by day, and real estate enterprises are under pressure of bad debts with corporate bonds being held by banks. If bad debts jump further then banks will cut the profit of provisioning to reduce risks and then the profit will shrink. Under such pressure, real estate enterprises are wanting the banking industry to open the credit door, which seems unlikely because in the current scenario, banks are moving cautiously. If there is any lending made towards the real estate in 2023, it will only occur if it benefits the State Bank of Vietnam with more focus towards the social housing segment as well as low-cost housing for workers.