Key Takeaways
- Vietnam's property developers are still struggling to repay debt after the government cracked down on the rapidly expanding sector in 2022.
- In our view, the resultant property downturn and price correction could spill over to the banking sector.
- Recent interest rate cuts and forbearance measures will mitigate the impact.
Vietnam's property market is still feeling the pain from a real estate correction that began almost a year ago. This will likely spill over to banks, which are exposed both directly and through holdings of property-related corporate bonds. S&P Global Ratings expects the strains will be manageable for the banks.
By our estimates, aggregate residential sales will contract by 15%-20% in 2023; this follows growth of 25%-30% in 2022. These factors have weakened the debt-servicing capacity of real estate developers, particularly the highly leveraged ones with corporate bonds maturing in 2023 and 2024.
In terms of the spillover to banks, we think mortgage loans look manageable. Banks are more likely to suffer nonpayment from commercial real estate loans, which make up 7% of loan books for Vietnam banks. In a worse-case scenario, sector-wide nonperforming loans (NPLs) would rise to about 4.5%, by our rough estimates.
Property dynamics in emerging markets like Vietnam are inherently volatile. However we believe the fundamentals favor a recovery. This will be underpinned by supply and demand fundamentals reflecting the country's favorable demographics, a young workforce, and a growing middle class.
Chart 1
Still Feeling The Pain Of A Boom And Bust Cycle…
The current pain in Vietnam's property market originates from a period of rapid growth prior to 2022, spurred by rising affluence and solid economic development. Real estate firms needed large sums of capital to finance this surging demand, and had difficulty accessing bank credit. They turned to the nascent bond market and raised funding through private placements with relaxed conditions. During this period, the Vietnam corporate bond market surged to around 15% of GDP in 2022, from just 5% in 2017.
The large number of small and midsized property developers that mobilize large amounts of capital at high interest rates had caught the attention of the regulators. They responded with a series of reforms in September 2022, including "Decree 65" which imposes more stringent conditions on the private placement of bonds. Some highlights include compulsory credit ratings for high value bond issuances, mandatory disclosures of issuer indebtedness in bond offering documents, and more stringent certification of eligible investors as "professional investors."
These policy tightenings coincided with a series of interest rate hikes in late 2022, which created significant refinancing stress for property developers. Issuances ground to a halt, and the bond market contracted for the first time in 2022 after nine consecutive years of expansion. Several real estate projects had to be delayed or put on hold as financing dried up. Consumer sentiment turned sour as property sales dried up and prices corrected.
Where Are The Bank Exposures?
The banking system's property exposures are equivalent in value to about 25% of total loans. Mortgage loans constitute the majority, at about 15% of total loans, followed by commercial real estate at about 7%, and corporate bond holdings at roughly 3%. While data on the composition of corporate bonds is opaque, we estimate that between one-third to half is property related.
We believe the mortgage book will remain resilient. Borrower repayment capacity is tied closely to employment and interest rates, rather than property market and price dynamics. Employment conditions are robust with the unemployment rate declining to 1.9% in 2022, from 2.4% the previous year. Mortgage loan interest rates are largely floating, and have been declining with the central bank's four policy rate cuts so far in 2023.
The banks' direct commercial real estate exposures and holdings of property-related corporate bonds represents the most obvious pain points. Default risks from overleveraged developers unable to refinance their bonds could spill over to bank loans. Assuming a bad-case scenario where one-fifth of the banking sector's direct real estate and property bond exposures default, this could add about 1.7 percentage points in incremental NPLs, from the March 2023 systemwide NPL ratio of 2.8%.
Policy Relaxation And Forbearance To Blunt The Damage
The Vietnamese authorities has a track record of being responsive and protective of the country's financial stability. They acted swiftly in 2023 with a series of rate cuts to ease repayment burdens, suspend certain requirements under Decree 65 (such as delaying the compulsory credit rating requirement to Jan. 1 2024), and delay loan repayments or restructure bad debts for distressed property companies. In some cases, bond holders have been asked to accept condominium units in lieu of payment.
Not all property developers are in trouble. The current crunch has mainly hit overleveraged developers who borrowed aggressively but failed to get proper legal status on their land holdings and did not have visibility on project cash flows. The large and well-established developers will likely have the financial buffers to tide through.
We believe the government's policy to instill greater discipline in developers' funding and discourage property speculation is conducive for the long-term development of the bond and property markets. There will, however, be short-term pain as the market adjusts to the new norms.
Related Research
This report does not constitute a rating action.
| Primary Credit Analyst: | Ivan Tan, Singapore + 65 6239 6335; ivan.tan@spglobal.com |
| Secondary Contact: | Sue Ong, Singapore 62161082; sue.ong@spglobal.com |
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