[Industry report] - Vietnam Consumer Finance Report 2023

The negative impacts of the past two years under COVID-19 and geo-political tensions have spread to all economic sectors and are reflected in the business results of most FinCos in 2022. Although the market is on track to resume, the recovery trajectory remains bumpy given emerging challenges, especially the high-interest rate environment and deterioration in the credit quality of borrowers, which threaten both the lending and funding activities of CF players. However, this is  the time to change the game. Younger FinCos with a leaner business model and timely transformation of business model take the opportunity to get ahead. 

As the economic uncertainties remain, FinCos will aim for sustainable growth by building a healthy loan portfolio structure started by reviewing and eliminating non-performing segments, diversifying product offerings with revolving loans, and embracing comprehensive digital transformation, FinCos are forging a path towards long-lasting and responsible expansion, departing from previous aggressive approaches.

Loan book growth 

The economy's slower-than-anticipated rebound, particularly in labour-intensive sectors such as manufacturing and exports, coupled with foreign exchange rate pressures and geopolitical tensions, necessitated the implementation of stringent monetary policies by the State Bank of Vietnam (SBV) to curb inflationary pressures. Consequently, a liquidity crunch ensued, leading to higher interest rates and increased funding costs. These combined factors had a detrimental impact on the credit growth of major FinCos, notably FE Credit and Home Credit, resulting in a contraction of their market share.

Market share

The consumer finance market is undergoing increasing fragmentation as the market leaders, namely FE Credit and HCVN, experience a decline in their market shares. As a result, this has created a favorable environment for other FinCos such as Mcredit, Shinhan Finance, and Mirae Asset to actively compete and seize a larger portion of the market.

Product development among FinCos

FinCos are proactively reducing their reliance on cash loans to comply with Circular 18/2019 by diversifying their offerings with revolving loan products. Within the realm of cash loans, FinCos are transitioning towards offering credit limits tailored to specific purposes. In 2022, most FinCos experienced strong growth in their vehicle lending portfolios, driven by a resurgence in demand for transportation following a two-year period of limited travel opportunities. Concurrently, the credit card segment has witnessed growth, propelled by ongoing digitalization efforts. In contrast, the consumer durable segment experienced a contraction in size due to subdued consumer demand. 

Earnings quality and profitability

In 2022, the sector interest spread, and net interest margin on the loan portfolio experienced a slight decline, attributed to the liquidity crunch and the subsequent increase in the cost of funds, particularly in Q4. Looking ahead, the sector NIM is expected to level off or slightly contract in 1H2023, with potential improvement in the second half due to potential decreases in institutional funding caused by worsening business performance in the post-COVID-19 period and concerns about asset quality following recent scandals.

Asset quality

The sector average non-performing loan (NPL) ratio has recorded a significant increase, mainly stemming from the deterioration of the CF portfolio after the forbearance policy (Circular 14) expired by the end of June last year, especially in the leading player, FE Credit, whose market share accounts for nearly half of the CF market, dragging down the broader market. Asset quality in the next quarters may further deteriorate due to the adverse effects of recent scandals on debt collection practices as well as the deteriorated customer creditworthiness grappling with an unfavourable macroeconomic environment.

Emerging issues of the consumer finance market

• Prevalence of black credit given unserved demand by mainstream credit providers and incomplete regulations on alternative lenders, especially interest rates & origination fees.
• Incomplete legal framework for debt collection.

Key market and development trends

• Transition from a product-centred to a customer-centred approach in CF market, accompanied by the rise of omni-channels, involves exploring and tapping into specific customer segments.
• Super-app model revolutionising the user experience by offering a single, all-inclusive platform for managing financial activities, enhancing convenience, and generating multiple revenue streams.
• Generational shift with the rise of Gen Z: Banks and FinCos must swiftly cater to the tech-savvy and mobile-oriented Gen Z demographic by offering tailored products and services.

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