Fitch Ratings says that the major Vietnamese banks’ ratings largely reflect difficult domestic operating conditions and other structural issues typically found in low-income emerging markets. The outlook is stable, reflecting that the banks’ ratings in the single B category are already among the lowest in Asia, as well as the Vietnamese sovereign’s stable outlook.
Downside rating risks could arise if the operating environment becomes even more challenging than Fitch’s current expectations and significantly threatens banks’ solvency, and/or due to negative rating action on the sovereign.
Fitch forecasts Vietnam’s gross domestic product (GDP) growth at around 5% for 2012 and around 5.8% for 2013, lower than the 7% average between 2004 and 2011. Regulatory efforts at cutting interest rates and capping lending rates have done little to support investor sentiment, with credit growth of only 2% in January to September 2012. This together with governance issues, persistent global uncertainties and high levels of corporate leverage – evident in the country’s credit/GDP of 113% at end-2011 – continues to weigh on the domestic economy.
The banking system is vulnerable to macroeconomic shocks, with pressures already mounting on asset quality, earnings and capital of the major Vietnamese banks. Fitch continues to believe that reported non-performing loans (NPLs) are understated which, together with poor transparency, mean that banks’ capitalisation would be much weaker than reported. Around half of banks’ capital could be at risk, based on the central bank’s public admission that the system-wide NPL ratio could be as high as 10%. Fitch believes the actual figure is higher and could weaken given the downside risks from a materially weaker economic environment. Structural issues, including deposit competition and fragile confidence, may keep loan/deposit ratios over or close to 100% for most major Vietnamese banks.
There has been little perceptible progress on Vietnam’s banking system reforms, such as banking sector consolidation and the establishment of an asset management company to acquire bad debt from banks. Local authorities have also mentioned concurrent reforms surrounding state-owned entities and investments in Vietnam, but meaningful progress here has proved elusive.
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