Vietnam - Vietnamese banks' ratings reflect heightened risks – Fitch

The major Vietnamese banks' ratings largely reflect difficult domestic operating conditions and other structural issues typically found in low-income emerging markets, said Fitch Ratings in a recent report.

Those banks’ 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 said.

“Fitch forecasts Vietnam's GDP growth at around 5 percent for 2012 and around 5.8 percent for 2013, lower than the 7 percent average over 2004-2011.”

Regulatory efforts at cutting interest rates and capping lending rates have done little to support investor sentiment, with credit growth of only 2 percent in January-September.

Slower-than-expected credit growth, together with governance issues, persistent global uncertainties and high levels of corporate leverage - evident in the country's credit/GDP of 113 percent at end-2011, continues to weigh on the domestic economy, the rating agency added.

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' capitalization 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 percent.”

“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 percent 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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