Moody’s lowers outlook on Vietnamese banking system

“Economic growth in Vietnam will remain robust, and the banks’ asset quality will improve, helping to strengthen their profitability,” Eugene Tarzimanov, a Moody’s Vice President and Senior Credit Officer, said in a statement.

Rebaca Tan, a Moody’s Analyst said, “But asset risks are still evident after years of rapid credit growth, and negative spillovers from the escalating trade tensions between the U.S. and China will see Vietnam vulnerable to slower trade growth.”

Moody’s conclusions are contained in its report on Vietnamese banks, entitled “Banking System Outlook – Vietnam: Economic growth and improving asset quality support stable outlook,” and is co-authored by Tarzimanov and Tan.

The stable outlook rating is based upon Moody’s assessment of six drivers: operating environment (stable); asset risk (improving) and capital (stable); funding and liquidity (stable); profitability and efficiency (improving); and government support (stable).

Within the current environment, Moody’s says that strong economic growth in Vietnam will support the banks’ operating environment.

Moody’s expects Vietnam’s real GDP growth to remain one of the strongest among the Association of Southeast Asian Nations, at 6.7% this year and 6.5% next year, driven by improved economic competitiveness, exports and domestic consumption. Domestic credit growth will moderate to about 16% in 2018, from 20% in 2017, as the Vietnamese government seeks to control inflation in the country, holding it to less than 4%.

Regarding the quality of their assets, Moody’s says that Vietnamese banks will show improved asset quality over the next 12-18 months, because strong economic growth will translate into improvements in borrower repayment capabilities and enable the banks to accelerate the write-offs of legacy problem assets.

However, rapid credit growth in recent years can result in a deterioration of asset quality as new loans mature, although this situation is unlikely to occur during Moody’s outlook period in the next 12-18 months.

The banks’ capitalization is expected to prove broadly stable. A moderation in asset growth will ease pressure on the banks’ capitalization, while internal capital generation will further improve, along with profitability at most rated banks.

Also, funding will remain stable as loan growth slows. In particular, Moody’s points out that the banks’ deposit growth has been strong, reducing their reliance on market-sensitive funding sources, such as interbank borrowings. As loan growth moderates to the pace of deposit expansion, the banks’ loan-to-deposit ratios will remain largely stable.

As for profitability, the banks will show better profitability because interest margins will continue to improve, as the banks boost loans in the higher-yielding retail and small and medium-sized enterprise segments. At the same time, credit costs will decline, as more banks resolve their legacy problem assets.

With government support, Moody’s says that the Vietnamese Government will continue to support the country’s banks when needed, mainly in the form of liquidity assistance and forbearance from the central bank.

Moody’s rates 16 banks in Vietnam, which together accounted for 61% of total banking system assets, as of the end of 2017.

Three of the 16 banks – Bank for Investment and Development of Vietnam (BIDV, B1 stable, b2), Bank for Foreign Trade of Vietnam (Vietcombank, B1 stable, ba3) and Vietnam Bank for Industry and Trade (Vietinbank, B1 stable, b1) – are controlled by the Government, while the other 13 are privately owned joint-stock commercial banks.