Vietnam’s banking sector clean-up to weigh on credit growth

Calculation for risk-weighted assets will be stricter under Basel II standards, the capital adequacy ratio (CAR) of these banks will decline further once the new rules come into play.

Fitch Solutions Macro Research, a unit of Fitch Group, stated in a newly-released outlook for Vietnamese banks that although the balance sheets of banks have notably improved over the past two years and have been helped by robust economic growth, the banking sector continues to be plagued by a wide range of legacy problems, including a weak regulatory framework, crony capitalism, and State - directed lending.

Combining tighter lending criteria with a slowdown in economic growth, Fitch Solutions expects credit growth to slow to 13 per cent in 2019, down from an estimated 14 per cent in 2018, which is somewhat in line with the State Bank of Vietnam’s (SBV) lower credit growth target of 14 per cent in 2019, versus 17 per cent for 2018.

Though Fitch Solutions expects Vietnam to remain a regional growth outperformer, it is unlikely to be spared from the synchronized global growth slowdown.

Of note, Vietnam’s high and growing degree of economic openness will likely see the slowing global growth momentum act as a drag on the country’s export performance in 2019, following an export growth print of 13.8 per cent in 2018.

Indeed, exports accounted for approximately 103 per cent of GDP in 2018, up from just around 84 per cent in 2013. This could weigh on capital demand as businesses scale back on their investment amid slowing sales.

In order to improve transparency and accountability in the banking sector as part of the transition to Basel II standards, last August the Government issued Decision 986 on the development strategy of Vietnam banking sector by 2025, with orientations towards 2030. This is likely to weigh on the supply of credit.

According to the SBV’s press release, some of the key objectives and timeline are highlighted. Between 2018 and 2021, the restructuring of credit institutions (CIs) places a focus on managing non-performing loans, ensuring the interests of depositors, and maintaining financial stability.

By 2020, most major commercial banks to have sufficient capital which are in line with Basel II standards, at least one or two commercial banks to be among the top 100 largest banks (by total assets) in Asia. They also have to ensure that bad debt (including those sold to the Vietnam Asset Management Company) stays below 3 per cent of total loans.

During the 2021 - 2025 period, efforts would be made to further enhance the competitiveness, increase the transparency, and ensure compliance to good international standards and practices in the management and operations of CIs.

At least two or three commercial banks to be among the top 100 largest banks (by total assets) in Asia by end-2025 while all commercial banks should meet Basel II standards.

Fitch Solutions holds that undercapitalization will likely remain a pressing issue for many banks over the coming quarters as the banking system transits towards Basel II standards, and this will likely weigh on lending activities.

To be sure, State-owned banks recorded a capital adequacy ratio (CAR) of just 9.4 per cent in May 2018 (latest available data), while joint stock commercial banks had a CAR of 11.34 per cent. Together these banks account for more than 85 per cent of total banking assets.

Given that the calculation for risk-weighted assets will be stricter under Basel II standards, the CAR of these banks will decline further once the new rules come into play.

Fitch Solutions predicts that one or a combination of the following three scenarios is likely. Firstly, smaller and weaker domestic banks may have to sell part of their asset book to reduce loan and risk exposure or merge with bigger banks to ensure sufficient capitalization. Secondly, the Government may have to step in to recapitalize State-owned banks.

Thirdly, the Government could lift foreign ownership restrictions to incentivize foreign banks to inject capital into the banking system. Currently, foreign banks face a cap of 30 per cent on foreign ownership in Vietnamese banks, making managerial control difficult.

Given that most domestic banks struggle with poor operations and management, a growing number of foreign banks have preferred to set up a 100 per cent foreign-owned bank, rather than collaborating with local banks.