The outlook for the banking system in Vietnam (B1 stable) is stable over the next 12-18 months, Moody's Investors Service has said, reflecting the agency’s expectation that the country’s macroeconomic stability and resilient economic growth will continue to support the banks' weak credit profiles.
Moody's has maintained a stable outlook for Vietnam's banking system since December 2014.
“The banks’ balance sheet buffers are weak, because of the size of their legacy problem assets," says Daphne Cheng, a Moody’s analyst.
“Nevertheless, while legacy loan levels remain elevated, transparency in relation to such problem assets has improved,” adds Cheng. “Moreover, Vietnam's rapid economic growth will improve the recovery prospects of the banks' legacy problem assets and stabilize asset risks.”
The stable outlook is based on Moody's assessment of five drivers: Operating Environment (stable); Asset Quality and Capital (stable/deteriorating); Funding and Liquidity (stable); Profitability and Efficiency (stable); and Systemic Support (stable).
On Operating Environment, Moody's expects that Vietnam's economy will show resilient growth, supported by robust exports and foreign investment. Real GDP growth will remain strong, with Moody's forecasting growth of 6.1% in 2016 and 6.0% in 2017.
Stable inflation and interest rates will help support domestic demand and household consumption, the rating agency adds.
On Asset Quality and Capital, Moody's says that asset quality will stay stable but weak, while capital buffers will continue to deteriorate because of high loan growth.
Moody's also says that the banks' elevated credit growth is outpacing internal capital generation and sources of external capital are limited.
Moody's estimates a problem loan ratio of 3.8% for rated banks, based on non-performing loans classified in categories 3 to 5 under Vietnam Accounting Standards (VAS), plus special mention loans classified in category 2 under VAS.
However, if the gross value of assets sold to the Vietnam Asset Management Company (VAMC
) is included, the problem assets ratio would increase to 7.1% as of June 30, 2016 from 6.9% at end-2015.
The problem loan ratio in the Vietnamese banking system is fully calculated at 7.1%. Photo: Internet
As for Funding and Liquidity, system liquidity is tightening moderately, because rapid lending growth is not matched by deposit growth. Moody's-rated banks reported an average loan-to-deposit ratio of 81% at end-June 2016, up from 79% at end-2015.
Nevertheless, low inflation rates and government de-dollarization policies have supported a stable environment for the funding of local currency deposits. At end-2015, market funds financed 19% of assets, down from 23% in 2012. Lower levels of interbank funding have also decreased the risk of contagion.
With Profitability, Moody's says that profitability will stay stable but low, as credit costs offset higher pre-provision income. Net interest margins should show a slight compression, due to the high levels of competition in the banking system.
Although loan growth has shifted to the higher-yielding consumer and small- and medium-size enterprise segments, deposit rates have increased. Bottom-line profitability will remain stable, because higher pre-provision income will be offset by elevated credit costs.
On Government Support, Moody's says that its government support assumptions for Vietnam are unchanged. Moody's assumes that systemic support will be forthcoming for state and private banks, in case of need.
The government's capacity for capital injections into banks is limited, and support will mainly be in the form of liquidity assistance and regulatory forbearance.