Moody’s-rated Vietnamese banks are expected to see a further weakening in their capital buffers in 2016 as credit growth and provisioning expenses outpace the capacity for internal capital generation, Moody’s Investors Service has said in a report.
Banks also have few sources of external capital, given limited domestic resources and restrictions on foreign investments in banks. Foreign ownership is curbed at 30% in a bank, and most rated banks are at and close to the cap.
“These observations continue to underpin our concerns that Vietnamese banks’ weak capital levels will remain a constraining factor for their credit profiles, even as asset quality pressure has stabilized,” says the report.
The rating agency says that all rated banks reported a tightening in liquidity conditions in 2015 as they allocated more of their assets to accommodate the rebound in loan growth. As a result, their holdings of liquid assets declined, a credit-negative.
The full-year 2015 results of Vietnamese banks testify to an ongoing process of recognizing and cleaning up problem assets, a credit positive. However, the corresponding increase in loan-loss provisions is also raising credit costs for the banks, thus pressuring profitability.
“There are now both an acceleration in loan growth -- mirroring a cyclical economic upturn -- and higher loan provisions related to problem assets, including securities from the Vietnam Asset Management Company (VAMC
),” says Eugene Tarzimanov, Moody's vice president and senior credit officer.
Moody’s report highlights that the greater transparency on asset risks is the result of two regulatory developments. First, the acceleration in the carve-out and recognition of bad loans as reflected in an increase in banks’ holdings of VAMC securities, is in line with the central bank's mandated resolution to reduce NPLs to below 3% of loans by end of 2015.
Second, a tightening in the regulatory guidance on NPL recognition follows the full implementation of Circular 02/09 in April 2015 on asset classification and risk provision.
Due to an annual 20% provision rate for five years, the ten Moody’s-rated banks posted a sharp 49% increase in credit costs to 24.9 trillion dong ($1.16 billion) in 2015. As a result, loan-loss provisions grew to 48% in 2015 from 39% in 2014.