Vietnamese Banks to Issue Offshore Regulatory Capital; Risk Profiles Vary

Diep Nguyen

14:20 15/07/2019

BizLIVE -

The banking system faces substantial capital needs in the run-up to the adoption of Basel II standards, scheduled for 1 January 2020, which, by our estimates, could be as much as USD20 billion.

Vietnamese Banks to Issue Offshore Regulatory Capital; Risk Profiles Vary
Fitch Ratings expects Vietnamese banks to seek offshore capital to satisfy the country's upcoming Basel II regulations, with media reports indicating that Tien Phong Commercial Joint Stock Bank (not rated) - a small privately owned bank - is considering the country's first offshore Tier 2 bond offering by a bank via a US-dollar denominated issuance.
Up until now, Vietnamese banks' issuances have been in local currency. However, the banking system faces substantial capital needs in the run-up to the adoption of Basel II standards, scheduled for 1 January 2020, which, by our estimates, could be as much as USD20 billion. 
The country's immature capital market is unlikely to be able to support such large capital demand. This is further hindered by a 30% foreign-ownership limit, meaning that common equity is unlikely to form a large part of additional regulatory capital raised. However, offshore issuance is likely to be confined to better-managed state-owned and private commercial banks. 
Fitch understands that Tien Phong's proposed subordinated bonds will have an optional, cumulative coupon deferral feature linked to a net loss trigger. However, the bank will be required to pay interest on the skipped coupon. The securities, which will mature in 10 years and can be called by the issuer in five years, are intended to qualify as Tier 2 capital. 
Under Fitch's criteria, the notes would be rated at least two notches below the banks' anchor ratings, which, for Vietnamese private commercial banks, would be their Standalone Credit Profiles, as indicated by their Viability Ratings. This is assuming that the notes carry the above-mentioned terms and conditions. 
The two notches take into account the instrument's higher loss severity relative to senior unsecured instruments due to its subordinated status. Fitch expects further notching to reflect the higher risk of non-performance against that of most other subordinated instruments being issued into global capital markets.
Fitch would factor in sovereign support for the ratings of securities where it believes that the probability of state support is likely to be strong for the issuer and would flow through to the bank's junior debt. In such cases, the securities would be rated at least two notches below the bank's Issuer Default Rating (IDR). 
This may apply to state-owned commercial banks, such as Joint Stock Commercial Bank For Foreign Trade of Vietnam (BB-/Positive) and Vietnam Joint Stock Commercial Bank for Industry and Trade (BB-/Positive) in light of their high systemic importance and the government's controlling stakes. The IDRs of both banks are two notches above their Viability Ratings. The agency would not factor in such support for banks that it considered as not systemically important.

DIEP NGUYEN

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