Fitch: Vietnamese Banks’ Funding and Liquidity to be Stable

Diep Nguyen

12:31 27/09/2018

BizLIVE -

Fitch expects these banks to continue to capitalise on their higher earnings and the strong economy to reduce legacy bad debt exposures.

Fitch: Vietnamese Banks’ Funding and Liquidity to be Stable
Fitch Ratings expects rated Vietnamese banks to sustain their improving operating trends in 2H18, on the heels of better credit quality and profitability, and broadly stable funding and liquidity in 1H18. 
Fitch expects these banks to continue to capitalise on their higher earnings and the strong economy to reduce legacy bad debt exposures.
According to Fitch Ratings, net interest margins (NIM) improved further and asset quality remained relatively stable in first half 2018 for Vietnamese banks rated by Fitch Ratings, which boosted overall profitability to recent highs. 
Fitch expects the positive trends to persist in the short to medium term in the absence of any major economic shocks. The banks’s funding and liquidity profiles were broadly stable in first half 2018, but loss-absorption buffers still remain thin amid rapid credit growth.
Fitch-rated banks enjoyed NIM expansion, underscored by a larger composition of higher-yielding retail loans. However, NIM upside could be affected by keener competition for retail loans and deposits. 
Stronger net interest income and lower credit costs lifted the weighted-average operating profit/risk weighted assets of Fitch-rated banks to 2.2%, from 1.6% in 2017 and 1.5% in 2016. 
This supporting operating environment and rising profit have motivated banks to write down their legacy exposures, especially bad debt sold to Vietnam Asset Management Company (VAMC). This, along with rapid credit expansion, saw the weighted-average problem loan ration remain steady at 1.9% at end-June 2018 and end-2017, but down from 3.4% at end-2016. That said, Fitch believes the underlying assets quality remains weaker than reported, and a prolonged unrestrained loan growth would be credit negative. 
Vietnamese banks have been pursuing the high growth retail segment, which Fitch expects will remain underpinned by rising consumerism on the back of growing affluence and improving sentiment in the domestic property market market. This has helped diversify the loan mix, with less exposure to state-owned enterprises – a positive, but risk appetite could grow as the banks jostle for market share. This could have impact on credit quality if not properly monitored and controlled. 
The banks continue to be funded mainly by customer deposits, which made up more than 80% of total funding at end-June 2018. Loan/deposit ratios rose due to rapid credit growth that continued to exceed deposit growth, Fitch expects this trend to continue in the short to medium term.
In Fitch’s recent report named “Measuring Potentila Capital Shortfalls of Vietnam Banks – Amended”, Fitch highlighted the significant capital shortfall of Fitch-rated banks – estimated at USD 6.5 billion – which would require new capital injections in order to meet Basel II standards and to address the under-reporting of problem loans in a better way. A relaxation of the foreigh-ownership cap would support the significant capital needs of Vietnamese banks. 

DIEP NGUYEN