Vietnam Banking Out Look

Vietnam Banking Outlook 2014: Reforms Critical For A Sustainable Recovery
Primary Credit Analyst: Amit Pandey, Singapore (65) 6239 6344; amit.pandey@standardandpoors.com Secondary Contact: Ivan Tan, Singapore (65) 6239-6335; ivan.tan@standardandpoors.com
Table Of Contents
Growth In Economy And Credit Are Likely To Increase Marginally Earnings Will Remain Muted Banking Industry Reforms Are Crucial Reforms, Asset Quality, And Capitalization Are Key To Rating Trends Relates Criteria And Research
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Standard & Poor's Ratings Services expects structural improvements for Vietnam banks to be gradual even as the economy remains stable. Vietnam banks will face challenges in the form of weak asset quality, low profitability, and weak capitalization in the next 12 months, in our opinion. We believe resolution of these challenges requires industry consolidation, re-capitalization, and better regulation and governance of banks, which are likely to take time. The economic and industry trend for banking industry is stable. However, the outlook on some banks that we rate in Vietnam is negative reflecting the asset quality and capitalization concerns. Overview We expect banks to benefit from stable macroeconomic conditions in Vietnam in 2014. Economic and banking reforms are vital for the long-term sustainability of these institutions, in our view. However, the progress on this front is gradual. The economic and industry risk trends for Vietnam banks is stable. However, we expect asset quality, profitability, and capitalization challenges to remain high for some banks.
Growth In Economy And Credit Are Likely To Increase Marginally

We expect Vietnam's GDP growth to inch up to 5.5% in 2014, from 5.4% in 2013, still below the historical growth (see chart 1). Vietnam remained relatively insulated from the selloff in emerging markets last year, primarily due to the country's trade surplus and sizable foreign direct investment inflows. Although Vietnam does not depend on large inflows from foreign institutional investors, its relatively open economy (exports account for about 80% of GDP) exposes the country to any slowdown in global demand--particularly from the European Union (which accounted for 18% of exports in 2013) and China (10%).
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Chart 1
We do not expect the State Bank of Vietnam (SBV), the country's central bank, to lower its policy rates further in 2014. It has already cut 800 basis points off two key policy rates--the refinance rate and discount rate (they are now at 7% and 5%, respectively)--since March 2012 as inflation remained in the single digits. Any further reduction to boost credit growth is likely to push up inflation and increase concerns about the SBV's commitment to macroeconomic stability. We expect credit growth in Vietnam to recover and be in low double digits in 2014, although it will remain much lower than the growth rates in 2005-2010. The banking sector continues to deleverage with credit growth lagging nominal GDP growth after the rapid growth until 2010, which took the credit-GDP ratio to 115% and inflation to 23% by mid-2011. Despite the easing in monetary policy, credit growth was just 7% for first ten months of 2013. Banks are being cautious about lending because their asset quality has deteriorated, amid high inventory levels of corporate borrowers. The industry and construction (I&C) segment has the highest share of bank credit in Vietnam, at 38% as of October 2013, followed by trade, transport, and telecommunication (TTT) (23%), agriculture (11%), and others (28%). The slowdown in credit was more pronounced in the TTT and I&C segments, where growth slowed to 3% and 6%, respectively. We expect larger banks to strive for higher growth than the industry average in 2014, given the SBV's current stance. The central bank has urged banks to boost lending in the later part of 2013 to meet its target of 12% credit growth.
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Earnings Will Remain Muted

We believe profits for Vietnamese banks will remain modest in 2014, especially on a risk-adjusted basis (see chart 2). We estimate that the return on assets for the banks we rate will be 0.8%-1.0% in this period, with substantial downside risk in case the SBV tightens asset quality recognition and regulation on provisioning for bad loans. Margins are under pressure because lending rates--especially for sectors such as agriculture, rural development, exporters, and small and medium enterprises--decreased more than deposit rates over the past couple of years. Moreover, the ratio of loans to deposits fell. We believe interest rates are likely to stabilize at current levels amid low credit demand.
Chart 2
We believe that the true extent of the asset quality problem is understated; even the SBV has admitted to it in the past. This is because of poor disclosures, lenient classification standards for nonperforming loans (NPLs), and the lack of uniform NPL accounting. The reported gross NPLs of Vietnam banks increased to 4.7% in October 2013 from 3.3% at the start of 2012. The steel, shipping, cement, building material, and real estate sectors are particularly affected by the lower growth in the Vietnam economy. We expect banks' requirements to provision for bad loans to be high in 2014 because economic growth is likely to remain modest and banks already have sizable amounts of underprovisioned NPLs and restructured loans. We believe
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the reported capitalization of Vietnam banks may weaken if the SBV enforces stricter norms on NPL reporting, or if banks resume their credit binge. We believe banks require fresh capital to provide for NPLs, and the ability to raise such capital will likely be a major differentiator among banks' credit profiles over the next few years. We expect the funding and liquidity of Vietnam banks to remain steady in 2014 as long as the banks offer real yields on deposits. The loan-to-deposit ratio of rated banks has reduced over the past couple of years. However, deposits in Vietnam remain susceptible to event risk emanating from concerns over corporate governance and the health of the banking sector. The depositors also flock to alternate investment avenues, such as U.S. dollar-denominated assets, real estate, and gold whenever inflation rises much above deposit rates. We don't expect this to happen in our base case, because inflation isn't likely to exceed single digits.
Banking Industry Reforms Are Crucial

We believe improving the health of the Vietnamese banking industry will require consolidation, improved capitalization, clean-up of NPLs, better risk management and governance, and improvements in regulation and supervision. Intense competition and the lack of consolidation in Vietnam's banking industry makes it difficult for banks to earn adequate risk-adjusted returns. Although the number of banks in Vietnam has declined, we believe the industry is too fragmented and consolidation has been limited to weaker banks. In our view, the larger banks have refrained from consolidating because they are not certain of the asset quality of the potential targets due to the lack of transparency in reporting data. Moreover, the ownership of several banks is fragmented, with cross-holding prevalent. Large banks also find limited synergies from such consolidation because they already have sizable distribution networks of their own. The restrictions on foreign ownership of local banks also limit consolidation opportunities. A single strategic investor can hold no more than 20% stake in a local bank, and total foreign ownership can't exceed 30%. Several foreign banks have minority stakes in Vietnam banks, and interest from foreigners, especially Japanese banks, remains high. Experience suggests that minority investment does not give the foreign banks enough control over strategy and risk management. A recent change in rule allows higher foreign ownership in Vietnam banks in special cases (e.g., as part of restructurings of weak banks), subject to the prime minister's approval. We believe this may be first step in allowing foreign banks to have larger stakes in Vietnam banks and will help improve capitalization, management, and governance of local banks. We expect some new regulations relating to NPLs to be in place in 2014. These regulations may standardize recognition of NPLs across banks by maintaining the names of NPL accounts in a central database. They may also expand the types of exposures (e.g., corporate bonds) that require provisioning, improve asset quality recognition, and reduce collateral values that can be used to net off exposure while computing provisioning requirements. We expect these regulations to increase the reported gross NPLs for Vietnam banks. The extent of the increase will depend on the scope of the final regulations and, more importantly, on the SBV's supervision of their implementation. The operations of The Vietnam Asset Management Company (VAMC), to which banks with NPLs of 3% or more of
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total loans can sell bad loans in exchange for five-year zero-coupon bonds, are progressing slowly. The VAMC had bought about 1% of total bank loans from more than 30 banks by the end of 2013, and we expect the company to purchase up to 2%-4% of bank loans in 2014. We believe the true test of the VAMC will be whether it can resolve bad loans through recovery or by selling them at market prices. Until such time, the benefit of this scheme is limited to helping banks spread out their provisioning requirements and hence limit the immediate impact on their capitalization. The banks have to provide for 20% of the value of bonds sold to the VAMC in their balance sheets each year. The scheme provides banks access to liquidity because they can discount these bonds with the SBV.
Reforms, Asset Quality, And Capitalization Are Key To Rating Trends

The economic and industry risk trends for Vietnam banks is stable. However asset quality, profitability, and capitalization challenges remain high for some banks in Vietnam. Continued deterioration in these factors due to high credit costs, aggressive lending, or lack of depositor confidence that strains banks' liquidity or funding could lead to downgrades. We believe that economic and banking reforms are vital for Vietnam banks' long-term sustainability. Well-executed banking reforms would improve our assessment of the system's risk, particularly its credit risk, competitive dynamics, and institutional framework. These factors can improve our assessment of economic and industry risks under our Banking Industry Country Risk Assessment. However, progress on reforms is gradual. We could raise our ratings on Vietnam banks if they significantly strengthen their capitalization through fresh infusions.
Table 1
Key Indicators Of Selected Vietnam Banks

Net Gross NPAs/customer NPAs/customer loans + other real loans + other real estate owned Tier 1 capital estate owned (%) (%) ratio (%) 2013* N.A. 2.6 2012 2.4 2.7 2013* N.A. 0.6 2012 0.2 1.0 2013* N.A. N.A. 2012 N.A. N.A.
Name of the bank
Rating
SACP
Return on average assets (%) 2013* 2012 1.1 0.7
Total loans/customer deposits (%) 2013* N.A. 113.7 2012 84.8 113.5
Bank for Foreign Trade of Vietnam Joint Stock Commercial Bank for Investment and Development of Vietnam Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) Vietnam Export Import Commercial Joint Stock Bank Vietnam Technological And Commercial Joint Stock Bank (Techcombank)
BB-/Stable/B bbB+/Stable/B b+
N.A. 0.8
BB-/Negative/B bb-
1.5
0.7
4.6
6.0
3.1
4.7
N.A.
N.A.
90.8
87.6
B+/Stable/B b+
0.7
1.0
1.5
1.3
0.7
0.5
N.A.
N.A.
122.0
121.1
BB-/Negative/B bb-
0.6
0.4
17.8
12.8
16.3
11.3
N.A.
N.A.
63.2
67.5
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Table 1
Key Indicators Of Selected Vietnam Banks (cont.)

Vietnam Joint Stock Commercial Bank for Industry and Trade BB-/Stable/B bb1.2 1.3 2.2 1.5 0.6 0.4 N.A. N.A. 123.0 127.8
*For six months ended June 30. Do not include restructured loans because restructured figures are not publicly available except for Techcombank. N.A.--Not available. SACP--Stand-alone credit profile. NPA--Nonperforming assets.
Table 2
Banking Industry Country Risk Assessment

Country Government support Vietnam Highly supportive BICRA group Anchor rating Group 9 b+
Economic risk factors and descriptors Economic risk Economic resilience Economic imbalances 9 Very high risk High risk
Industry risk factors and descriptors Industry risk 8
Institutional framework Extremely high risk Competitive dynamics Very high risk Intermediate risk
Credit risk in the economy Extremely high risk Systemwide funding
Relates Criteria And Research

Related Criteria
Banks: Rating Methodology And Assumptions, Nov. 9, 2011 Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
Related Research
It's A Double Whammy For Vietnam's Banks: Bad Loans Are Rising As Economic Growth Falters, Aug. 21, 2013 Banking Industry Country Risk Assessment: Vietnam, Oct. 3, 2013
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Vietnam Banking Outlook 2014: Reforms Critical For A Sustainable Recovery

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