Fitch Ratings expects Vietnamese banks to sustain their improving operating trends in the second half of 2018 (H2) on the heels of better credit quality and profitability, and broadly stable funding and liquidity in the first half.

“We expect these banks to continue to capitalise on their higher earnings and the strong economy to reduce legacy bad debt exposures,” Fitch noted in a report released on Wednesday.

The weighted-average problem loan ratio at banks of Fitch-rated banks had eased to 1.9 per cent by end-June 2018 from 3.4 per cent at end-2016. Nonetheless, Fitch believes the true credit quality remains weaker than reported.

“We expect profitability of these banks to continue to rise in H2, aided by rapid growth in high-margin retail loans and a reduction in credit costs. The expansion into retail loans in recent years has helped diversify banks’ commercial loan-dominated loan compositions, which reduces concentration risk. However, it could lead to future credit quality issues if not properly monitored and controlled.”

According to Fitch, one area to monitor is the growing pace of funding costs in view of rising loan/deposit ratios on the back of rapid credit growth that’s outpacing deposit growth. This, along with tighter short-term funding rules, could trigger keener competition for deposits.

That said, deposit competition is unlikely to become overly intense in the short term - given that the loan/deposit ratio of Fitch-rated banks is not excessive at 89.7 per cent at end-June 2018, compared with 89.3 per cent at end-2017.

Notwithstanding the improvements, Fitch-rated banks’ loss-absorption buffers remain thin and will require significant capital injections to recapitalise their balance sheets as Basel II implementation in Viet Nam draws closer. — VNS