Viet Nam banks will face capital shortfall over the next 12-18 months and such a situation continues to represent a key credit burden for the industry. — Photo

Moody's Investors Service on Monday said Viet Nam banks will face capital shortfall over the next 12-18 months and such a situation continues to represent a key credit burden for the industry.

"Banks' rapid loan growth rates will widen their capital gap, according to our baseline scenario of robust economic growth in Viet Nam over the coming 12-18 months," Moody's analyst Daphne Cheng said.

Moody's analysis is contained in its just-released report titled "Banks-Viet Nam: Capital shortfall remains key credit burden," authored by Cheng.

Moody's projects real GDP growth in Viet Nam will average 6.4 per cent in 2017 and 2018, up from 6.2 per cent in 2016, with loan growth at 26 per cent in 2017 and 2018, in line with growth seen in 2016.

Moody's also estimates that at end-2016, the Vietnamese banking system had total capital gap of US$9.5 billion, representing 4.6 per cent of GDP. Moody's defines this point-in-time gap as the amount of external capital needed for banks to replenish their Tier 1 ratios back to 8 per cent after they utilise their balance sheet reserves to absorb expected losses on impaired loans and, at the same time, take an upfront write off on all Viet Nam Asset Management Company (VAMC) bonds, which they receive from the government by swapping their non-performing loans (NPLs). The estimate for the banking system is based on an analysis of Moody's-rated banks in Viet Nam, which accounted for 53 per cent of total system assets at end 2016.

Moody's baseline scenario capital analysis concludes that the system could see a capital shortfall ranging from $5.1 to $6.1 billion by end-2017, representing 2.5-3.0 per cent of GDP.

Moody's scenario analysis assumes that banks' NPL ratios will remain largely stable; there will not be an increase in VAMC transactions; banks' core earnings will remain stable; and banks will amortise their existing VAMC securities on the current SBV-approved five or 10 years' amortisation schedule, rather than a complete write down upfront.

In such a situation and in the absence of external capital injections, Moody's-rated Vietnamese banks' Tier 1 ratios would fall to an asset-weighted average of 6.1 per cent by the fiscal year ending December 31, 2017 (FY2017) from an asset-weighted average of 7.8 per cent in fiscal year 2016. — VNS