Stronger government support and operating environment have helped Vietnamese banks gain positive momentum, according to Fitch Ratings.
In a report released this week, the rating agency said the propensity of Viet Nam's authorities to support the banking system is evident from recent regulatory actions. This led to Fitch's upgrade of most domestic banks' Long-Term Issuer Default Ratings (IDRs) in November 2022.
IDRs of three of the four rated Vietnamese banks (Vietinbank, Vietcombank, MB and ACB) are driven by Fitch Ratings' expectations of sovereign support, following the upgrade of their Government Support Ratings (GSR) in November 2022. Only ACB's rating is underpinned by its standalone credit profile, as denoted by the Viability Rating (VR).
“The State Bank of Vietnam's record of prudential supervision over the past decade and its policy response to a run on deposits at a mid-sized commercial bank in October 2022 have reinforced our view that the State has a strong propensity to support the banking system during times of stress to avert bank defaults. The IDRs of State-owned banks with high systemic importance are now equalised with the sovereign rating as a result,” Fitch said in the report.
According to Fitch, the operating environment for the banking system remains broadly supportive with revenue prospects riding on Viet Nam's strong economic performance, while asset quality, profitability and capitalisation continue to make steady progress.
“We believe that the risks of a liquidity crunch in the property sector spilling over to the banking sector are manageable, as refinancing challenges are mainly policy-driven and supply-and-demand fundamentals remain conducive over the medium term,” it said.
According to Fitch, Viet Nam's economy grew by a robust 8.8 per cent in the first nine months of 2022 and it expects the country’s GDP growth to be sustained above 6 per cent in 2023 and 2024. The favourable economic backdrop has enabled banks to take advantage of ample asset origination opportunities to expand, while rising household incomes and improved business cash flow keep credit risks in check.
“The outlook on the operating environment score is positive and may be upgraded in the next 12-18 months should Viet Nam's economic momentum be sustained,” it noted.
Key performance indicators in the banking system have continued to improve. Loan growth in the first nine months of 2022 accelerated to 17 per cent, and the SBV announced in December that the 14 per cent system credit growth limit for 2022 may be increased by 1.5-2.0 percentage points. The system's reported non-performing loan (NPL) ratio was steady at 1.5 per cent as of the first half of 2022, pushing credit costs lower year-on-year and raising return on equity in the system to nearly 20 per cent on an annualised basis. Capitalisation improved, although only modestly, as much of the generated capital was expended to sustain rapid balance-sheet growth. Fitch expects these trends to hold up in the near term, which would strengthen the case for a more favourable operating environment assessment.
Fitch said problem loan ratios remained steady in the first three quarters of 2022 despite the expiry of COVID-19 loan classification forbearance in June 2022.
“We see limited spill-over risks from the remaining restructured loans in the banks' books, as all of the rated banks have fully provisioned for these loans, ahead of the regulatory deadline of end-2023. The higher-interest-rate environment is likely to weigh on borrowers' debt servicing capacity, but we expect any weakening in loan quality to be manageable amid the resilient economic momentum. Moreover, about 60 per cent-70 per cent of the rated entities' loans have a tenor of less than five years, with the majority being under one year. The relatively short loan lives suggest that the 200 basis points increase in interest rates would not have increased gross repayment amounts materially,” Fitch said.
Reserves against NPLs at the banks remained adequate at around 137-402 per cent as of September 2022, with Vietcombank maintaining the highest coverage ratio. Fitch believes this reflects the bank's more conservative provisioning policy. The rating agency expects its loan-loss coverage to decline as uncertainty surrounding the pandemic recedes, although all of the banks have said that they intend to maintain coverage above 100 per cent over the next 12-18 months to safeguard against future asset-quality weakness.
“The rated banks' direct exposures to real-estate developers are moderate and are usually secured. However, the banks remain vulnerable to swings in property prices, since real-estate assets form a significant portion of loan collateral. We do not expect property prices to plummet in the near term in light of the resilient demand,” Fitch said. — VNS