Moody’s Investors Service on Tuesday upgraded its outlook for Viet Nam’s banking system to positive for the next 12-18 months from stable, reflecting the country’s strong economic prospects and the positive outlook for most rated banks.

"The change in outlook - which expresses our expectation of how bank creditworthiness will evolve in this system over the next 12-18 months - reflects Viet Nam’s robust economic growth, supported by domestic demand, healthy exports and public sector investment," Eugene Tarzimanov, Moody’s vice president and senior credit officer, said.

"We forecast Viet Nam’s real GDP will grow 6.1 per cent in 2017 and six per cent in 2018, faster than the 5.9 per cent average for the previous five years."

"Strong economic growth translates into positive conditions for banks’ asset quality, but rapid credit growth, aided by accommodative monetary policy, can raise asset risks again," Tarzimanov said.

According to Moody’s the banks’ operating environment will benefit from robust economic growth, based on ongoing improvements to infrastructure, favourable demographics and the government’s continued focus on reform to support foreign direct investment.

The banks’ asset quality will remain largely stable during the outlook with problem loan ratio at 7.1 per cent at end-2016, slightly lower than 7.5 per cent in 2015. Moody’s further expects this ratio to decline to 5.8 per cent in 2018, driven by loan growth outpacing the formation of problem loans and because of modest recovery in the property sector.

However, rapid credit growth will continue to erode capital buffers and capitalisation will deteriorate as banks struggle to replenish capital against rapid loan growth. High provisioning expenses will undermine banks’ abilities to generate internal capital, while options to raise external capital are limited.

In addition, the growth in local-currency customer deposits, the main funding source for Vietnamese banks, will continue to be healthy, but it will lag behind credit growth, resulting in slightly tighter system liquidity.

Profitability will remain stable with banks’ pre-provision income growing steadily over the next 12-18 months on the back of strong loan growth. However, the improvement will be offset by high credit costs. Net interest margins will also likely decline further due to competition and government pressure to lower bank lending rates.

At the same time, Government support notching could increase for some bank ratings. Any upgrade of the Government of Vietnam rating -- which has positive outlook -- will likely result in upgrades of a number of banks’ ratings, which in some cases could receive greater uplifts from their baseline credit assessments.

Moody’s rates 15 banks in Viet Nam, which together account for 58 per cent of banking system assets as of June 30, 2017. Three of the 15 banks — Bank for Investment & Development of Vietnam (B1 positive, caa1), Bank for Foreign Trade of Vietnam (B1 positive, b1) and Bank for Industry and Trade (B1 positive, b2) — are owned by the Government, while the other 12 are privately owned joint-stock commercial banking institutions. — VNS