|A bank employee counts Vietnamese banknotes. Fitch Ratings believes the State Bank of Vietnam will continue to provide liquidity to the local banking system (Photo: Thanh Hoa)
These actions stem from the sharply lower, albeit positive growth that Vietnam faces from the novel coronavirus disease (COVID-19) pandemic and its potential to negatively affect the banks’ credit profiles in, at least, the near term.
“The issuer default ratings of all five banks were affirmed at existing levels, as we expect a firm economic recovery in 2021, although there will be lingering effects on the banks,” said the United States-based rating agency.
Vietnam Bank for Industry and Trade (Vietinbank), Bank for Foreign Trade of Vietnam (Vietcombank), and ANZ Bank (Vietnam) had their outlooks lowered to stable from positive.
Meanwhile, the agency revised the outlooks of Asia Commercial Bank (ACB) and Military Bank (MB) to negative from stable.
Vietnam’s gross domestic product growth slowed to 3.8% in the first quarter of 2020 from 7% in the fourth quarter of 2019. Fitch forecast the full-year growth at 3.3%, which would be the slowest pace since the reforms first launched in 1987.
“The sharp economic shock will cause unemployment to rise and can quickly tip Vietnam’s large proportion of informal workers and micro business owners into severe financial hardship,” said the agency.
In response, the State Bank of Vietnam (SBV) cut its policy rates and directed banks to extend debt relief to affected borrowers, while easing requirements on loan classification and provisioning.
As a result, the banking sector has become a key intermediary and will likely bear much of the policy burden of the financial relief, according to Fitch.
Fitch has lowered Vietnam’s operating environment midpoint to ‘b+’ from ‘bb-’, but kept the outlook at stable, as the agency expected the slowdown to be sharp, before a sizeable recovery in 2021, with growth forecast at 7.3%.
The sudden loss of economic momentum that banks in Vietnam have grown accustomed to in recent years will most directly affect their asset quality and earnings, Fitch warned.
Moreover, risk appetite, capitalization and governance scores could also be lowered, should pressure for banks to undertake policy lending manifest in large scale non-risk-based lending.
The outlook on the quality of assets has been lowered to negative from stable for all Vietnamese banks. “Brewing asset-quality stresses, even if not all are reported as impaired during the relief period, means there are deferred credit impairments accruing,” said Fitch.
The firm said the negative outlook also considers the rapid credit growth of banks in recent years, especially in consumer loans and unsecured lending, which have not been tested through a down cycle.
Some banks’ credit allowances have lagged behind their dash for market share, such that loss-absorption buffers remain thin at many banks. More than a few banks continue to hold Vietnam Asset Management Company bonds, a legacy of bad debt from the 2010-2011 downturn.
Fitch projected that profitability would come under significant pressure due to waning credit demand and lower lending rates, after the SBV’s rate cuts and authorities’ orders to reduce debt burdens for affected borrowers.
“Deposit rates have not declined as quickly as term deposits reprices, and banks typically put a floor under real interest rates to compete for depositors’ funds,” said the firm.
This continued the resultant margin compression, slower credit growth, and lower fee incomes, which means banks have lower core earnings to buffer against anticipated increases in credit costs. Therefore, its outlook on the banks’ profitability is negative.
Thin capital buffers are another area of weakness that Fitch has been wary of, with some major banks still struggling to comply with local Basel II requirements.
The outlook on most Fitch-rated banks’ capitalization factor scores are stable, as Fitch expected banks to be sufficiently profitable to support slower balance-sheet growth. It viewed SBV’s directive for banks not to distribute cash dividends as a credit positive.
Also, Fitch’s assessment of banks’ funding and liquidity has not changed materially as a result of the coronavirus.
“Our expectations of slower credit growth and highly accommodative liquidity management from the SBV have kept the factor outlook at stable. We believe the SBV will continue to provide liquidity to the system, as directed by the Government,” said the firm.