World Economy

Moody’s Upgrades Outlook of Vietnam Banks

Banks’ asset quality will remain largely stable.Banks’ asset quality will remain largely stable.

Moody’s Investors Service upgraded its outlook for Vietnam’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 Vietnam’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, VNA reported.

“We forecast Vietnam’s real GDP will grow 6.1% in 2017 and 6% in 2018, faster than the 5.9% 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, favorable 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% at end-2016, slightly lower than 7.5% in 2015. Moody’s further expects this ratio to decline to 5.8% 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 capitalization 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.

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