Fitch Ratings just released Vietnamese Banks Report Card 1H18
According to its press release on September 26, 2018, Fitch Ratings expects its rated Vietnamese banks to sustain their improving operating trends in 2H18, on the heels of better credit quality and profitability, and broadly stable funding and liquidity in 1H18. Fitch Ratings expects these banks to continue to capitalize on their higher earnings and the strong economy to reduce legacy bad debt exposures.
The weighted-average problem loan ratio – comprising reported non-performing loans, “special mention” loans and bad debt sold to Vietnam Asset Management Company (VAMC) – of Fitch-rated banks had eased to 1.9% by end-June 2018 from 3.4% at end-2016. Nonetheless, Fitch believes the true credit quality remains weaker than reported.
Fitch Ratings expects profitability of these banks to continue to rise in 2H18, aided by rapid growth in high-margin retail loans and a reduction in credit costs. The expansion into retail loans in recent years has helped diversify banks’ commercial loan-dominated loan compositions, which reduces concentration risk. However, it could lead to future credit quality issues if not properly monitored and controlled.
One area to monitor is the growing pace of funding costs in view of rising loan/deposit ratios on the back of rapid credit growth that outpaces deposit growth. This, along with tighter short-term funding rules, could trigger keener competition for deposits. That said, Fitch Ratings believes deposit competition is unlikely to become overly intense in the short term – given that the loan/deposit ratio of Fitch-rated banks is not excessive at 89.7% at end-June 2018 (end-2017: 89.3%).
Notwithstanding the improvements, Fitch-rated banks’ loss-absorption buffers remain thin and will require significant capital injections to recapitalize their balance sheets as Basel II implementation in Vietnam draws closer. For details, please refer to “Measuring Potential Capital Shortfalls of Vietnam Banks – Amended”, dated 12 September 2018.