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Banking & Finance

Moody's downgrades Sacombank's long-term ratings, maintains negative outlook

Released at: 09:23, 14/06/2017

Moody's downgrades Sacombank's long-term ratings, maintains negative outlook

Photo: Sacombank

Credit ratings agency releases latest opinion on June 13.

by Quang Huy

Moody’s Investors Service downgraded Sacombank’s long-term deposit and issuer ratings to Caa1 from B3 on June 13, mainly on account of the bank’s weakened solvency position, as reflected in its large stock of problem assets.

It also downgraded the bank’s BCA to caa2 from caa1 to reflect the higher risk to the bank’s standalone financial position.

In May 2017, the State Bank of Vietnam (SBV) approved the restructuring plan for Sacombank from now to 2025. According to Sacombank, the plan is the consequence of its merger with the problematic Southern Bank in late 2015.

The plan identifies problem assets that need to be dealt with by 2025, which gives the bank the flexibility to create credit provisions over the coming years without the need to create provisions upfront, giving Sacombank time to gradually work out its problem assets through the repossession and disposal of collateral.

The plan does not envisage the provision of capital or liquidity support either from the government or the central bank, but “Moody’s understands that the majority of shareholders in Sacombank have entrusted their shares to SBV through the Vietnam Asset Management Company (VAMC), which currently manages these shares,” the report said.

Sacombank’s total stock of problem assets stood at around VND90 trillion ($3.96 billion) at the end of 2016, or around 27 per cent of total assets. According to the bank, problem assets include non-performing loans, VAMC securities, repo transactions, and accrued interest receivables.

The bank has low balance sheet buffers against such a large stock of problem assets, Moody’s believes. Buffers included credit provisions of VND4.8 trillion ($211.5 million) and tier 1 capital of VND19.6 trillion ($863.8 million) at the end of 2016. In Moody’s view, it will take the bank many years to gradually resolve its large stock of problem assets.

As part of its restructuring plan, Sacombank plans to aggressively repossess and sell collateral that is backing its problem assets. According to the bank, the value of such collateral - mostly real estate - amounted to VND77 trillion ($3.4 billion) at the end of 2016 and the bank’s management has very high recovery expectations on problem assets in the coming years.

Moody’s considers that success in recoveries is far from assured, because collateral repossession can be lengthy in Vietnam, while monetization depends on the dynamics of the real estate market.

The reported capital position of the bank is modest, with a tangible common equity to adjusted risk weighted assets ratio of 8.5 per cent at the end of 2016. The economic capital position of the bank is actually much weaker in Moody’s view, “because of the large provisioning gap, even if the bank is able to sell the collateral at close to its expected valuation,” its report noted.

Moreover, Moody’s expects that Sacombank will pursue a rapid growth strategy to increase the share of performing assets, which will create further negative pressure on its capital position.

Profitability will remain very low in the coming years, as a large part of pre-provision income will be channeled into credit provisions. For 2016, the bank’s financial performance was close to break-even level.

Sacombank’s liquidity and funding profiles were relatively stable in 2016 and the early part of 2017 but at a thin level after deteriorating in 2015 following the merger with Southern Bank. Liquid assets amounted to 14 per cent of total assets at the end of March, providing a weak buffer against funding and liquidity shocks.

Its Caa1 deposit and issuer ratings benefit from a one-notch uplift above the bank’s caa2 BCA, based on “moderate” support probability from the government (B1 positive).

Moody’s support assumption is underpinned by Sacombank’s approximate 4 per cent market share in banking system assets at the end of 2016. Although Moody’s does not expect any capital support to be provided to Sacombank from the government, some emergency liquidity assistance from the SBV may be provided, in case of need.

Because the bank’s BCA was downgraded to caa2 from caa1, Moody’s has downgraded its adjusted BCA to caa2 from caa1 and long-term counterparty risk assessment to B3(cr) from B2(cr).

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