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Banking & Finance

Moody's raises outlook for banking sector

Released at: 15:54, 31/10/2017

Moody's raises outlook for banking sector

Illustrative image (Source: enternews.vn)

Outlook up from stable to positive for next 12-18 months.

by Quang Huy

Moody’s Investors Service has changed 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 expectations of how bank creditworthiness will evolve in the system over the next 12-18 months, reflects Vietnam’s robust economic growth, supported by domestic demand, healthy exports, and public sector investment,” said Mr. Eugene Tarzimanov, Moody’s Vice President and Senior Credit Officer.

“We forecast that Vietnam’s real GDP will grow 6.1 per cent in 2017 and 6.0 per cent in 2018; faster than the 5.9 per cent average for the previous five years,” he added. “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.”

Moody’s believes 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.

Banks’ asset quality will remain largely stable during the outlook with the 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 a 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, Moody’s noted.

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, any upgrade of the Vietnamese Government’s rating, which is positive, 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 Vietnam, which together accounted for 58 per cent of banking system assets as at June 30, 2017. Three of the 15 banks - BIDV (B1 positive, caa1), Vietcombank (B1 positive, b1), and Vietinbank (B1 positive, b2) - are controlled by the government, while the other 12 are privately-owned joint stock commercial banks.

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