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Banking & Finance

Moody's: Vietnamese banks' profitability strengthening

Released at: 14:33, 31/07/2018

Moody's: Vietnamese banks' profitability strengthening

Photo: Duc Anh

Ratings agency releases report on Vietnam's banking sector.

by Doanh Doanh

The profitability of Vietnamese banks is strengthening as robust economic growth fuels credit demand and supports an improvement in asset quality, but challenges are also apparent, according to the latest announcement from Moody’s Investors Service.

Moody’s conclusions are contained in its recently-released report, “Banks - Vietnam: Deteriorating capitalization will weaken State-owned lenders’ credit profiles”. The average return on tangible assets (ROTA) at rated Vietnamese banks rose to 0.97 per cent in 2017 from 0.70 per cent in 2016 while their asset-weighted average ratio of problem loans declined to 4.7 per cent at the end of 2017 from 5.9 per cent a year earlier.

“Credit growth is outpacing internal capital generation, weighing on capital ratios, and State-owned banks - unlike their private-sector counterparts - have been slow in raising external capital even as their capital ratios slide,” said Moody’s analyst Ms. Rebaca Tan. “Against such a backdrop, a continued deterioration of capitalization will weaken the competitiveness of State-owned banks and ultimately their credit profiles.”

Looking ahead, Moody’s expects profitability and asset quality metrics to further improve in 2018-19, although rapid loan growth, at 21 per cent in 2017, could mask asset risks.

Specifically, banks have increased their lending to retail and small and medium-sized enterprises (SMEs), a positive for their margins due to the relatively high rates for such loans. At the same time, the shift away from lending to State-owned enterprises (SOEs) is positive because many SOEs remain in poor financial health.

However, internal capital generation will be insufficient to cover this rapid pace of loan growth and rated Vietnamese banks will need an additional $7 billion-$9 billion in capital to achieve Tier 1 capital ratios of 11 per cent in 2018 and 2019, while sustaining current loan growth rates.

Without external capital, Moody’s estimates that the Tier 1 capital ratio of rated private sector banks will drop to 8.0 per cent by the end of 2019 from 9.4 per cent at the end of 2017, while that of rated State-owned banks will drop to 6.1 per cent from 6.9 per cent over the same period.

These concerns are somewhat mitigated for private sector banks, which have been actively raising equity capital from the market through a series of successful new share offerings since 2017 that have helped increase capital ratios.

By contrast, State-owned banks have been slow in raising external capital even as their capital ratios slide - primarily because the government prefers strategic investors.

With their larger capital buffers, private sector banks will be able to increase investments in business growth, which will lead to stronger profitability and internal capital generation.

Conversely, Moody’s views State-owned banks as caught in a cycle, with capital shortfalls impeding growth, resulting in continuously inferior internal capital generation and ultimately weaker competitiveness. As a result, Moody’s expects their credit profiles to fall behind those of private sector banks.

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