Moody's outlook remains stable for Vietnam banking system

"The banks' balance sheet buffers are weak, because of the size of their legacy problem assets," said Daphne Cheng, a Moody's Analyst in the report released on December 1.

"Nevertheless, while legacy loan levels remain elevated, transparency in relation to such problem assets has improved," added Cheng. "Moreover, Vietnam's rapid economic growth will improve the recovery prospects of the banks' legacy problem assets and stabilize asset risks."

Moody's analysis of Vietnam's banking system is contained in its recently-released report on Vietnamese banks titled, "Banking System Outlook Vietnam: Resilient Economic Growth Drives Stable Outlook.”

With the operating environment, Moody's expects that Vietnam's economy will show resilient growth, supported by robust exports and foreign investment. Real GDP growth will remain strong, with Moody's forecasting growth of 6.1% in 2016 and 6.0% in 2017. Stable inflation and interest rates will also help support domestic demand and household consumption.

On asset quality and capital, Moody's says that the asset quality will remain stable but weak, while capital buffers will continue to deteriorate because of high loan growth. Moody's also says that banks' elevated credit growth is outpacing internal capital generation, while sources of external capital are limited.

Moody's estimates a problem loan ratio of 3.8% for rated banks, based on non-performing loans classified in categories 3 to 5 under Vietnam Accounting Standards (VAS), plus special mention loans classified in category 2 under VAS. However, in addition to the gross value of assets sold to Vietnam Asset Management Company (VAMC) they also reported an increase in problem assets ratio from 6.9% at end of 2015 to 7.1% on June 30 of this year.

As for funding and liquidity, system liquidity is tightening moderately, due to rapid lending growth not matching up with deposit growth. Moody's-rated banks reported an average loan to deposit ratio of 81% on June 30, 2016, up 79 per cent at the end of 2015.

Nevertheless, low inflation rates and government de-dollarization policies have supported a stable environment for the funding of local currency deposits. At end of 2015, market funds financed 19% of assets, down from 23% in 2012. Lower levels of interbank funding have also decreased the risk of financial contagion.

With profitability, Moody's says that it will stay stable but low as credit costs offset higher pre-provision income. Net interest margins should show a slight compression, due to the high levels of competition in the banking system.

Although loan growth has shifted to the higher-yielding consumer and small- and medium-sized enterprise segments, deposit rates have increased. Bottom-line profitability will remain stable, because higher pre-provision income will be offset by elevated credit costs.

On government support, Moody's says that its government support assumptions for Vietnam remain unchanged. Moody's assumes that systemic support will be forthcoming for state and private banks, in case of need. The government's capacity for capital injections into banks is limited, and support will mainly be in the form of liquidity assistance and regulatory forbearance.

Moody's rated 14 banks in Vietnam, which together accounted for 56% of banking system assets on June 30, 2016.

Three of the 14 banks, BIDV at B1 local currency deposit rating, stable; Vietcombank at B1 local-currency deposit rating, stable; and Vietinbank at B1 localcurrency deposit rating, stable. All three above are government controlled, while the other 11 are privately owned joint-stock banks.

Moody's has maintained a stable outlook for Vietnam's banking system since December 2014.