TEXT-S&P revises BICRA on Vietnam to group '9' from group '10'
(The following statement was released by the rating agency)
Sept 26 -
-- Standard & Poor's has revised its Banking Industry Country Risk Assessment (BICRA) on Vietnam to group '9' from group '10'.
-- We have revised our economic risk score to '9' from '10' following the change in our assessment of economic imbalances to "high risk" from "very high risk". Our revision follows moderation in loan growth and asset prices subsequent to the government's stabilization policies.
On Sept. 26, 2012, Standard & Poor's Ratings Services revised its Banking Industry Country Risk Assessment (BICRA) on Vietnam (BB-/Stable/B; axBB+/axB) to group '9' from group '10'. It also revised the economic risk score to '9' from '10'. The industry risk score remains unchanged at '8'.
Our revision of the economic risk score follows the change in our assessment of "economic imbalances" in Vietnam to "high risk" from "very high risk", as our criteria define the terms. Our views of "very high risk" for "economic resilience" and "extremely high risk" for "credit risk in the economy" remain unchanged.
Policy actions that the Vietnam government initiated in 2011 to stabilize the economy have moderated the pace of loan growth and improved asset price stability. This has reduced the risk of economic imbalances. A tight credit policy slowed loan growth to 14.5% in 2011 from 28% on average in the previous four years. Lending restrictions on "non-productive" sectors--mainly property lending and securities lending--contributed to a reduction in real asset prices. These developments have halted or reversed a deterioration in key risk indicators. Inflation has retreated to 6.5% as of September 2012, from a peak of 23% in August 2011, which helped the central bank reduce policy rates and led to a moderation in lending rates.
Despite these improvements, potential risks of economic imbalances in Vietnam remain. The government has eased its policy stance to accommodate its growth objectives, and risks renewing concerns about its commitment to price stability. Any aggressive expansionary stance will heighten imbalances from private sector leverage. The process of restoring confidence in the banking system and monetary policy is in an early phase and calls for careful management, especially when nonperforming loans are rising.
Vietnam has a low-income economy, developing financial system, and evolving policy framework. These weaknesses increase the vulnerability of the economy to severe shocks. Vietnam's growth prospects partly offset these weaknesses.
Our assessment of credit risk in the economy is based on high private sector credit in a low income economy, and rudimentary underwriting standards. In our view, the legal system has inefficiencies that could lead to low recoveries and delays in settlement of foreclosures. We believe that reported nonperforming loan ratios will continue to increase in 2012 due to portfolio seasoning from years of rapid loans growth. That said, we expect the private sector's debt servicing burden to reduce due to lower lending rates as compared with 2011.
Our industry risk score for Vietnam reflects our "extremely high risk" assessment of the institutional framework, a "very high risk" assessment of competitive dynamics, and an "intermediate risk" assessment of system-wide funding.
In our view of Vietnam's institutional framework, its regulatory standards lag international norms. The central bank is prone to regulatory forbearance. We note that regulatory intervention has typically been reactive rather than proactive, though recently there have been some efforts to tackle long-standing issues in the banking sector and enforcement levels. We believe weaknesses in corporate governance and transparency further weaken the institutional framework and hamper the timely identification of emerging weaknesses. Most banks do not publish timely financial statements and notes typically do not contain sufficient details.
Our assessment of the Vietnam banking industry's competitive dynamics reflects the moderate risk appetite of the banks with a relatively stronger focus on short-term profitability and growth. Banks compete for both deposits and loans in saturated economic centers while a large part of the population is devoid of banking services. Smaller and less-known banks tend to compete on price and faced liquidity pressure recently. Furthermore, we believe the banking system is subject to market distortion from the frequent use of administrative controls.
Vietnam's adequate level of core customer deposits results in a low dependence on external funding and supports the banking system. Nevertheless, we believe that Vietnam is a confidence sensitive system where retail deposits have been volatile and susceptible to negative news. We believe the government would play a supportive role in the funding of the banking system, if needed.
We classify the Vietnam government as "highly supportive" toward domestic banking. We have observed a record of support for systemically important institutions, including capital injections.
RELATED CRITERIA AND RESEARCH
-- Vietnam Outlook Revised To Stable From Negative; 'BB-/B' Sovereign Ratings Affirmed, June 6, 2012
-- Banking Industry Country Risk Assessment Methodology And Assumptions, Nov. 9, 2011
-- Banks: Rating Methodology And Assumptions, Nov. 9, 2011
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