August 24, 2012 / 10:51 AM / 8 years ago

TEXT-Fitch:Vietnam banks' vulnerabilities surface; rtg risk rises

(The following statement was released by the rating agency)

Aug 24 - Fitch Ratings says recent events in the Vietnamese banking industry highlight its vulnerabilities to shocks and could put financial stability at risk, increasing the potential for negative rating actions on banks. Vietnamese banks’ ratings are already among the lowest in Asia Pacific.

The recent arrest of a high-profile banking tycoon could trigger renewed investor concerns about corporate governance, transparency and liquidity issues in the Vietnam’s banking sector, which are broadly reflected in the banks’ ratings. Despite additional liquidity reportedly provided by the State Bank of Vietnam to the sector in response to this incident, Fitch will monitor the broader impact of the above development on domestic banks.

Likely negative rating triggers would be a deposit run contributing to institution-specific liquidity risks, corporate governance issues or disclosure of bank-specific exposures with the potential of losses threatening capital.

Even if the situation were to be short-lived and largely contained, Fitch highlights that Vietnamese banks are still vulnerable due to its high - despite stabilising over the past one to two years - credit/GDP ratio relative to many emerging markets, as mentioned in a recent report ‘Asia-Pacific Banks’ Rising Leverage Highlights Concerns’. This, together with broader macroeconomic vulnerabilities often found in developing markets, makes the financial system particularly sensitive to shocks.

Fitch still believes Vietnam’s system-wide NPLs to be understated, which together with a general lack of transparency, means banks’ capital levels may be weaker than reported. Since 2011 NPLs have increased across the system due to difficult credit conditions. While there has been some success in bringing down the high inflation and interest rates, economic activity is likely to be further hit by global headwinds. Earnings growth may continue to be modest, as interest rate cuts/caps in H112 had hurt margins and did little to boost loan demand. Also, notwithstanding core capitalisation increases of some major banks over 2011/H112, the system remains weak on this measure and vulnerable to asset-quality shocks.

On the regulatory reform front, the Vietnamese authorities have been attempting to tackle several deep-rooted issues. Specific reform measures have been announced such as consolidation among smaller players and the establishment of an asset management company to acquire bad debt from banks. However, there has no perceptible progress so far on implementation.

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