Moody's: Outlook for Vietnam banking system is positive; strong economic prospects

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 outlooks for most rated banks.

"The change in outlook -- which expresses our expectation of how bank creditworthiness will evolve in this system over the next 12-18 months -- reflects Vietnam's robust economic growth, supported by domestic demand, healthy exports and public sector investment," says Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer. "We forecast Vietnam's real GDP will grow 6.1% in 2017 and 6.0% in 2018, faster than the 5.9% average for the previous five years."

"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," says Tarzimanov.

Moody's conclusions are contained in its just-released, "Banking System Outlook -- Vietnam, Positive outlook reflects strong economic prospects". Moody's subscribers can access this report via the link provided at the end of this press release.

The banks' operating environment will benefit from robust economic growth, based on ongoing improvements to infrastructure, favourable demographics, and the government's continued focus on reform to support foreign direct investments.

The banks' asset quality will remain largely stable during the outlook with the problem loan ratio at 7.1% at end-2016, slightly lower than 7.5% in 2015. Moody's further expects this ratio to decline to 5.8% 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 the banks struggle to replenish capital against rapid loan growth. High provisioning expenses will undermine the 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.

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, government support notching could increase for some bank ratings. Any upgrade of the Government of Vietnam rating -- which is on positive outlook -- 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% of banking system assets as of 30 June 2017. Three of the 15 banks — JSC Bank for Investment & Development of Vietnam (B1 positive, caa1), JSC Bank for Foreign Trade of Vietnam (B1 positive, b1) and Vietnam JSC Bank for Industry and Trade (B1 positive, b2) — are controlled by the government, while the other 12 are privately owned joint-stock commercial banking institutions.