There was nothing too surprising in Fitch Ratings’ downgrade of four leading banks in Vietnam.
One month after downgrading Vietnam’s rating from BB-minus to B-plus, on August 31, Fitch Ratings has announced bulletins on ratings for four top Vietnamese banks: the Asia Commercial Bank (ACB), the Bank for Foreign Trade of Vietnam (Vietcombank), the Vietnam Bank for Agriculture and Rural Development (Agribank), and the Bank for Investment and Development of Vietnam (BIDV).
Sad but true
ACB and Vietcombank were downgraded in their Individual Rating to D/E from D and removed from Rating Watch Negative (RWN). Fitch has also affirmed ACB’s support rating at “5” and Vietcombank’s at “4”. The downgrade reflects both ACB’s and Vietcombank’s substantially weakened balance sheet, given excessive strong loan growth. Fitch estimates that, by end-September 2010, ACB’s capital adequacy ratio (CAR) will be lower than the newly regulated minimum of 9 percent in Circular No.13 (effective October 1, 2010). Fitch also believes that the credit profile of Vietcombank is comparable to its D/E-rated Vietnamese state-owned banks, even though the bank’s loan-to-deposit (LTD) ratio is among the lowest. Furthermore, Fitch believes Vietcombank’s Individual Rating remains under pressure, due to increasing risk of high credit costs arising from underlying weak loan quality and already limited capitalization.
At the same time, Agribank and BIDV had Individual Ratings affirmed at E and D/E, respectively, and a support rating of “4” for both. This reflects Fitch’s view that the banks continues to be challenged by limited balance sheet strength arising from excessive strong loan growth, weak asset quality, high loan concentration to the riskier agricultural/rural and construction sectors (60 percent of Agribank’s total loans and around 23 percent of BIDV’s total loans), and low liquidity. In this regard, Agribank and BIDV remain under considerable pressure due to the increasing risk of higher credit costs arising from very weak underlying loan quality and weakening liquidity.
Time to improve
If we look back on Fitch’s report last year – “Outlook on Vietnamese Banks, Another Year of High Growth Adds to Concerns” – this downgraded result is no surprise. In that report Fitch considered Vietnamese Accounting Standards (VAS) to not be as strict as International Financial Reporting Standards (IFRS), especially in clarifying standby loans. Fitch said that Vietnam’s banks face many difficulties related to asset and capital quality, with high credit growth leading to quality loans going down, and regulation are often looser as banks rapidly expand. Fitch forecasted a credit risk for Vietnamese banks so the downgrade was fairly predictable.
Ms. Christine Shields, Head of Country Risk Research at Standard Chartered Bank, said: “Credit risk in the banking system in Vietnam is relatively significant and the outlook will be even more become significant. From 2007 to now we have seen very rapid credit growth, and high credit growth may pressure the banks’ liquidity and credit quality. One of the most important solutions in dealing with this risk is improving transparency in banks.” Fitch also notes that there is a risk of banks’ loan growth accelerating in 2010, given the government’s strong encouragement to expand loans by up to 25 percent in 2010 as a means of supporting economic growth.
Fitch expects the four banks, along with other Vietnamese banks, to continue to face a difficult environment, particularly given the Vietnamese government’s weakening ability to manage and control inherently volatile market conditions when needed.
It will also consider upgrading a bank’s rating in the event of the following: were it to maintain capitalization well above the new regulatory minimum on a sustainable basis; its loan quality under IFRS substantially improves; and its loan-to-deposit (LTD) ratio is managed down through growth in retail deposits.
Vietnam Financial Review
