Fitch Ratings has revised the outlook of 5 Vietnamese banks because the low growth rate caused by the Covid-19 pandemic is likely to negatively impact banks’ credit information in the near future.
Lower long-term issuer default rating (IDR)
Fitch Ratings has revised the Long-term Issuer Default Ratings (IDR) of two state-owned banks and one 100% foreign-owned bank in Vietnam from Positive to Stable, and outlook on the two joint stock commercial banks to Negative from Stable.
Specifically, the three banks having their outlook changed from ‘Positive’ to ‘Stable’, with IDR affirmed at ‘BB-’ are VietinBank, Vietcombank and ANZ Vietnam; the two banks have their outlook adjusted from 'Stable” to 'Negative', with IDR at ‘B’, is ACB and MB.
This downgrade comes from the low growth - albeit positive - that Vietnam has faced due to the Covid-19 pandemic and the possibility of negative impacts on banks' credit information in the coming time. IDRs of all five banks have been affirmed at the present level because Fitch Ratings expects a solid economic recovery in 2021, although the adverse effects on banks caused by pandemic will still last long.
GDP growth at 3.3%
Vietnam's GDP growth has slowed down, reaching 3.82% in the first quarter of 2020, which is a decrease from 7% growth in the fourth quarter of 2019. Fitch forecasts growth of Vietnam’s GDP in 2020 will be only 3.3%, the lowest growth since 1987 - the first year of economic reform. The economic shock from the pandemic will lead to rising unemployment rate and could quickly bring a large number of informal workers and micro-businesses serious financial difficulties.
On March 16, the State Bank of Vietnam (SBV) also announced to cut operating rates and instructed commercial banks to provide support to borrowers affected by the disease, and to relax provisions on classification and provisioning. As a result, the banking industry has become an important intermediary in bailout and will likely bear most of the policy burden.
Fitch has downgraded Vietnam's operating environment from 'BB-' to 'B+', but maintained a stable outlook with the prediction that the slowdown in economic activities will be short-term and there will be significant recovery in 2021, with growth rate at 7.3%. According to Fitch, the sudden shortage of economic dynamics that Vietnamese banks have faced in recent years will directly affect their asset quality and income. Moreover, risk appetite, capitalization, and declining governance scores may put pressure on banks to issue subsidized loans.
The outlook on asset quality is also downgraded to 'Negative' from “Stable” for all Vietnamese banks. This negative outlook also takes into account the rapid credit growth of banks in recent years, especially consumer loans and unsecured loans. In some banks, credit risk provisions are not enough, making the " loss absorbing capacity buffer" still quite thin. Many banks still have to hold bonds of Vietnam Asset Management Company (VAMC).
In addition, Fitch also predicts that banks' profits will be under considerable pressure due to falling credit demand and lower lending rates after the SBV announced interest rate cuts and required banks to join hands to assist affected businesses. Meanwhile, deposit interest rates did not fall too much for the sake of depositors. Slower credit growth and lower fee income means that banks have lower core earnings to cover credit costs. Therefore, Fitch has lowered the outlook on banks' profits to ‘Negative’.
The thin capital buffer is also a weakness that Fitch once warned when some banks tried to meet Basel II standards. The outlook on capital structure of most banks is rated as 'Stable' by Fitch with the hope that banks will have enough profit to support the balance sheet growth, except for Vietinbank whose capital was rated as 'Negative' as its asset quality is lower than that of other domestic banks.
Fitch's ratings of banks' liquidity did not change due to the impact of Covid-19 when liquidity management received great support from the SBV. Fitch said that the SBV will continue to provide liquidity to the system under the direction of the government.
Fitch emphasized that the ratings of private commercial banks could return to “Stable” if economic conditions become more favorable, allowing business activities to recover to pre-pandemic levels. On the contrary, if the credit tension in the system becomes more pronounced and exceeds the basic profit expectations, banks' capitalization will deteriorate and the rating outlook will continue to be lowered.
Source: Fitch Ratings
Writer: Henry Tran - VietnamCredit
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