Fitch Ratings has said it expects its rated Vietnamese banks to sustain their improving operating trends in the second half this year, on the heels of better credit quality and profitability, and broadly stable funding and liquidity in 1H18.Net interest margins (NIM) improved further and asset quality remained relatively stable in 1H18 for Vietnamese banks rated by Fitch Ratings, which boosted overall profitability to recent highs.
Fitch Ratings expects these banks to continue to capitalize on their higher earnings and the strong economy to reduce legacy bad debt exposures, the rating agency has said in a note on Thursday.
The weighted-average problem loan ratio of Fitch-rated banks had eased to 1.9% by end-June 2018 from 3.4% at end-2016. Nonetheless, Fitch believes the true credit quality remains weaker than reported.
The trouble loans comprise reported non-performing loans, “special mention” loans and bad debt sold to Vietnam Asset Management Company (VAMC), according to Fitch.
“We expect profitability of these banks to continue to rise in 2H18, aided by rapid growth in high-margin retail loans and a reduction in credit costs. The expansion into retail loans in recent years has helped diversify banks' commercial loan-dominated loan compositions, which reduces concentration risk. However, it could lead to future credit quality issues if not properly monitored and controlled.”
One area to monitor is the growing pace of funding costs in view of rising loan/deposit ratios on the back of rapid credit growth that outpaces deposit growth. This, along with tighter short-term funding rules, could trigger keener competition for deposits.
That said, Fitch analysts believe deposit competition is unlikely to become overly intense in the short term - given that the loan/deposit ratio of Fitch-rated banks is not excessive at 89.7% at end-June 2018, compared to 89.3% at end-2017.
Notwithstanding the improvements, Fitch-rated banks' loss-absorption buffers remain thin and will require significant capital injections to recapitalize their balance sheets as Basel II implementation in Vietnam draws closer.
“We expect more active capital-raising to bridge potential capital shortfalls under Basel II, especially by state-owned banks,” Fitch said.
