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Apr 07, 2020 / 18:40

Moody's places five Vietnamese financial institutions on review for downgrade

An upgrade is unlikely, given the review for downgrade.

Moody's Investors Service has placed the long-term ratings and assessments of three Vietnamese finance companies and two Vietnamese banks on review for downgrade.

 Moody's has placed VPBank and SHB on review for downgrade

The three finance companies are VPBank Finance Company Limited (FE Credit), Home Credit Vietnam Finance Company Limited (HCV), and SHB Finance Company Limited (SHB Finance).

The two banks are Vietnam Prosperity Joint Stock Commercial Bank (VP Bank), which fully owns FE Credit, and Saigon-Hanoi Commercial Joint Stock Bank (SHB), which fully owns SHB Finance.

According to Moody’s, the rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, and falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets.

The consumer finance industry in Vietnam is vulnerable to the disruptions given its risky borrower profile and heavy reliance on wholesale funding. Moody's regards the coronavirus outbreak as a social risk under its Environmental, Social, and Governance (ESG) framework, given the substantial implications for public health and safety.

“Today's action reflects the impact on Vietnamese consumer finance companies and their parent banks of the breadth and severity of the shock, and the deterioration in credit quality it has triggered,” said Moody’s in a release.

The review for downgrade of FE Credit, HCV and SHB Finance reflects Moody's expectation that the economic shock caused by the coronavirus could have a negative impact on the companies' asset quality, profitability and liquidity, because of the risky profile of its borrowers and heavy reliance on wholesale, confidence-sensitive funding. The impact will depend on the severity and duration of the economic shock.

The review for downgrade on the ratings and assessments of VP Bank takes into consideration the negative implications of a potential deterioration in the credit profile of FE Credit on that of the consolidated group.

Moody's expects a deterioration in SHB Finance's credit profile will only have a modest impact on its parent, SHB, as the subsidiary accounted for just 1% of consolidated total assets at the end of June 2019. However, while SHB's asset quality improved in 2019 following a sizable resolution of its legacy problem assets, the review for downgrade on the ratings and assessments of SHB reflects Moody's expectation that the bank's loans to small and medium-sized enterprises (SMEs) in Vietnam -- which accounted for 31% of gross loans at the end of 2019 -- will pose renewed asset risk, as these SMEs have limited financial buffers to withstand revenue shocks.

An upgrade is unlikely, given the review for downgrade. Nevertheless, Moody's could confirm the ratings with a stable or a negative outlook depending on macroeconomic conditions in Vietnam and the severity and duration of the coronavirus outbreak on the companies' credit metrics.

Moody's could downgrade the ratings if the companies' solvency and liquidity profile weaken materially as a result of a prolonged outbreak and poor risk management.

For VP Bank and SHB, Moody's review for downgrade will focus on the quality of the banks' consumer finance loans as well as loans to borrowers operating in industries directly affected by the coronavirus outbreak.

Meanwhile, Moody's could downgrade the ratings and assessments if the banks' BCAs are downgraded. The BCAs could be downgraded if the banks' solvency weakens as a result of a prolonged outbreak of the coronavirus. Any indication of a bank run or a limited access to market funds will also be negative for the banks' BCAs.