Vietnam devaluation negative for banks: Moody's

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Vietnam's large currency devaluation this month will likely weaken asset quality at the country's banks, while exacerbating liquidity management problems, Moody's Investors Service said on Monday.

A depreciating dong and heightened concerns about asset quality would delay banks' plans to sell shares to foreign strategic investors, it said in a statement.

The State Bank of Vietnam devalued the dong 8.5 percent by raising its reference rate against the dollar. It also narrowed the band in which the dollar can trade against the dong to 1 percent from 3 percent around that rate.

It was the central bank's biggest devaluation since the 1997-8 Asian financial crisis.

The devaluation will exacerbate inflation, Moody's said, creating higher costs, which will have the knock-on effect of reducing cashflows for consumers and businesses "and hence harm borrowers' ability to service their liabilities".

"The situation is worse in cases where borrowers have debt denominated in dollars but cashflows predominantly in dong," it added, warning that a similar mismatch hurt Thai and Indonesian banks during the Asian crisis and drove up non-performing loans in those countries.

The devaluation may reduce banks' capital ratios as dollar-denominated assets rise in dong terms relative to dong-denominated equity.

That, plus the threat of worsening asset quality and expected "aggressive" loan growth, may leave some with insufficient Tier 1 capital "to withstand these forces".

Moody's said some Vietnamese banks already faced tight liquidity because of insufficient deposits, particularly in dollars.

"Exchange-rate volatility may cause fund-flow difficulties and exacerbate liquidity-management challenges," it said.

On the bright side, the devaluation could stem the fall in foreign exchange reserves, which a senior economic minister said earlier this month ended last year "above $10 billion".

It may also narrow the country's trade deficit, Moody's said.

"However, without consistent policies to rein in excessive demand and control inflation, the positive aspects of the devaluation are likely to prove fleeting," Moody's said.

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