Vietnam's banking system outlook over the next 12 to 18 months remains negative, in line with the country's sovereign debt, Moody's Investors Service said, citing concerns about falling profits and poor asset quality.
Domestic economic imbalances pose a risk to banks' asset quality and make funding more difficult, Moody's said in a report Thursday. The quality of assets held by banks is "far worse" than implied by officially reported non-performing-loan figures, and some companies have begun reducing deposits due to refinancing difficulties and weaker earnings, Moody's said.
Vietnam is struggling to contain the fastest inflation in Asia and facing slower growth and a persistent trade deficit. Its economy is vulnerable to systemic risk resulting in part from undercapitalized banks, rising debt and deteriorating corporate profits, Credit Suisse Group AG (CSGN) said this week.
"The central bank is reinforcing the monitoring of the banks and they are prepared to take action against any that don't follow their directives," Alain Cany, the Ho Chi Minh City-based chairman of the European Chamber of Commerce in Vietnam, said by phone today. "We may also see some consolidation in the sector."
Asset quality is worsening and credit growth is beginning to slow after loans swelled rapidly over the past two years, wrote Karolyn Seet, a Singapore-based assistant vice president at Moody's. Bank loans rose 28 percent in 2010 and the central bank is capping credit growth at 20 percent this year to quell inflation, the ratings company said.
"A combined deterioration in asset quality and funding would cause impairment charges to increase and competition for deposits and other sources of funding to intensify, which would unavoidably cause profit margins to narrow," Seet wrote, also citing a "troubling trend" toward more dollar loans, which exposes borrowers to refinancing risks if exchange rates change.
Moody's has a negative outlook on the country's B1 credit rating, its fourth-highest non-investment grade. The New York- based company downgraded Vietnam's long-term foreign-currency rating in December, as did Standard & Poor's.
Bank risk management and strategy in Vietnam have been hampered by inconsistent policies resulting from government efforts to control inflation and support growth at the same time, according to Moody's. It cited the central bank's decision to cut a key interest rate in July, reversing an increase a month- and-a-half earlier.
Borrowers face difficulties because of high inflation and lending rates as high as 27 percent, Seet wrote. Consumer prices in Vietnam climbed 23.02 percent in August from a year earlier, the fastest pace among 17 Asian economies tracked by Bloomberg.
"We are concerned about the ability of banks to raise capital from the markets, as more weakly capitalized entities may be perceived as experiencing difficulty maintaining their market shares and showing increased vulnerability to solvency pressures," Seet wrote.
The near-bankruptcy of state-owned Vietnam Shipbuilding Industry Group, known as Vinashin, has raised doubts about the "true" asset quality of the country's banks, Moody's said. Some banks have failed to classify loans to Vinashin as non- performing, according to the ratings company.
Vinashin defaulted on foreign-currency borrowings at the end of 2010, according to Moody's.