Fitch upgrades Issuer Default Ratings of Vietnamese banks

Accordingly, MB’s Long-Term IDR has been upgraded from ‘B’ to 'B+' with a Stable Outlook and its Viability Rating went from ‘b’ to 'b+'.

The agency has also upgraded the Viability Ratings of Vietcombank and Vietinbank from ‘b-’ to 'b'. The Long-Term IDRs of Agribank, Vietinbank, and Vietcombank have been affirmed at 'B+' with a Positive Outlook.

The IDR of ACB, meanwhile, has been affirmed at 'B' with a Stable Outlook. The positive ratings, according to Fitch, takes into account the Vietnamese banking system's enhanced operating environment, with improved economic policy-making from authorities promoting macroeconomic stability and predictability.

Fitch upgrades MB, affirms four local banks’ Issuer Default Ratings

“This has enabled banks to significantly reduce their exposure to legacy problem loans that have long weighed on their balance sheets and offsets, in part, the banking system's long-standing structural weaknesses—such as thin capital buffers and weak profitability—which we expect to be more adequately addressed over the longer term,” Fitch Ratings wrote in its press release.

The upgrade of MB's Viability Rating and Long-Term IDR takes into account its higher capital levels compared with peers and continued asset quality improvement, as reflected in its more diversified loan composition and declining problem-loan ratio (end-2017: 2.9 per cent, end-2015: 6.8 per cent). The bank's Fitch Core Capital ratio of 11.4 per cent at end of June 2017 was the highest among Fitch-rated Vietnamese banks.

The ratings agency expects MB to continue generating higher profitability than peers, supported by a wider net-interest margin and leaner cost structure, which has aided its internal capital generation. The bank's operating profit/risk-weighted assets ratio of 2.3 per cent is likely to stay above the majority of local peers. The bank's loan/deposit ratio increased to 88 per cent at the end of June 2017 due to rapid loan growth.

The long-term IDRs of MB and ACB are driven by their Viability Ratings and reflect their smaller franchises but better loan quality compared to state-owned banks. Fitch believes the capital encumbrance of ACB and MB from under-reporting of non-performing loans is lower than state-owned banks.

ACB's ratings also reflect its improving asset quality and profitability profile. Its loan quality is likely to be better than most of its peers given its much lower loan concentration risk, with a small 1 per cent exposure to state-owned enterprises at the end of June 2017. The bank's problem loan ratio improved significantly after selling the entirety of its bad debt to Vietnam Asset Management Company (VAMC) in 2017.

“We expect ACB to continue improving its profitability in the near term, as legacy problem exposures are mostly provisioned for and the full resolution of bad debts sold to VAMC should alleviate its credit cost burden. The bank's operating profit/risk-weighted assets ratio improved to 1.9 per cent in the first six months of 2017 from its four-year average of 1.2 per cent to the end of 2016,” said the agency.

The Stable Outlooks on MB and ACB reflect Fitch's expectation that their asset quality and profitability profiles will be maintained over the near- to medium-term amid macroeconomic stability in Vietnam.

The upgrade of Vietcombank and Vietinbank's Viability Ratings reflects the banks' improvement in asset quality, with problem loan ratios—comprising of reported non-performing loans, bad debt sold to VAMC, and special mention loans—improving to 2.4 per cent and 2.8 per cent at the end of June 2017, from 5.1 per cent and 3.4 per cent, respectively, at the end of 2015.

This was supported by the benign operating environment and strong retail loan growth. Vietcombank's full resolution of bad debts sold to VAMC in 2016 will lower its credit cost burden.

The assessment also incorporates the banks' strong domestic franchises, but limited balance sheet strength relative to problem assets and growth aspirations. Fitch Core Capital ratios of 8.8 per cent for Vietcombank and 6.9 per cent for Vietinbank are low and require capital raising in the run-up to the implementation of Basel II by January 1, 2020. Internal capital generation remains weak, as evidenced by low operating profit/risk-weighted assets ratios of 1.8 per cent for Vietcombank and 1.4 per cent for Vietinbank from 2013 to the first half of 2017.

Loan/customer deposit ratios remain manageable and largely unchanged—at 81 per cent for Vietcombank and 106 per cent for Vietinbank as of the end of June 2017—despite strong loan growth in the previous few years.

Fitch believes the two state-owned banks have an advantage over private banks in times of stress, as depositors are likely to have more confidence in a majority state-owned bank.

Fitch does not assign a Viability Rating to wholly government-owned Agribank. Providing support to the domestic economy has a high influence on its standalone profile and makes it likely that it will continue to benefit from regulatory forbearance.