Moody's praises VN's tighter bank liquidity, lending rules

Credit ratings agency Moody's has responded positively to the State Bank of Vietnam's Circular 06/2016/TT-NHNN on asset-liability management and real estate loans. - Photo bizlive.vn

"The new rules, while milder than those proposed in February, are credit positive for Vietnamese banks, as they will support liquidity and limit the banks' exposure to the higher-risk real estate sector," Moody's analysts wrote in a recent report.

It will also help moderate banks' credit growth in the system, particularly in the real estate sector, the credit rating agency said.

Circular No06, replacing Circular No36, contains some major changes, among which is the central bank's approval of banks using a maximum ratio of 50 per cent of short-term funding for loans with terms extending beyond 12 months by the end of 2016, down from the current 60 per cent.

This ratio will then be reduced to 40 per cent by the end of 2017.

This transition period gives banks time to adjust to the new rule and is longer than that initially proposed in February, when it was suggested that the maximum ratio be lowered to 40 per cent by the end of this year, according to Moody's.

Moody's analysts believe banks with a sizeable share of longer-term loans will have to slow their credit growth or shift their focus to shorter-term loans, which will benefit their liquidity.

"The banks can attract longer-term funding to finance longer-term loans, but success in such an endeavor is unlikely because of higher funding costs and intense competition for deposits," the report said.

Moody's also pointed out that among ratios of short-term funding used for loans with terms longer than 12 months, Vietnam Prosperity Bank (VPB) had the highest, at 43 per cent, followed by VIB, with 40 per cent.

Circular No06 also raises the risk weights for real estate loans to 200 per cent by the end of 2016 from the current 150 per cent, an increase that is smaller than the 250 per cent suggested in the February proposal.

"The increased risk weight is credit positive for the banks, as it will help limit their appetite for lending to this high-risk sector, given their already weak capital ratios," Moody's said.

The credit rating agency warned, however, that the Vietnamese banks most affected by the higher risk weightings were VPB and SHB, owing to their sizeable exposure to the real estate sector.

"Their already weak capital ratios, which reflect both higher credit costs and a rebound in credit growth, mean the new guidelines will compel these banks to either reduce their exposure to the real estate sector or significantly slow their credit expansion," Moody's said.