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S&P: BICRA on Vietnam revised to Group '10' from Group '9'
Overview
We are reviewing our Banking Industry Country Risk Assessment on Vietnam after having published our updated methodology.
We are revising our BICRA on Vietnam to group '10' from group '9'.
We are also revising our economic risk score to '10' from '9', and assigning an industry risk score of '8'.
Bicra Action
On Nov. 9, 2011, Standard & Poor's Ratings Services revised its Banking Industry Country Risk Assessment (BICRA) on Vietnam to group '10' from group '9'. It has also revised the economic risk score to '10' from '9'. In addition, it has assigned an industry risk score of '8'.
Rational
We have reviewed the banking sector of Vietnam under our updated BICRA methodology. The BICRA groups summarize our view of the risks that a bank operating within a particular country and banking industry faces relative to those in other banking industries. They range from group '1', (The lowest risk) to group '10' (The highest risk). Other countries in BICRA group '10' are Greece and Belarus.
Our economic risk score of '10' for Vietnam reflects "very high risk" assessments on economic resilience and economic imbalances, and an "extremely high" credit risk in the economy.
Vietnam has a low-income economy, developing financial system, and evolving policy framework. These weaknesses increase the vulnerability of the economy to severe shocks. Healthy growth prospects, reinforced by the government's persistent efforts in economic restructuring, partly offset these weaknesses
We believe there is a very high risk of economic imbalances, given the rapid credit growth in the past several years. Strong growth in real housing prices also contributes to the risk of a sharp drop in prices.
Our "extremely high risk" assessment of credit risk in the economy is based on high private sector credit, low income levels, and rudimentary underwriting standards. In our view, the legal system has inefficiencies, which could lead to low recoveries and delays in settlement of foreclosures.
Our industry risk score of '8' for Vietnam reflects an "extremely high risk" assessment of the institutional framework, a "very high risk" assessment of the competitive dynamics, and an "intermediate risk" assessment of system-wide funding.
In our view of Vietnam's institutional framework, its regulatory standards lag international norms and the central bank is prone to regulatory forbearance. We do not believe there is an effective early warning system that could be used as a pre-emptive supervisory tool. We note that regulatory intervention has typically been reactive rather than proactive. In our view, the institutional framework is further weakened by weaknesses in governance and transparency. Most banks do not publish financial statements on a timely basis, and notes typically do not contain sufficient details.
In our assessment of competitive dynamics, risk appetite for the banks is moderate and focused on growth. We also consider the market to be saturated, with moderate overcapacity, which leads to competition between banks for both loans and deposits. We expect pressure on net interest margins to put stress on the ability of financially weaker and smaller players to price adequately for risk. Furthermore, we believe the banks system is subject to market distortion from the frequent use of administrative controls.
Vietnam's banking system is supported by a healthy level of stable core customer deposits, resulting in a low dependence on external funding. Nevertheless, there are few funding alternatives available to the banks, given Vietnam's narrow and shallow domestic debt capital markets. We believe the government would play a supportive role in the funding of the banking system, if needed.
We classify the Vietnam government as "highly supportive" toward domestic banking. We have observed a track record of support for systemically important institutions, including capital injections.
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