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Moody's assigns first-time ratings to STB
Moody's Investors Service has assigned the following ratings to Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank):
• B2 / Not-Prime long and short-term foreign currency deposits
• B1 / Not-Prime long and short-term local currency deposits
• B1 / Not-Prime long and short-term foreign currency issuer ratings
• B1 / Not-Prime long and short-term local currency issuer ratings
• Bank Financial Strength Rating (BFSR) of E+
RATINGS RATIONALE
The outlook for all ratings is stable, except for the foreign currency deposit and issuer ratings which carry a negative outlook, reflecting the negative outlook on the foreign currency ceiling of Vietnam.
* S&P assigns 'B+/B' rating to STB; outlook is stable
The ratings reflect: (i) its tightening liquidity, (ii) moderate risk absorption capacity, as well as moderate single-borrower concentrations, versus global peers, (iii) the uncertainties surrounding its shareholding structure and share buy-back plans, and (iv) the inherent challenges in Vietnam's operating environment.
Moody's analysis also takes into account the strengths of the bank's credit profile, in particular: (i) the quality of its franchise, as the sixth-largest in Vietnam by asset-size and the largest network of branches and ATMs in the country, (ii) its diversified loan portfolio, with the consumer sector accounting for about a third of its loans, and (iii) lower problem loans reported compared with the average for the Vietnamese banking sector, supported by above-average loan-loss reserve coverage.
As with most other Vietnamese banks, Sacombank's liquidity position is tightening, as evidenced by a 107% gross loan-to-gross customer deposit ratio at the end of first-half 2011, versus 99% at end-2009. Including certificates of deposits, its loan-to-deposit ratio was 82% at the end of first-half 2011, compared with 74% at end-2009.
Its sizable and stable core deposit base accounted for nearly 60% of its funding at end-2010, with a profile mainly in local currency. This concern is somewhat offset by the fact that short-term assets formed 27% of total assets at end-2010. Strong liquidity is an important factor in emerging markets like Vietnam, where deposits can be highly sensitive to investors' confidence.
While Sacombank has solid Tier 1 capital ratios compared with other rated Vietnamese banks, Moody's believes the bank's recent decision to buy back shares is credit negative as it has reduced its capacity to absorb losses and negatively affected its ability to support future loan growth.
In addition, the single-borrower concentration of the bank's loan portfolio, relative to core capital and earnings, is slightly higher than its regional and global peers and exposes its earnings to volatility, and may affect asset quality in a downturn. Its top 20 loan exposures make up almost 400% of pre-provision profits.
Sacombank may not be able to sustain its good financial metrics over the medium term, due to the lack of portfolio diversification and the challenging operating environment, characterized by high inflation and a tightening monetary policy, which makes access to funding a major challenge.
The Vietnamese economy has registered high growth rates in the past decade, but continues to remain fragile and vulnerable to volatility.
Moody's is also concerned by the absence of a foreign strategic partner. The bank's previous foreign strategic partner, ANZ, had partly contributed positively in areas such as risk management, retail and IT since 2005. ANZ's Technical Assistance agreement ended in 2008.
It remains to be seen if Sacombank will be able to continue with its above-average performance without a foreign strategic partner, or if synergies can eventually be developed with a new strategic partner.
While reported non-performing loans are low compared with other Vietnamese banks, the true level of non-performing loans by international standards is hard to estimate. Nonetheless, the composition of Sacombank's loan book and the apparent absence of exposures to troubled state-owned enterprises such as Vinashin are positive factors for the bank.
Its profitability is modest due to worsening economic conditions. Pre-provision profits to average risk weighted assets were 2.6% in 2010; this maps to above the median of regional banks rated E+ on our BFSR scale. Fees and commission, insurance, dividend, and treasury income together account for 23% of the bank's income.
Amid a fiercely competitive environment, the challenge of enhancing its retail franchise and fee-based income, while protecting its interest margins remains.
A BFSR upgrade is unlikely in the near term, given: (i) Vietnam's challenging operating environment, (ii) the absence of a robust recovery in the global economy, (iii) tight liquidity, and (iv) the potential for further deterioration in loan quality.
On the other hand, the stable outlook could change to negative if: (i) there is a significant erosion in franchise value, (ii) Tier 1 capital ratio falls below 8%, (iii) the mismanagement of its growth strategy adversely affects its liquidity profile such that loan-to-deposit ratios exceed 130%, and (iv) material losses arising from its loan book result in non-performing loans ratio of more than 2%.
moody's
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