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Fitch: Vietnam bank reforms positive, but risks remain high
A government plan to restructure the Vietnamese banking system is positive for the sector. But a lack of clarity about the proposals and uncertainty regarding the authorities' commitment and ability to go through with them means significant risks remain in the short to medium term.
The government plans include the potential acquisition of bad loans from commercial banks, measures to boost capital levels and potentially the merging of weaker banks. Weak capital levels, tight liquidity, and deteriorating asset quality are among our main concerns in the relatively low-rated Vietnamese banking sector. The government's efforts to address these problems are therefore welcome.
In particular, we believe that the broader financial system would benefit from banking sector consolidation, as it could reduce the risk of insolvencies among smaller banks. These smaller banks are fairly dependent on short-term interbank borrowing and could therefore cause wider disruption to the sector in an insolvency scenario. Liquidity in the domestic banking system remains susceptible to high inflation and confidence in the local currency, the dong.
Asset quality is likely to deteriorate further. Non-performing loans are also significantly understated under the country's accounting standards and could be three or four times higher under international standards. For example, there is a lack of transparency about how banks are recognising, and the adequacy of, provisions relating to loss-making state-owned enterprises.
Nevertheless, there is little detail available on when the government might initiate mergers, how big the bad-debt acquisitions will be or what price the government might pay. Without these details it is impossible to gauge how significant a benefit the measures will be for the sector.
The government's commitment to push through the reforms and its capacity to absorb these bad debts is also unclear. Vietnam's 'B+' Long-Term IDR reflects the risk from very high inflation relative to GDP growth and high contingent liabilities from state-owned enterprises and banks. Although we would therefore view the financial-sector reforms as a positive step by the sovereign, they would have an impact on the country's balance sheet.
reuters
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