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Risks remain in bank restructuring
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 remained in the short to medium term, according to the latest statement released by global credit agency Fitch Ratings.
On the agency's website, it said that the Government planned to 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 were among the main concerns in the relatively low-rated Vietnamese banking sector.
The Government's efforts to address these problems were therefore welcomed.
In particular, the rating agency believed that the broader financial system would benefit from banking sector consolidation, as it could reduce the risk of insolvency among smaller banks.
These smaller banks were 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 remained susceptible to high inflation and confidence in the local currency, the Vietnamese dong.
The statement also stated that asset quality was likely to deteriorate further. Non-performing loans were also significantly understated under the country's accounting standards and could be three or four times higher under international standards.
For example, there was a lack of transparency about how banks were recognising, and the adequacy of, provisions relating to loss-making State-owned enterprises.
Nevertheless, there was little detail available on when the Government might initiate mergers, how big the bad-debt acquisitions would be or what price the Government might pay. Without these details it was impossible to gauge how significant a benefit the measures would be for the sector.
The Government's commitment to push through the reforms and its capacity to absorb these bad debts was also unclear, the statement said, adding that Viet Nam's ‘B+' Long-Term IDR reflected the risk from very high inflation relative to GDP growth and high contingent liabilities from State-owned enterprises and banks.
Although the financial-sector reforms would be viewed as a positive step by the Government, they would have an impact on the country's balance sheet.
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