S&P sees high risk in Vietnam’s banking sector as credit growth rises

SINGAPORE - Economic risks for Vietnam's banking sector are very high by global standards, as reflected in the country's lower-middle income and emerging institutional settings that hamper policy responsiveness, S&P Global Ratings said in its latest banking industry country risk assessment for Vietnam.

S&P has classified the banking sector of Vietnam as (BB-/Stable/B; axBB+/axB) in group '9' under its Banking Industry Country Risk Assessment (BICRA) criteria. Other countries in this group include Argentina, Azerbaijan, Cambodia, Kenya, Nigeria, Papua New Guinea and Tunisia.

S&P says a recent rise in credit growth in Vietnam, if it accentuates, could renew concerns associated with previous periods of macro-economic instability and high inflation.

“Vietnam's banking system has yet to fully work through legacy stressed assets (created due to rapid credit growth between 2005 and 2011), the bulk of which are collateralised by real estate,” it says.

“Banks' credit risks remain extremely high, in our opinion, reflecting high private sector debt, low income levels, legacy stressed assets, and rudimentary underwriting standards.

“In our opinion, Vietnam's banking regulations lag international standards, underscoring industry risks for banks. The banking system has a moderate risk appetite, overcapacity, and market distortions. A supportive core customer deposit base and low reliance on external funding temper these weaknesses.

“We regard Vietnam's economic risk trend as stable. Vietnam's growth prospects remain steady supported by good performance in the sizable foreign-owned and export-focussed manufacturing sector.

We believe managing asset quality and growth will continue to be challenging for banks, and will undermine their profitability and capitalisation.

Vietnam's industry risk trend is stable. We expect the central bank to take steps to address the banking industry's fragmentation, legacy stressed assets, and weak regulation and governance. But implementation of these reforms will likely be gradual, as will be the benefits.

“We also expect Vietnam's system-wide funding to remain a relative strength. However, deposits remain susceptible to event risk emanating from corporate governance incidents.” www.standardandpoors.com (ATI).