Fitch Ratings in a February 27 report upgraded the long-term issuer default rating (IDR) of Military Bank to “B+” from “B” with a stable outlook and its viability rating to “b+” from “b”. At the same time, it upgraded the viability ratings of Vietcombank and Vietinbank to “b” from “b-”.

At the same time, the long-term IDRs of Agribank, Vietinbank and Vietcombank have been affirmed at “B+” with a positive outlook, while the IDR of ACB has been affirmed at “B” with a stable outlook.

According to Fitch, the positive rating action takes into account the Vietnamese banking system’s enhanced operating environment, with improved economic policy-making from authorities promoting macroeconomic stability and predictability.

“This has enabled banks to significantly reduce their exposure to legacy problem loans that have long weighed on their balance sheets and offsets, in part, the banking system’s long-standing structural weaknesses - such as thin capital buffers and weak profitability - which we expect to be more adequately addressed over the longer term,” the report noted.

The upgrade of Military Bank’s viability rating and long-term IDR takes into account its higher capital levels compared with peers and continued asset quality improvement, as reflected in its more diversified loan composition and declining problem-loan ratio, which stood at 2.9 per cent at end-2017 from 6.8 per cent at end-2015. 

The bank’s Fitch Core Capital ratio of 11.4 per cent at end-June 2017 was the highest among that of Fitch-rated Vietnamese banks.

Fitch expects Military Bank to continue generating higher profitability than its peers, supported by a wider net-interest margin and leaner cost structure, which has aided its internal capital generation. 

The bank’s operating profit/risk-weighted assets ratio of 2.3 per cent is likely to stay above that of the majority of its local peers, according to Fitch, which added that the bank’s loan/deposit ratio increased to 88 per cent at end-June 2017 due to rapid loan growth.

The long-term IDRs of Military Bank and ACB are driven by their viability ratings and reflect their smaller franchises but better loan quality compared with State-owned banks. 

Fitch believes the capital encumbrance of ACB and Military Bank from the under-reporting of non-performing loans is lower compared with State-owned banks.

ACB’s ratings also reflect its improving asset quality and profitability profile. 

Its loan quality is likely to be better than most of its peers given its much lower loan concentration risk, with a small 1 per cent exposure to State-owned enterprises (SOEs) at end-June 2017. 

The bank’s problem loan ratio improved significantly after writing off its entire bad debts sold to the Vietnam Asset Management Company (VAMC) in 2017.

“We expect ACB’s improving profitability to continue in the near term, as legacy problem exposures are mostly provisioned for and the full resolution of bad debts sold to VAMC should alleviate its credit cost burden. The bank’s operating profit/risk-weighted assets ratio improved to 1.9 per cent by end-June 2017 from its four-year average of 1.2 per cent to end-2016,” Fitch wrote in the report.

The stable outlooks on Military Bank and ACB reflect Fitch’s expectation that their asset quality and profitability profiles will be maintained over the near- to medium-term amid macroeconomic stability in Vietnam.

The upgrade of Vietcombank and Vietinbank’s Viability Ratings reflects the banks’ improvements in asset quality, with problem loan ratios - comprising reported non-performing loans, bad debts sold to VAMC, and special mention loans - improving to 2.4 per cent and 2.8 per cent at end-June 2017, from 5.1 per cent and 3.4 per cent, respectively, at end-2015. 

This was supported by the benign operating environment and strong retail loan growth. 

Vietcombank’s full resolution of bad debts sold to VAMC in 2016 will lower its credit cost burden, according to Fitch.

“Our assessment also incorporates the banks’ strong domestic franchises, but limited balance sheet strength relative to problem assets and growth aspirations,” it noted. 

“Fitch Core Capital ratios of 8.8 per cent for Vietcombank and 6.9 per cent for Vietinbank are low and require capital raising in the run-up to the implementation of Basel II by January 1, 2020. 

Internal capital generation remains weak, as evidenced by low operating profit/risk-weighted assets ratios of 1.8 per cent for Vietcombank and 1.4 per cent for Vietinbank from 2013 to 2017’s first half.”

Loan/customer deposit ratios remain manageable and largely unchanged - at 81 per cent for Vietcombank and 106 per cent for Vietinbank as at end-June 2017 - despite strong loan growth in the previous few years. 

Fitch believes the two State-owned banks have an advantage over private banks in times of stress, as depositors are likely to have more confidence in a majority State-owned bank.

VN Economic Times