Economic risks for Vietnam's banks very high

KUALA LUMPUR: Economic risks for Vietnam's banking sector are very high by global standards, according to Standard & Poor's Ratings Services.

The ratings agency said on Tuesday the risks were reflected in the country's low income levels, developing financial system, and evolving policy framework.

S&P expected private sector credit to increase in line with nominal GDP growth, and property prices to stabilize over time. 

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

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

In its report "Banking industry country risk assessment: Vietnam", S&P classified Vietnam’s banking sector in group “9” under its banking industry country risk assessment methodology. 

Other countries in the group include Argentina, Cambodia, Jamaica, Kenya, Mongolia, Nigeria, Papua New Guinea and Tunisia.

S&P said Vietnam's banking regulations lagged 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,” it said.

S&P regarded Vietnam's economic risk trend as stable as its economic growth has picked up, albeit from a low base. 

“We expect infrastructure spending and exports to improve the country's growth prospects. However, a push to build infrastructure without efficient execution, and uncertain conditions in the exports market are downside risks. 

“We believe managing asset quality will continue to be difficult for banks, and could in turn undermine their profitability and capitalisation,” it added. 

S&P described Vietnam's industry risk trend as stable. It expected the central bank to continue to address the banking industry's fragmentation, legacy stressed assets, and weak regulation and governance. 

The ratings agency, however, also pointed out the implementation of these reforms, as well as the benefits, would likely be gradual. 

“We also expect Vietnam's system-wide funding to remain a relative strength. However, bank deposits remain susceptible to event risk emanating from corporate governance incidents,” it said.