Rising bad debts may undermine Vietnam’s banks, says S&P

KUALA LUMPUR: Standard & Poor's Ratings Services has cautioned that Vietnamese banks are facing heightened asset quality risk as companies find it difficult to repay loans in a slowing economy, with some segments faring worse than others.

It said on Tuesday that increasing bad debts could significantly undermine the resilience of Vietnam's banking sector.

"Bad debts could erode Vietnamese banks' capitalisation and profitability over the next 12-18 months," said S&P credit analyst Ivan Tan in the report, titled "There's no easy fix for Vietnamese banks' bad debt woes”.

Tan said this was because banks' nonperforming loans continue to rise as local companies, which are the main recipients of bank credit, are affected from slow sales, high inventory, and weak cash flows.

However, the report noted that the government intends to adopt more stringent standards, clean up bad loans.

He added the government was also encouraging consolidation to fulfill its vision of a transparent banking system dominated by a few strong banks.

However, few concrete steps have been taken to take this vision forward.

"We estimate that the banking sector's actual nonperforming loans are substantially higher than reported, due to a lack of consistent classification and reporting standards for banks.

"In our view, the government has yet to deliver on its intent to strengthen the banking system through consolidation and cleaning up banks' balance sheets.

“Nevertheless, we maintain our stable outlook on Vietnamese banks because our ratings already factor in asset quality risks and sluggish profitability," Tan said.

The S&P report acknowledged that while domestic statistics consistently underplay the likely scale of bad debts, the government's macroeconomic stabilisation measures have begun to yield some results.

It also pointed out these measures reflect the government's policy choices, which emphasize stability and the need to address structural shortcomings in the banking sector in particular.