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Banking & Finance

Guiding lights

Released at: 10:20, 16/03/2015

Guiding lights

Ratings assigned to Vietnamese banks by credit rating agencies play an important role in their operations.

by Hung Khanh

Given the nature of the banking sector, the macro-economic environment always has a very strong impact on banking activities, Mr. Kieu Huu Thien, Deputy President of the Vietnam Banking Academy, told VET. The sector is very sensitive to any changes in socioeconomic factors and especially so to reports from credit rating agencies (CRAs) such as Fitch Ratings, Moody's, and Standard & Poor's.

Fitch said in February that the Military Commercial Joint Stock Bank (MB)'s Long-Term Issuer Default Rating (IDR) was driven by its Viability Rating (VR). The rating reflects the bank's relatively strong financial profile and risk management compared to its local peers, and its strong position as one of the largest private commercial banks in Vietnam. The rating also relates to the bank's above-industry average loan growth and its high reliance on corporate deposits.

Meanwhile, Vietnam International Bank (VIB) become one of two banks with the highest bank financial strength rating (BFSR) among Vietnam's nine large banks. In particular, VIB's baseline credit assessment (BCA) was upgraded to B3 (previously Caa1). Both of these banks view the assessments from CRAs as tools to benchmark their performance against external criteria.

Over recent years, CRAs have always placed great attention on the situation of commercial banks in Vietnam as well as policy moves from the government and the State Bank of Vietnam (SBV). Information from CRAs is referenced in the operating policies of the central bank and the government.

Mr. Thien also pointed out that Fitch's upgraded credit rating for Vietnam shows the country's macro economy is increasingly stable. This provides confidence in the banking sector to invest in bonds, issue valuable papers, and raise capital at a time when mobilizing and lending markets still face difficulties. Bank restructuring will become more convenient and calculating and ranking the value of banks will be easier.

Moreover, Fitch also said that Vietnam's inflation rate this year could fall below 4 per cent, which creates confidence regarding interest rates for mobilization and lending. It also spurs belief in better profits from manufacturing and trading, thereby promoting lending. Finally, most banks are ranked as stable with positive outlooks, spreading confidence among investors and customers towards the banking sector. Ratings therefore contribute to increased prestige and brand profile among Vietnamese banks.

Structural Change

The introduction of Circular No. 36, which forbids a bank from cross-holding more than 5 per cent in another financial institution, is likely to force a change in the shareholder structure at a number of Vietnamese banks. MB is owned by two other banks: Vietcombank, with 9.59 per cent, and Maritimebank, with 9.95 per cent. However, Fitch believes that MB, as a listed company, is unlikely to face significant challenges in finding new investors, considering its relatively strong credit profile in Vietnam.

Mr. Le Cong, General Director of MB, told VET that in recent years the bank has succeeded in increasing its capital due to the belief of shareholders and investors in its safety and sustainable operations. Many foreign banks have proposed strategic investments in MB, so it is actively building an investment plan to ensure its sustainable development in the future.
Fitch also said that Circular No. 36 may cause a change in the ownership structure at MB by the end of 2015, although this is not likely to have a major impact on the bank's reputation. "The positive evaluation from Fitch contributes to further strengthening the confidence among investors in MB, so the bank will quickly find strategic investors that meet its criteria and expectations," Mr. Cong said.

Mr. Thien also said that the positive results from CRAs clearly help Vietnamese banks find new investors in accordance with the requirements of Circular No. 36. He also predicted merger and acquisition (M&A) activities by Vietnamese banks to adapt to the Circular.

Risk Management

Loan classification methodology is another factor that CRAs use to calculate ratings for the banking sector. The positive rating from Moody's for VIB was based on changes to its target customer profile, which helped the bank rid itself of high-risk businesses and find businesses and individuals with sound financial positions. The bank also uses Centralized Credit Management (CCM) to better control credit risk, even though it cuts into profit margins. In three and a half years VIB has set provisions of more than VND3 trillion ($142.85 million). Equity has remained at around VND8 trillion ($380.95 million).

Research from Fitch points out that MB's reported asset quality metrics reflect a more conservati