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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 conservative loan classification methodology relative to its peers. At end-June 2014, MB announced a non-performing loan (NPL) ratio of 3.08 per cent, which is in accordance with Circular No. 2 on stricter rules toward classifying bad debts, introduced by the SBV. Furthermore, the bank's loan book is also being diversified across industries and highly collateralized. MB have effectively controlled its bad debts, with Mr. Cong saying that its bad debt ratio was 2.73 per cent as at December 31, 2014.

To achieve this result, Mr. Cong indicated that MB was one of the first banks in Vietnam to build and implement a system of different internal credit ratings for both corporate and individual clients, which applies both quantitative and qualitative loan classification and provisioning. MB has conducted a lot of projects with assistance from international consultants such as Deloitte and KPMG to strengthen its risk management capacity and apply Basel II standards and the "Three Lines of Defense" model.

Credit and international payments

Mr. Cong said that evaluations from CRAs are analyzed in order to strengthen the bank while also helping it to overcome its limitations. In particular, MB conducts inspections and controls daily operations to maintain safety indicators, as recommended by Fitch and the SBV, such as lending rates by industry, customer segment classification, loan/deposit ratios, loans per individual or group, the capital adequacy ratio, bad debt ratios, overdrafts, and continuously improved risk management systems.

Regarding international payments, MB is working with more than 800 banks and bank branches worldwide. The international banks have their own ratings system to evaluate the credibility of partners, including MB. On this basis, banks have extended the limits previously imposed on MB for service activities such as loans, guarantees, confirmations, and discount L/C. Positive evaluations by Fitch have helped international banks gain an additional source of information.

After Fitch announced its evaluation, MB was congratulated by customers, partners, and domestic and foreign banks, which makes Mr. Cong believe that an independent source of information helps MB enhance its credibility, strengthen its confidence and expand its partnerships with customers and partners in the international system and contributes to promoting the development of credit operations and international payments at MB.

Maritime Bank's request to take over the Textile and Garment Finance Joint Stock Company (TFC) received approval from the State Bank of Vietnam recently. The bank has been requested to complete the paperwork required by the SBV.

Eximbank has been allowed by the SBV to provide mobile points of sale (mPOS) services and issue electronic receipts for customers of the service.

Techcombank has released its business results for 2014, with pre-tax profit increasing 61 per cent against 2013 to VND1.417 trillion ($67.4 billion). The bank's bad debt ratio stood at 2.38 per cent of total loans as at the end of last year.

SeaBank and its strategic partner Mercedes-Benz Vietnam have officially launched the MercedesCard, available to all Mercedes-Benz passenger car owners who buy cars from authorized dealers of Mercedes-Benz Vietnam and register the car in their own name. Card owners can use it all over the world, with standard utilities from SeaBank.

BIDV plans to sell 25 per cent of its shares to foreign partners, of which 15 per cent will be earmarked for a strategic foreign partner and 10 per cent for an overseas financial investor. The plan was approved at its annual general meeting at the beginning of the year.

LienVietPostBank has just sold 16.4 million shares to the Him Lam Corporation, making the latter become the former's largest shareholder. In owning almost 15 per cent of LienVietPostBank, Him Lam replaces Vietnam Post as the bank's largest shareholder.

Mr. Le Cong, General Director of the Military Commercial Joint Stock Bank (MB), shares his views on the ratings by Fitch with VET's Hung Khanh.

Why do you think Fitch said that MB's IDRs are driven by its VR and its rating reflects the bank's relatively strong financial profile and risk management compared to its local peers?

Fitch positively evaluated the financial situation and risk management capabilities of MB after analyzing our financial situation, which included financial and non-financial indicators, for three successive years. We provided transparent and detailed results of our operations, financial indices, portfolio loans, investments, deposits, reserve risk, managing operational risk, credit granting, and development strategy. Fitch also actively collected information about MB independently.

In terms of financial profile, MB maintains financial indices such as loans/deposits at less than 80 per cent and a capital adequacy ratio above 10 per cent. Customer segments and loan portfolios are diversified by sector, in order to avoid concentration risk. Especially in recent years, MB has been the market leader in ROE and ROA ratios and has among the highest workplace productivity in the market.

MB was one of the first banks in Vietnam to build and implement a system of different internal credit ratings for both corporate and individual clients, which apply both quantitative and qualitative loan classifications and provisioning. We have conducted many projects with assistance from international consultants such as Deloitte and KPMG to strengthen risk management capacity and apply Basel II standards and the Three Lines of Defense model.

I believe that these assisted Fitch is assigning a positive rating for the financial profile and risk management of MB that was stronger than for other Vietnamese banks.

What were the impacts of applying the Centralized Credit Management (CCM) model on Fitch's assessment for MB?

MB applies a best practice corporate governance model that includes strategic goals to 2020 and vision to 2030. Credit risk management is carried out under the Three Lines of Defense model, which involves the separating of responsibilities in selling, risk management, and internal audit. MB also applies Basel II standards, designed a Lean Sigma process to ensure increased productivity, and reduced transaction processing times, minimizing procedures for customers. MB first developed a credit rating system approved by the central bank to rank and quantify risk when providing credit. With the CCM model, MB succeeded in implementing its business strategies and ensured credit quality objectives, goals and risk management. In particular, MB has maintained stable credit growth over the years. The growth rate in loans in 2013 and 2014 was 18 per cent and 14 per cent, respectively. MB's NPL ratio has been below 3 per cent for the last ten years and stood at 2.73 per cent as at December 31, 2014. Finally, customer satisfaction has increased due to procedures being minimized.

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