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Banking & Finance

Moody's: Unresolved bad debt risks higher

Released at: 17:00, 14/12/2016

Moody's: Unresolved bad debt risks higher

Photo: Duc Anh/Illustration

Brisk economic growth and stable interest rates sustain domestic demands to ensure a GDP growth of 6.1% according to Moody's.

by Duy Anh

Vietnam’s macroeconomic stability and resilient economic growth will continue to support the bank’s weak credit profile, but high credit growth and unresolved bad debts might turn the outlook into a negative, a report released on December 14 by Moody’s said.

Fourteen Vietnamese rated banks are set to pose a 3.8 per cent bad debt rate, which, including the gross value of assets sold to the Vietnam Asset Management Company (VAMC), would increase the ratio to 7.1 per cent at June 30, 2016, up from 6.9 per cent at the end of 2015.

This figure comes at a time when the State Bank of Vietnam (SBV) has consistently tried to keep the system-wide bad debt rate below the 3 per cent cap. A report of the National Financial Supervision Commission (NFSC) on the country's economic situation in the first nine months of the year unveiled bad debts of 19 credit institutions which accounted for 55.1 per cent of the total non-performing loans (NPLs) in the system.

Limited government support for the banking system is still unchanged. Moody’s assumes the systemic support would be forthcoming for State-owned and private banks, in cases of need. However, the government’s capacity for capital injections into banks is limited, and support will mainly be in the form of liquidity assistance and regulatory forbearance.

Asset quality will stay stable but weak, while capital buffers will continue to deteriorate because of high loan growth. Notably, elevated credit growth is outpacing internal capital generation and sources of external capital are limited.

“Vietnamese banks are now reluctant to lend due to their weak balance sheets buffers” and yet, “I have not seen a new capital source for banks,” Executive Chairman of Dragon Capital Mr. Dominic Scriven told VET.

Source: Moody's, December 14, 2016

A solution to attract new capital for the banking system has been proposed to the government by the Capital Market Working Group, co-chaired by Mr. Scriven, He suggested increasing the foreign ownership limit (FOL) in banks which the State is still a majority shareholder to 35 per cent FOL from the current 30 per cent cap, 49 per cent FOL for private banks and 100 per cent FOL in the three ‘zero dong’ banks.

“If you ask me, I want 49 per cent FOL but not 35 per cent for banks in which the State is still a majority shareholder,” Mr. Scriven stressed, “however, we are a group, and 35 per cent FOL gets you closer to the locking vote.”

On a positive note, Moody’s believes even though legal problem assets remain elevated, transparency has somewhat improved. Rapid economic growth is set to improve the recovery prospects of legacy problem assets and stabilize asset risks.

Macro-wise, the international research company casts a GDP growth rate of 6.1 per cent in 2016 and 6.0 per cent in 2017 for Vietnam. “Stable inflation and interest rates will help support domestic demand and household consumption,” Moody’s wrote in its report.

Last week, Prime Minister Nguyen Xuan Phuc said during the Bloomberg ASEAN Business Summit in Hanoi that the 2016’s GDP growth rate is estimated at 6.3 per cent for Vietnam, while the National Assembly in early-November passed through the plan for GDP growth rate to be 6.7 per cent for next year.

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