Photo: Duc Anh
Credit ratings agency notes advantages from links with government that remained post-equitization.
The Bank for Foreign Trade of Vietnam (Vietcombank) has been evaluated highly by credit ratings agency Moody’s for its strong financial fundamentals and close links with the government while its modest capitalization was identified as a weakness.
Vietcombank was fully owned by State until it underwent equitization in 2007, after which it has two major shareholders: the State, with 77.11 per cent, and Japan’s Mizuho Corporate Bank Ltd with 15 per cent.
According to analysts at Moody’s, its links to the government provide benefits to the bank. “The bank’s strong linkages to the government, even after its commercialization in 2007, is, on balance, advantageous to the bank,” Moody’s analysts wrote in its latest report on Vietcombank, released on August 3.
Since the State still holds a majority stake it still influences certain banking policies, Moody’s went on. “But these concerns are more than compensated by the associated tangible credit benefits in terms of the bank’s above-average funding strength and asset quality.” Moody’s also sees no significant incentive for the government to interfere with the bank’s daily operations, but “we do not rule out the risk that the bank may face direct or indirect pressure to take on initiatives which could strain its capacity and weaken its credit standing.”
The bank’s management has maintained an “arm’s length” relationship with the government and placed emphasis on its commercial role. However, in practice, it could be difficult for the Board of Directors (BOD) to exert independent oversight over the majority shareholder. According to the bank’s 2015 financial statements, only one out of the seven members of the BOD is an independent member, Moody’s noted.
The bank was founded by the State for the main purpose of providing banking services for foreign trading activities, and after equitization it still benefits from the strong legacy franchise as a trade-oriented State-owned bank, with leading positions in trade finance, foreign exchange and international settlements providing a competitive advantage and attracting a superior client base, which has supported asset performance.
Thanks to this legacy, on July 7 Moody’s gave the bank a rating of b2 in its baseline credit assessment (BCA), which is the highest among Vietnamese banks and reflecting its above peer financial fundamentals on a standalone basis.
Vietnam’s economy, which Moody’s rates B1, stable, and has sustained economic growth, continues to support Vietcombank’s large corporate borrowers and maintains its asset performance advantage, Moody’s analysts believe.
Another advantage for Vietcombank over its peers is liquidity, which strengthens its credit profile. “The bank will continue to benefit from its strong deposit franchise and its role in the national payment system,” according to the report. However, Moody’s expects the bank to shift its credit to smaller borrowers to better benefit from its liquidity position.
Vietcombank’s net income from banking services is equal to its foreign exchange trading, which is its major activity. According to its first half 2016 report, Vietcombank’s service activities earned net income of VND1.01 trillion ($45.29 million) while forex trading earned VND1.03 trillion ($46.19 million).
However, a shift of its loan book towards a more retail-oriented business could transform Vietcombank’s credit profile. While the current fast pace of retail loan growth poses underwriting risks and could lead to an accumulation of unseasoned loans, this risk is mitigated by its conservative approach to bad debt management, Moody’s analysts wrote.
In the first half Vietcombank had VND7.42 trillion ($332.78 million) in bad debts, 5 per cent higher than on December 31, 2015. Short-term outstanding credit in the first half was VND247.51 trillion ($11.1 billion), 7.5 per cent higher than on December 31, while long-term outstanding credit reached VND129.95 trillion ($5.82 billion), an increase of 15 per cent against December 31.
Moody’s also pointed out that the modest capitalization of the bank is a key weakness. It is maintaining its loan growth rate close to the industry average, which helps avoid pressure from capital consumption.
The State Bank of Vietnam (SBV) approved Vietcombank’s proposal on August 2 to increase its charter capital from VND26.65 trillion ($1.19 billion) to VND35.97 trillion ($1.61 billion) by issuing bonus shares at a ratio of 0.35:1 to existing shareholders.
According to Moody’s, the bank’s capital raising plan has an upside risk that could raise its Tier 1 ratio from a projected 7.7 per cent to 10.1 per cent by end-2016, compared with a reported 8.5 per cent in the first quarter of 2016.