Fitch: Vietnamese banks' rating outlook "Stable"

Slower Local Economy: Fitch forecasts Vietnam's GDP growth at around 5.0% for 2012 and 5.5% for 2013– lower than the 7% average over 2004-2011. Regulatory efforts at cutting interest rates and capping lending rates have done little to spur investor sentiment, which, together with high levels of leverage and lingering global uncertainties, may continue to weigh on the domestic economy.

NPLs on the Rise:The slowdown, along with the country's high credit/GDP ratio of 113% in 2011, could lead to more NPLs in the near to medium term. Fitch estimates that net new NPLs (before write-offs; under Vietnamese Accounting Standards (VAS)) of the major banks have risen to an annualised 2.5% of loans in 9M12 from 1.7% in 2011.

Transparency Issues Persist:Fitch remains sceptical on the level of reported NPLs. Tightened loan classification under Article 7– which supposedly considers qualitative factors on top of past-due triggers as per Article 6– seems to have bumped up only special-mention loans (SMLs; one category before NPLs), not NPLs. The State Bank of Vietnam's (SBV) public admission of the“actual” system-wide NPL ratio being around twice as high as initially reported reinforces the agency‟s view, although Fitch‟s estimates are even higher.

Mounting Pressures on Profit:Average credit costs of the major local banks could rise from the estimated 1.8% of loans in 9M12 (2011: 1.7%), having seemed to lag the rise in NPLs. This could also hurt banks' earnings, in addition to thinner NIMs and non-interest income growth.

Higher Capital; Still Low: Capitalisation has risen gradually (Figure 115), benefiting from earnings retention, low credit growth and fresh equity. Yet Fitch views major banks' capital as weak and prone to impairment, in light of tough economic conditions and poor NPL transparency. A higher 10% NPL ratio (SBV's estimate) and prudent provisioning would cut the core Tier 1 CAR to around 5% from the reported 9% at end-Q312.

Funding Tight and Fragile:Structural features, including deposit competition and alternative investments such as gold, may keep loans/deposits ratios over or close to 100% for most major banks. Another feature is depositors' fragile confidence. This was highlighted at Asia Commercial Bank (Vietnam) (ACB;„B‟/RWN) following news of a shareholder‟s arrest in August 2012, although the incident seems to have been isolated and financial sector stability broadly restored.

Gold Regulations Hurt Profit: The regulatory requirement to cease gold mobilisation has dampened profit at a few private-owned banks in Q312. Such gold-related losses are one-off in nature, and likely to be manageable towards the compliance deadline– which has been extended to June 2013.

Restructuring Mooted; Limited Progress: There has been little noticeable progress on banking system reforms. Specific measures mooted include banking sector consolidation and the establishment of a national asset management company to acquire bad debt from banks. Local authorities have also mentioned concurrent reforms surrounding state-owned entities and investments in Vietnam, but meaningful progress here has also proved elusive.

What Could Change the Outlook
Weaker-Than-Expected Environment: The major Vietnamese banks' ratings, already among the lowest in Asia, reflect difficult operating conditions and other structural issues typically found in low-income emerging markets. This, together with the sovereign‟s Stable Outlook, underpins the Stable Outlooks on the banks' ratings for now. Downside rating risks could arise if the operating environment becomes even more challenging than expected at this stage and significantly threatens banks' solvency, and/or due to negative rating action on the sovereign.