Strong Growth Attracts Foreign Capital for Vietnam Banks, Says Fitch

RVietnam's strong economic performance is helping to attract much-needed foreign capital into its banking system, says Fitch Ratings. 

Banks are likely to need additional capital as they respond to the phasing-in of Basel II capital adequacy standards by end-2018 while trying to meet demand for rapid credit growth. 

GIC, a Singapore sovereign wealth fund, signed a memorandum of understanding on Monday to buy a 7.7% stake in Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank; B+/Stable), Vietnam's largest bank by market capitalization. 

The deal follows the recent purchase of a 5% stake in a much smaller bank, TienPhong Bank (not rated), by International Finance Corporation (IFC).

This injection of foreign capital is a positive trend and comes at a time of strong economic growth, which has helped to stabilize asset quality. Fitch forecasts real GDP growth of 6.2% in both 2016 and 2017. 

Healthy economic growth plus a recovery in the real estate market are likely to lead to a slower NPL formation, at least in the short term. Liquidity and funding conditions should continue to be supported by local-currency stability and benign inflation. Fitch's outlook for the banking sector was revised to stable from negative in December 2015 to reflect these conditions.

Among lowest in Asia

Nevertheless, Vietnam's bank ratings are among the lowest in Asia, reflecting a range of structural problems - not least of which is weak capitalization. Published capital-adequacy ratios (CAR) are low, and under-reporting of NPLs suggests that true capitalization is even weaker.

Capital buffers are likely to come under pressure over the next couple of years. Ten banks have been designated by the central bank to move to Basel II, with full adoption expected by end-2018. We believe their CARs will be pushed lower by the shift to a more conservative regime. Those banks with CARs close to the 9% regulatory minimum will need more capital. 

Vietcombank, for example, had a CAR of just 9.7% under the Basel I regime at end-June 2016, and Basel II is likely to have been one of the key motivations for its deal with GIC. 

Rapid credit growth

Rapid credit growth is also creating a need for more capital. Private-sector credit grew by an average of 16.4% per year during 2010-2014, and rose by 17.3% in 2015. Another pick-up is likely in 2016, with the official target for the year set at 18%-20%. In our opinion, rapid credit growth poses a risk to Vietnam's medium-term financial stability, particularly since the credit/GDP ratio - at 110.5% in 2015 - is already extremely high by frontier-market standards. 

A sustained rise in foreign appetite for Vietnam's bank equity would be a positive development because the banking sector has significant recapitalization needs. However, there is a limit to how much capital can be raised from overseas.

Foreign ownership of any Vietnamese bank is capped at 30% - and, within that, foreign strategic investors are collectively allowed to own only 20%. Vietnam's banks may still need to raise significant capital in the still-developing domestic market unless foreign-ownership restrictions are relaxed. 

Read more on

Suggested Articles

Some of you might have already been aware of the news that Questex—with the aim to focus on event business—will shut down permanently all media brands in Asia…

Some advice for transitioning into an advisory role

Global risks are intensifying but the collective will to tackle them appears to be lacking. Check out this report for areas of concern