Moody's Investors Service is maintaining its negative outlook on the Vietnamese banking system, although it recognises recent signs of stabilisation on the macroeconomic front and regulatory measures that could bring benefits in the next two to three years.
Among other constructive developments, Moody's notes that the Vietnamese government has taken steps to stabilise liquidity in the banking sector, which have made the risk of a systemic crisis more remote.
"However, we do not expect a significant broad-based improvement in the capitalization of Vietnamese banks in the next 12-18 months," says Gene Fang, a Moody's Vice President and Senior Analyst.
"Capital remains inadequate to absorb the extent of potential losses stemming from pervasive weaknesses in asset quality," adds Fang.
Fang was speaking on a just-released Moody's report, titled "Vietnam Banking System Outlook." The report details Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months.
Moody's estimates problem assets in the system to comprise at least 15% of total assets, significantly above the 4.7% non-performing loan ratio reported by the State Bank of Vietnam in October 2013.
Profitability remains stagnant in a challenging operating environment in which an improved external position has yet to revive domestic demand.
Weak loan demand is depressing bank margins, which remain insufficient to offset rising credit costs and improve internal capital generation.
Though bank regulators are aware of the need to improve accounting standards and transparency, decisive policies to address these issues have yet to be implemented.
Similarly, recent policies -- such as the Vietnam Asset Management Company designed to take over banks' problem loans -- have not directly addressed undercapitalisation in the banking system.
Discussions around attracting foreign capital have also yielded limited results, since a cap on foreign investments continues to prevent control of domestic banks by foreign investors.
Moody's rates nine banks in Vietnam, including two government-controlled banks and seven joint-stock banks.