Moody's lifts Vietnamese banking system's negative outlook

Thanks to macroeconomic stability.

Moody's Investors Service has said it has revised its outlook for the Vietnamese banking system to stable from negative.

According to a release from Moody's Investors Service, this reflects the increased stability in the operating environment for the banks, as well as in Vietnam's macroeconomic situation, and a reduction in liquidity stress in the system.

"Improvements in macroeconomic stability have led to strengthened systemic liquidity," says Gene Fang, a Moody's Vice President and Senior Credit Officer.

"Deposit growth has recently improved, driven by government policies targeted at reducing gold and foreign currency deposits."

"At the same time, banks have lowered their reliance on interbank funding, which had exacerbated systemic liquidity risks, because the very high levels of interbank borrowing meant that a liquidity squeeze at any one bank could spread quickly to other banks," adds Fang.

Here's more from Moody's Investors Service:

Fang was speaking on the release of Moody's "Banking System Outlook Vietnam".

The report -- whose outlook expresses Moody's expectation of how bank creditworthiness will evolve in this system over the next 12-18 months -- looks at Vietnam's banking system in terms of five factors: Operating environment (which is classified as stable); funding and liquidity (improving); asset quality and capital (deteriorating); profitability and efficiency (deteriorating); and systemic support (stable).

Moody's report points out that the operating environment for Vietnamese banks has begun to stabilize, after a spell of weakness from 2012 that followed several years of very rapid credit growth.

Inflation and domestic interest rates have moderated significantly over the past two years from double-digit levels, and pressure on the exchange rate has subsided.

In addition, higher levels of foreign direct investments, a shift in the current account balance to a surplus from a deficit, and a policy preference for stability over growth have all contributed to the improved conditions.

Moody's report further points out that loan growth has slowed — despite lower interest rates — as the increase in export activity has not entirely offset the fall in domestic demand.

As a result, liquidity in the banking system has improved, as deposit growth has outpaced loan growth, lowering loan-to-deposit ratios. Moody's report also says that while recent improvements in regulatory standards have improved the prospects for a potential recovery in bank solvency, the large amount of remaining problem loans suggests that any recovery will be a gradual process.

In addition, the banks' loan loss reserves and capital are likely insufficient to absorb potential losses on problem assets. Moreover, options for capital raising are limited, due to the banks' weak internal capital generation capacity, constraints on the government budget, and restrictions on foreign investment in banks.

As for profitability, Moody's says the banks' profitability profiles will continue to come under pressure, given the low demand for new loans, and likely fall in average net interest margins.

A stronger-than-anticipated recovery in profitability could occur if real estate prices rebound and/or the retail segment generates greater loan demand. Given that many problem assets are tied to real estate collateral, a recovery in real estate could hasten the resolution of problem assets and limit provisioning expenses.

The low penetration of retail lending also creates opportunities not directly tied to the weak corporate sector. However, weak domestic demand continues to limit stronger growth in retail.