Vietnamese banks' credit quality rides improved economic governance

Credit differentiation has been prompted among banks.

Moody's Investors Service says that the combination of macroeconomic stability and improved governance has prompted some credit differentiation among Vietnamese banks, albeit at modest levels, as reflected by the positive rating actions on six banks on 22 September 2014.

According to a release from Moody's Investors Service, in its just-released report titled "Stabilizing Trend for the Macro Environment Will Help Vietnamese Banks Address Problems in Asset Quality," Moody's provides a detailed analysis of the key drivers behind the recent positive rating actions on Vietnamese banks.

"The recent positive rating actions on Vietnamese banks were primarily driven by the stabilization in the operating environment in the country, which is positive for the banks because it supports the recovery in their poor asset quality, provides stability to their deposit bases, and improves their business prospects," says Eugene Tarzimanov, a Moody's Vice President and Senior Credit Officer.

"Additionally, some Vietnamese banks have also improved their governance standards and lowered their risk appetites, thereby improving their credit underwriting standards," adds Tarzimanov.

Here's more from Moody's Investors Service:

The Moody's report provides insight into the Vietnamese banks' individual strategies and on the steps taken to improve governance, highlighting that some of them have made more adjustments than others in response to the adverse market conditions since 2011.

These developments, when taken together with macroeconomic stabilization, have reduced the incidence of new problem assets on their balance sheets, and have also improved recovery prospects for legacy problem assets.

However, Moody's report also says that the banks' credit profiles and ratings will only improve if underwriting standards and capital-generation capacities also improve significantly, and if the banks allocate more profits to provisioning and the writing off of problem assets.

Moody's report notes that Vietnam's economic growth has recovered somewhat from the trough reached in 2012, and the country has managed to stabilize inflation at historically low levels. This achievement has allowed the State Bank of Vietnam to decrease its policy rates to promote economic growth. For example, the refinancing rate fell to 6.5% earlier this year from 15% in early 2012.

Moody's says that lower interest rates are positive for Vietnamese banks because they decrease the debt burden of their borrowers and lead to some improvements in the real estate market.

Supportive macroeconomic conditions, including stable inflation and exchange rates, and weak loan demand have improved liquidity for the entire banking system. As deposit growth outpaced loan growth, the system's loans to deposits ratio improved to 82% in June 2014, from 87% in June 2013.

Moody's rates nine banks in Vietnam, including two government-controlled banks and seven privately-owned joint-stock banks.