Fitch: Proposed Vietnam Bank Consolidation Positive for Sector

12-Mar-2015 Intellasia | Reuters | 6:00 AM Print This Post

Plans by Vietnam’s central bank to consolidate the nation’s banking system, and the introduction of new rules involving ownership structure under Circular 36 are likely to benefit the sector, says Fitch Ratings. However, implementation may be a challenge, while long-term structural problems such as weak asset quality, poor transparency and low capital buffers remain. Consolidation is likely to improve efficiency through better economies of scale, and reduce supervisory burden. The central bank State Bank of Vietnam (SBV) announced plans in recent months to approve M&A deals among the country’s lenders in 2015 to reduce the number of banks to between 15 to 17 banks by 2017, from around 40. Fitch expects the bulk of the consolidation to be led by the merging of weak, smaller banks with large state-owned commercial banks. Absorbing weaker banks could heighten asset-quality and execution risks for the larger state-owned commercial banks in the near term. That said, Fitch believes the impact will be manageable as potential targets remain small relative to their suitors’ total assets. In addition, new regulations under Circular 36 (effective 1 February 2015) that allow banks to hold less than a 5 percent stake each in a maximum of two other credit institutions are likely to help reduce the high level of inter-bank ownership in the sector, which overstates capitalisation in the banking system and raises corporate governance concerns. Banks with more than a 5 percent stake in other credit institutions will have one year (to 1 February 2016) to divest their shareholdings or merge with the relevant entities to comply with the new regulations. Minimum capital requirements under Circular 36 remain unchanged at 9 percent for the total capital adequacy ratio (CAR) – and are unlikely to have a major impact on Fitch-rated state-owned and private commercial banks. Fitch-rated commercial banks have reported CAR ranging from 12.6 percent to 14.4 percent as of June 2014. More concrete implementation of banking sector reforms, however, is likely to remain challenging in Vietnam as highlighted by the slow progress in state-owned enterprise (SOE) privatisation, and the multiple delays in implementing Circular 2 – a set of tighter loan classification rules aimed at improving asset-quality transparency. Consolidation is also unlikely to be a panacea for the nation’s banking-sector challenges, as Fitch believes high asset-quality risks and low capital buffers will continue to weigh on the industry. The agency maintains its negative outlook on the Vietnamese banking sector. The large stock of non-performing loans (NPLs) accumulated during past periods of excessive growth will take time to resolve, even as more supportive macroeconomic conditions may help ease incremental asset-quality pressures. The banks’ loss-absorption capacities are likely to be lower than reported due to the understated NPLs and that underscores the sector’s capital impairment risks. Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: [email protected] Contact: Mihwa Park Associate director Financial Institutions +65 6796 7238 #35-05 Suntec Tower 4 6 Temasek Boulevard 038986 Singapore Ker Liang Oh Analyst Financial Institutions +65 6796 7220 Justin Patrie Senior director Fitch Wire +65 6796 7232 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM’. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.


Category: Finance, Vietnam

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