Fitch Places Vietcombank's Individual 'D' on Negative Watch

Fitch Ratings has on August 18 placed Joint Stock Commercial Bank for Foreign Trade of Vietnam's (Vietcombank) Individual rating of 'D' on Rating Watch Negative. The Support rating has been affirmed at '4'.

 

"There are concerns regarding Vietcombank's weak balance sheet strength due to potential under-provisioning associated with loan quality deterioration as the country's trade-dependent economy slows," says Sabine Bauer, Director in Fitch's Financial Institutions Team. "Fitch would consider downgrading the Individual rating if it cannot gain sufficient comfort from the bank's loans quality, in particular the differences in loan classifications using international and local accounting standards," adds Ms. Bauer. The Individual rating also reflects solid profitability and the bank's strong franchise as one of four major state-owned banks with 10% of system assets.

 

Under IFRS, Vietcombank's NPLs rose to a very high 18% at end-May 2008 (2007: 14%) and net NPLs stood at 115% of equity. In addition, special-mention loans were very high at 23%. Audited IFRS 2008 accounts are not yet available, but Fitch anticipates that loans quality will have deteriorated further due to very high inflation and interest rates in H208 and a slowing economy. NPLs under local accounting standards (VAS) increased moderately to 4.3% of end-H109 loans from 3.3% at FYE07; this is however well above the system's 2.5%. In addition, special-mention loans rose to 5.4% from 2.0%. Loan quality may deteriorate further given strong loan growth over H109 (16% for the bank versus 17% for the system), particularly if borrowing rates rise with the state ultimately having to remove its current subsidisation of them. In addition, Vietcombank is exposed to a depreciation of the Vietnamese Dong as 40% of its loans are in foreign currency.

 

Pre-provision profit has remained solid (2.9% of assets in H109; 3.0% in 2008), but is somewhat under pressure as limited availability for deposits drives up funding costs and squeezes margins, especially as lending rates are capped. Meanwhile, liquidity tightened slightly in H109 as the bank funded its loan growth through liquid assets as customer and bank deposits contracted.

 

While capital appears adequate under VAS, based on IFRS loans quality data, there is the potential for it to be significantly eroded. That said, the bank holds significant loan collateral. At end-June 2009, the regulatory total CAR stood at 8.8% (2008: 9.3%).

 

Vietcombank is 90.7%-owned by the state and is Vietnam's third-largest bank. It employs 9,056 staff and has 65 branches. Its shares were listed in June 2009. (Fitch Ratings)