How slow economic reforms are hampering Vietnam banks' growth recovery

Risk profiles to remain vulnerable.

In a report, Fitch Ratings says that the major Vietnamese banks' risk profiles will remain vulnerable in view of the country's below-par economic performance, high asset-quality risks, poor transparency and slow pace of banking restructuring, alongside persistent global headwinds.

Here's more from Fitch:

Stable macro policies since early 2011 have led to lower volatility in interest rates, exchange rates, and inflation. Sustaining a broadly steady backdrop raises the chances of a banking-sector recovery.

However, state-led reforms have been slow; in part because the authorities probably fear exacerbating problems in an already fragile economy.

Fitch forecasts Vietnam's GDP growth to rise modestly to around 5.5% in 2014-2015 (2013: 5.0%) - low relative to the country's record over the last decade. Efforts to spur domestic demand have not been effective as banks and borrowers are wary of an uncertain operating environment. Reported loan growth was just 6% in the year to August 2013 (2012: 9%).

Fitch expects any recovery in the banking system to be gradual, depending on the pace and effectiveness of reforms, and regulatory discipline.

The Vietnam Asset Management Company (VAMC) may not tackle many of the asset-quality issues in the near term because some aspects of its operations are still unclear and regulatory rules to improve asset-quality data transparency have been delayed until June 2014.

Banking consolidation and reform of state-owned enterprises are likely to progress slowly over the medium-term.

Vague non-performing loan (NPL) transparency and tough economic conditions still pose impairment risks to major banks.

VAMC could remove bad debt from banks but not losses. A "true" level of the NPL ratio (say 15% relative to the reported 3%-4%) and an 80% loss rate would cut core Tier 1 capital adequacy ratio (CAR) of large lenders to about 1% from the reported 10% at end-June 2013.

This, together with pressure on banks' asset quality and profit generation, underlines the need for fresh capital, which Fitch believes will be hard to acquire, especially for small and medium-sized banks. Restrictive foreign ownership laws deter foreign investment while there may not be much investor appetite locally because of the uncertain domestic economy.

Downside rating risks could arise if the operating environment becomes even more challenging and threatens banks' solvency, a loss in depositors' confidence occurs, and/or if there is a negative rating action on the sovereign.

The Outlook is Stable, however, because the banks' ratings in the single 'B' category already factor in such vulnerabilities, and in light of the Vietnamese sovereign's Stable Outlook.