Vietnam banks plagued by deteriorating asset quality

Smaller banks will be worst hit.

A recent fall in the asset quality of Vietnam banks threatens to erode their capital and undermine the banking system's resilience. That's according to report titled "It's A Double Whammy For Vietnam's Banks: Bad Loans Are Rising As Economic Growth Falters" that Standard & Poor's Ratings Services published on 21 August.

"A sharp and prolonged economic slowdown will exacerbate the inherent structural weakness in Vietnam's banking system, leading to higher defaults, increased credit costs, and ultimately, capital impairment," said Standard & Poor's credit analyst Ivan Tan. The smaller banks are likely to be the worst hit.

Standard & Poor's ratings on Vietnam banks factor in elevated credit risk in Vietnam based on high private sector credit in a low-income economy, compounded by rudimentary underwriting standards. We also factor in a rise in bad loans because of the difficult operating conditions.

The recent fall in economic growth in Vietnam has meant that companies--the chief recipients of banking credit--are struggling with slow sales, high inventories, and cash flow problems. We expect Vietnam's economic growth in 2013 to be 5.3%, one of its slowest in about 10 years.

The report notes that the recently formed Vietnam Asset Management Company (VAMC) is unlikely to resolve problems in the country's banking system unless it is accompanied by more stringent regulations and stronger risk management practices among banks.

"The setting up of the VAMC will only have a "window-dressing" effect, where bad loans will be removed from the books of banks, causing a decline in reported nonperforming loans. In substance, banks will continue to bear the associated risks and credit losses," said Mr. Tan.

Well-executed banking reforms that improve supervision of banks will improve industry risk in Vietnam's banking industry, in Standard & Poor's opinion. Nevertheless, the report notes that progress in the reform and consolidation process that the government initiated in March 2012 has been slow.