Bad asset quality destabilizing Vietnamese banks

Continuing economic slowdown worsening situation.

Standard & Poor's Ratings Services said the recent drop in the asset quality of Vietnamese banks threatens to erode their capital and weaken the banking system's resilience.

In its report, "It's A Double Whammy For Vietnam's Banks: Bad Loans Are Rising As Economic Growth Falters," Standard & said 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.

Standard & Poor's ratings on Vietnam banks took into account the elevated credit risk in Vietnam based on high private sector credit in a low-income economy, worsened by rudimentary underwriting standards.

It expects Vietnam's economic growth in 2013 to be 5.3%, one of its slowest in 10 years.

The report notes that the recently formed Vietnam Asset Management Company 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. It described the VAMC as "window-dressing."