Fitch Publishes Vietcombank's 'B+' Rating; Outlook Stable
KEY RATING DRIVERS
IDR, SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF)
Vietcombank's Long-Term IDR is driven by state support. Its SR of '4' and SRF of 'B+' reflect Fitch's view that the probability of state support is limited. This takes into account the limited ability of the state to provide support due to the government's relatively weak finances -as reflected in the sovereign's Long Term IDR of 'BB-' - and the sizeable banking industry compared to GDP.
However, Fitch believes the propensity of state support is high due to Vietcombank's systemic importance and its majority ownership by the Vietnamese government. Vietcombank has a strong domestic franchise and is one of the four largest banks by asset size in Vietnam. The Stable Outlook of Vietcombank reflects the Stable Outlook on the sovereign rating.
VR
Vietcombank's VR incorporates structural systemic issues such as weak asset quality and capitalisation which are common across Vietnamese banks. The large stock of problem loans in the banking system raises capital impairment risks for Vietnam banks in general, and Vietcombank is unlikely to be immune given its sizeable loan market share and its relatively high exposure to SOEs, at 28% of gross loans at end-2014.
The understatement of problem loans by reported non-performing loan (NPL) ratios across the system also suggests that Vietcombank's capitalisation is likely to be weaker than reported capital ratios (Tier 1 Capital Ratio of 9.4% and Total Capital Ratio of 11.4% at end-June 2015) - similar to other Vietnamese banks.
Such risks are partially mitigated by the bank's higher NPL reserve coverage (96% at end-June 2015) than peers, and its historically more conservative NPL classification standards relative to other state-owned banks. Vietcombank's total problem loans - including loans classified as "special mention" and below, and special bonds issued by the Vietnam Asset Management Company - amounted to around 6.9% of gross loans at end-June 2015 (8.3% at end-2014). The improvement in asset quality reflects domestic macroeconomic stability in recent years.
Vietcombank's VR also accounts for its declining profitability, which is weighed down by rising credit costs and lower net interest margins. However, the bank's funding profile remains stable, underpinned by its strong domestic franchise. The bank will also likely have an advantage over private banks in times of stress as depositors would have higher confidence in a majority state-owned bank. Vietcombank's loan-to-deposit ratio stood at 74% at end-June 2015, comfortably below the regulatory limit of 90% for state-owned banks.
RATING SENSITIVITIES
IDR, SR, AND SRF
The SRs and SRFs are sensitive to shifts in the sovereign's credit worthiness and ratings, which at present, are on a Stable Outlook. These ratings may also be affected by any perceived change in the government's propensity to support the bank, although such a scenario is unlikely for the systemically-important state-owned banks, including Vietcombank.
VR
Vietcombank's VR may be pressured if asset quality deteriorates, and significantly weakens the bank's capitalisation. Negative rating action may also result from increasing risk appetite, which may be demonstrated by excessive asset growth, or event risks such as M&A or operational lapses that could materially affect the bank's credit profile.
The VR may be upgraded if the bank shows a sustainable improvement in asset quality - alongside credible reforms in the banking sector to address structural systemic issues such as a lack of transparency as well as bad debt resolution, among others.
The rating actions are as follows:
Vietcombank
Long-term IDR published at 'B+', Outlook Stable
Short-term IDR published at 'B'
Viability Rating published at 'b-'
Support Rating Floor published at 'B+'
Support Rating published at '4'.
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