OREANDA-NEWS. Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) on five Vietnamese banks as follows:

- Vietnam Bank for Agriculture and Rural Development (Agribank), Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) and Joint Stock Commercial Bank for Foreign Trade of Vietnam's (Vietcombank) were affirmed at 'B+'

- Asia Commercial Joint Stock Bank (Vietnam) (ACB) and Military Commercial Joint Stock Bank (Military Bank) were affirmed at 'B'

All of them have Stable Outlooks. A full list of the ratings is at the end of this commentary.

The ratings were affirmed because the banking sector is showing initial signs of stabilisation, aided by an improving economy. We expect funding and liquidity conditions for the sector to remain steady, aided by a relatively stable currency and benign inflation. If sustained, this is likely to alleviate asset-quality pressures on the system. However, we expect banks' profitability to still remain under pressure due to weak net interest margins and high credit costs on more stringent asset classification.

The understatement of problem loans seen in the low reported-NPL ratios across the system suggests that the capitalisation of banks is likely to be weaker than their reported capital ratios.

KEY RATING DRIVERS

IDRS, SENIOR DEBT, SUPPORT RATINGS (SRS) AND SUPPORT RATING FLOORS (SRFS) OF AGRIBANK, VIETINBANK AND VIETCOMBANK
The Long-Term IDRs of Agribank, Vietinbank and Vietcombank are driven by Fitch's expectation that the government would provide extraordinary support as these entities are systemically important and majority-owned by the Vietnamese government. They are among the top four Vietnamese banks by assets and have strong domestic franchises.

The banks' SRFs and IDRs are one notch lower than Vietnam's sovereign rating (BB-/Stable). Fitch believes the large size of the banking industry relative to GDP, and the government's weak finances may constrain the timeliness of support.

Vietinbank's senior notes are rated at the same level as its Long-Term IDR, given that the notes constitute direct, unsubordinated and senior unsecured obligations of the bank, and rank equally with other unsecured and unsubordinated obligations. The Recovery Rating of 'RR4' reflects average recovery prospects.

The Stable Outlooks on Agribank, Vietinbank and Vietcombank reflect the Stable Outlook on Vietnam's sovereign rating.

VRS OF VIETINBANK AND VIETCOMBANK
The VRs of Vietinbank and Vietcombank reflect their weak credit metrics, characterised by weak asset quality and capitalisation, declining profitability and high loan concentration risk, especially in state-owned enterprises (SOEs). The VRs also incorporate their strong domestic franchises, which focus on commercial and corporate lending, and their stable funding profiles.

Fitch believes these two state-owned banks have an advantage over private banks in times of stress as depositors would likely have higher confidence in a majority state-owned bank. Vietinbank's loan-to-deposit ratio of 107% at end-June 2015, as per Fitch's estimate, exceeds the 90% soft limit imposed by the State Bank of Vietnam on state-owned banks. In contrast, Vietcombank's 74% is lower.

Fitch does not assign a VR to wholly government-owned Agribank. Providing support to the domestic economy has a high influence on its standalone profile and makes it likely that it will continue to benefit from regulatory forbearance.

IDRS AND VRS OF ACB AND MILITARY BANK
The Long-Term IDRs of ACB and Military Bank are driven by their VRs and reflect their smaller franchises but modestly better loan quality compared to state-owned banks'. Fitch believes that their capital encumbrance from the underreporting of NPLs is lower compared with the state-owned banks.

ACB's ratings reflect its stable credit profile given its more moderate annual loan growth in the last three years and smaller exposure to SOEs. ACB's loan quality is likely to be better compared with most of its peers given its much lower loan concentration risk with small exposure to SOEs - 1.2% of total loans at end-June 2015. The reported NPL ratio was 1.7% at end-June 2015 (2014: 2.2%).

Military Bank's ratings reflect its franchise as one of the largest private banks in Vietnam. Fitch expects that the bank will continue to generate stronger profitability than its peers, supported by its higher net interest margins and more favourable cost structure. Its recent new share issuance has also helped maintain its capitalisation ratio above the majority of its local peers'. The ratings also take into account the bank's above-industry loan growth, its better liquidity profile - with loan-to-deposit ratio of 64% at end-June 2015 - and its strong government ties.

The Stable Outlooks on ACB and Military Bank reflect Fitch's expectation that their risk profiles will be maintained over the near to medium term amid macroeconomic stability in Vietnam.

SRS AND SRFS OF ACB AND MILITARY BANK
The '5' SRs and 'No Floor' SRFs of ACB and Military Bank reflect Fitch's view that state support may be possible but cannot be relied upon.

RATING SENSITIVITIES

IDRS, SRS and SRFS OF AGRIBANK, VIETINBANK, VIETCOMBANK, ACB AND MILITARY BANK
The Long-Term IDRs, SRs and SRFs of Agribank, Vietinbank and Vietcombank are sensitive to shifts in the sovereign's creditworthiness and ratings. These ratings may also be affected by any perceived change in the government's propensity to support the banks, although such a scenario is unlikely in the near term for the systemically important state-owned banks like Agribank, Vietinbank and Vietcombank. The SRs and SRFs for ACB and Military Bank are already at the lowest end of the ratings scale.

The Long-Term IDRs of ACB and Military Bank are sensitive to changes in their VRs.

SENIOR UNSECURED NOTES
The ratings on Vietinbank's senior unsecured notes are sensitive to any changes in the bank's Long-Term IDR.

The Recovery Rating is sensitive to Fitch's assessment of potential recoveries for creditors in case of default/non-performance.

VRS OF VIETINBANK, VIETCOMBANK, ACB AND MILITARY BANK
Vietnamese banks may be pressured if asset quality deteriorates further and if problem loan recognition were to accelerate, in turn significantly weakening banks' profitability and capitalisation. Downward pressure for Vietinbank may be higher given its low and declining capital ratio and higher loan concentration risk.

Negative rating action for Vietinbank, Vietcombank, ACB and Military Bank may also result from increasing risk appetite, which may be demonstrated by excessive loan growth, or event risks such as M&A or operational lapses that could materially affect the banks' credit profiles.

The VRs may be upgraded if structural issues such as lack of uniformity in loan classification standards and bad debt resolution are more adequately addressed, leading to greater transparency and sustainable improvement in the banks' asset quality and their overall financial profiles.

The full list of rating actions is as follows:
Agribank
Long-Term IDR affirmed at 'B+'; Outlook Stable
Short-Term IDR affirmed at 'B'
Support Rating Floor affirmed at 'B+'
Support Rating affirmed at '4'

Vietinbank
Long- Term IDR affirmed at 'B+'; Outlook Stable
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
Support Rating Floor affirmed at 'B+'
Support Rating affirmed at '4'
USD250m 8% notes due 2017 affirmed at 'B+'; Recovery Rating of 'RR4'

Vietcombank
Long-Term IDR affirmed at 'B+', Outlook Stable
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'b-'
Support Rating Floor affirmed at 'B+'
Support Rating affirmed at '4'

Military Bank
Long-Term IDR affirmed at 'B'; Outlook Stable
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'b'
Support Rating Floor affirmed at 'No Floor'
Support Rating affirmed at '5'

ACB
Long-Term IDR affirmed at 'B'; Outlook Stable
Short-Term IDR affirmed at 'B'
Viability Rating affirmed at 'b'
Support Rating Floor affirmed at 'No Floor'
Support Rating affirmed at '5'