Fitch Ratings has on May 2, 2007 upgraded the Individual Ratings of Vietnam's "Big Four" state-owned commercial banks which together account for around 75 per cent of system-wide assets.
The ratings for the Bank for Investment and Development of Vietnam (BIDV), the Industrial and Commercial Bank of Vietnam (Incombank) and the Vietnam Bank for Agriculture and Rural Development (Agribank) were raised to 'D/E' from 'E'. Meanwhile, the Bank for Foreign Trade of Vietnam's (Vietcombank) rating was raised to 'D' from 'D/E'. All the banks' Support ratings remain unchanged at '4'. Fitch believes the Vietnamese government is willing to support the banks but notes that its ability to do so could be constrained given its own limited financial capacity as per its sovereign rating of just 'BB-' (BB minus).
The upgrades reflect a number of positive developments at the banks over recent times as outlined in Fitch's just-released reports on them. This includes better underlying profitability thanks to higher margins resulting from a higher interest rate, and a shift towards more private-sector lending by the banks. Of greater note, however, at least in the cases of BIDV, Incombank and Vietcombank, have been the positive developments from their preparations for IPOs planned for late-2007/early-2008.
This has included ongoing commercialisation of these banks, an improvement in their credit-risk and management information systems, and last but not least, a substantial cleaning up of the banks' loan books aided by government recapitalisation funds. For all three of these banks, there is some way to go before their non-performing loans are fully covered (using International Accounting Standards) and their Capital Adequacy Ratios reach 8 per cent.
Such a milestone, however, is expected to be reached prior to their IPOs, which will also include the introduction of strategic foreign shareholders, albeit with the government maintaining at least a 51 per cent controlling stake in each of the banks. Vietcombank is somewhat further ahead than the other banks in terms of balance sheet cleaning and commercialisation, hence its higher 'D' rating. That said, we would expect BIDV and Incombank to also achieve a 'D' rating once further progress is made with regards to cleaning up their balance sheets, recapitalisation and commercialisation.
Meanwhile, Agribank's financial position remains weaker than the others and it is unclear what its commercialisation and privatisation plans are. Nevertheless, there has been some improvement in its underlying profitability (which is in fact better than average due to its substantial focus on higher-yielding loans to farmers) as well as its capitalisation (through ongoing government injections - albeit with an equity-to-assets ratio of just 0.41 per cent at end-2005).
The upgrade of its rating reflects these developments as well as depositor-confidence in it given expectations that it will be supported by the government if required given the bank's substantial size (28 per cent of system assets) and crucial role in supporting Vietnam's rural communities where 75 per cent of Vietnam's 84 million people live. In the case of all the banks' ratings, further upside potential could be limited, and indeed downside pressure could arise, if there was any deterioration in Vietnam's economy.
While this is not expected (noting that the GDP growth has been consistently coming in at about 8 per cent p.a. for some years now, on the back of ongoing reforms towards a market-driven economy), concerns do remain, particularly with regards to the country's stock market being over-inflated. Property markets in Vietnam also need to be closely watched. In the event that there is economic volatility, it could be particularly problematic for the banks given their generally very strong loans growth over recent years (over the three years to end-2005, the four banks' loan books grew 82 per cent); much of this has been to private-sector borrowers, which are of a higher risk than the country's better quality state-owned enterprises, as well as being relatively new area for the banks. (Fitch Ratings-Singapore/Hong Kong)
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