Standard & Poor’s downgrade of Vietnam’s banking industry last week has received sideways glances from leading economists in the country.
Financial institution analysts contacted by VIR said Standard & Poor’s was correct in pinpointing troublesome issues like a saturated banking market and market distortions caused by frequent use of administrative tools.
The headline-grabbing announcement could spark the State Bank into action to accelerate its banking system restructuring plans. However, they argued the rating agency failed to paint an accurate picture of Vietnam’s banking landscape when it revised its Banking Industry Country Risk Assessment (BICRA) for Vietnam from group nine to rock bottom group 10. Other countries in the BICRA group 10 include debt-ridden Greece and Belarus.
The BICRA groups summarise Standard & Poor’s view of the risks banks operate within a particular country and a banking industry faces relative to those in other banking industries.
Standard & Poor’s said risk appetite for local banks was moderate and focused on growth, and the market was saturated, with moderate overcapacity, which led to competition between banks for both loans and deposits.
“We expect pressure on net interest margins to put stress on the ability of financially weaker and smaller players to price adequately for risk. Furthermore, we believe the banking system is subject to market distortions from the frequent use of administrative controls,” the rating firm said.
Nguyen Tri Hieu, standing board member of a Vietnamese private bank with significant United States banking industry experience, said Standard & Poor’s analysis failed to mention positive elements that Resolution 11 had brought about.
Resolution 11, introduced by the Vietnamese government early this year, is a package of measures to rein in inflation, the highest in Asia this year, via cuts to public investment and a tightened monetary policy. “Resolution 11 has demonstrated certain successes with respect to the financial and banking system,” Hieu said.
Thanks to the resolution, the growth in banks’ lending to the economy has been restrained at the current rate of 12 per cent compared to the total loans at the end of 2010, versus 20 per cent target for the entire year 2011.
The banks in general are also on the target of reducing non-productive loans to 20 per cent at June 2011 and are expected to be able to further reduce to 16 per cent at the year’s end.
In terms of the Vietnam dong stability, the exchange rate has been kept in check in spite of rising inflation.
“Of course, it remains to be seen how the dong will behave towards US dollar over the next one and a half months of this year and whether the State Bank will be able to keep the USD/VND exchange rate not to exceed the 1 per cent increase target from June’s level, the State Bank’s management of the exchange rate is so far commendable,” Hieu highlighted.
Alan Pham, chief economist at brokerage VinaSecurities, said he “disagreed” with Standard & Poor’s assessment. Pham said among the strong points “not adequately recognised” was a depositor base that kept idle cash in banks.
“Banks in Vietnam do not engage in complex products, for instance derivatives, that can collapse because few people understand how they work. This happened in the US in 2008, causing the great crisis. “Real estate loans are simple compared to mortgage backed securities, and can be restructured. Banks in Vietnam are state supported institutions and can rely on state help in times of trouble,” Pham noted.
Nguyen Thuan, chief of financial information company StoxPlus, said the announcement was unsurprising considering the range of real estate, coffee and steel firms with their backs to the wall.
However, Thuan said local analysts and investors were skeptical whether Standard & Poor’s had conducted field visits in Vietnam. “If it gives rating based on their desktop analysis offshore then we would have huge doubts as to the rationales used,” he said.
Surging non-performing loans (NPL) and some banks’ poor liquidity, bad risk management and weak corporate governance are significant problems for Vietnam’s banking system.
By the end of August, the system’s NPL was about 3.2 per cent of outstanding loans against late last year based on Vietnamese accounting standards. Fitch’s some months ago estimated the figure was 12 per cent.
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