Keeping A Cautious Outlook Amid Rising NPLs

BMI View: The build-up of bad debt in the banking sector due to poor lending practices and a lack of regulatory oversight over the years will remain a daunting task for the Vietnamese government to tackle going forward. Although we believe that deeper banking reforms should benefit Vietnam's competitiveness and economic growth over the longer term, this process of restructuring the banking sector is set to depress earnings for the foreseeable future. Accordingly, we are maintaining a cautious stance on the banking sector throughout 2012 and into 2013.

Rising non-performing loans (NPLs) in Vietnam are becoming a serious threat to the stability of the banking system and we are keeping a cautious outlook on the sector over the medium term. Growing concerns that the banking system could be on the brink of collapse, as NPLs begin to undermine liquidity among poorly capitalised banks, have fuelled speculation that the Vietnamese government may need to seek financial assistance from the International Monetary Fund (IMF). The recent arrest of Nguyen Duc Kien, founder and major shareholder of Asia Commercial Bank (ACB) in August, further compounded fears that debt-laden banks could be on the verge of bankruptcy. This eventually led to a small-scale bank run that required the State Bank of Vietnam (SBV) to step in by guaranteeing deposits held by ACB.

Further Banking Reforms In The Pipeline

Although timely intervention by the SBV appears to have helped reinstall confidence and fend off a banking crisis for now, we believe that the build-up of bad debt due to poor lending practices and a lack of regulatory oversight over the years will remain a daunting task for the government to tackle going forward. Back in August, we said that the implementation of banking reforms would be a painful process for small and medium-sized banks ( see 'Banking Sector Set To Undergo Further Reforms', August 17). Indeed, we expect banks that are unable to compete effectively to be absorbed eventually by the larger state-owned banks under a directive from the SBV, or gradually exit the industry altogether. On the whole, we see this necessary adjustment as an effective way of eliminating uncompetitive banks in the economy and we are encouraged by the SBV's aggressive stance towards addressing the banking sector's weaknesses in recent months. We believe that such efforts should play a significant role in boosting Vietnam's competitiveness and economic growth over the longer term.

Still In A Deleveraging Mode
Vietnam - Outstanding Loans, VNDtrn (LHS) & % chg y-o-y (RHS)

A Drag On Earnings

In the medium term, however, the process of restructuring the financial system will present significant challenges for the banking sector and we expect earnings to be affected as banks adapt to tighter regulations and face increased foreign competition. As the accompanying chart shows, loan growth has moderated from a heady 35.0% year-on-year (y-o-y) in the beginning of 2011 to just 8.5% in February 2012. We expect this slowdown in loan growth to drag on banking sector earnings for the rest of the year and into 2013.

Keeping A Cautious Outlook

In the immediate term, we believe that mounting concerns of an impending collapse of the banking system - which is likely to require a large-scale bailout by the Vietnamese government and support from the IMF - are largely unwarranted. As mentioned above, the government has announced plans to absorb ailing banks and recapitalise the banking sector by further liberalising foreign investment. We believe that such measures will be given preference by the government before seeking assistance from the IMF. Nonetheless, the outlook for the banking sector remains precarious given the hidden exposure of local banks (largely a result of the lack of accounting standards and regulatory oversight) to the rising number of bankruptcies among small and medium-sized companies.

Figures published by the SBV indicate that NPLs across the banking sector have risen from 4.0-5.0% at the end of 2011 to 8.6-10.0% by the end of March 2012. We note that the overall NPL figure, however, has been heavily distorted by the performance of small ailing banks that are reportedly witnessing NPLs of as high as 20%. Meanwhile, NPLs across major listed commercial banks remain in a manageable range of 3.0-5.0%. Although these levels of NPLs do not necessarily present an immediate threat to the banking system for now, we see increasing risks that NPLs could head higher should economic conditions continue to deteriorate. Accordingly, we are maintaining a cautious stance on the banking sector as a whole going into 2013.

This article is tagged to:
Sector: Country Risk
Geography: Vietnam, Vietnam, Vietnam, Vietnam

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