Vietnam’s banking outlook changed to negative due to coronavirus: Moody’s

Vietnam’s banking outlook changed to negative due to coronavirus: Moody’s

By Thanh Thom

HCMC – Moody’s Investors Service has changed the outlook for the Vietnamese banking system to negative from stable, reflecting the impact of disruptions from the coronavirus outbreak on individuals and companies across industries.

The U.S.-based rating agency noted in a report released on April 2 that the impact on Vietnam has been less severe than that seen in other economies in Asia, but the situation could worsen as the coronavirus spreads more widely within the country.

“We expect the solvency of rated Vietnamese banks to deteriorate in line with broad economic conditions. Funding and liquidity at banks will be stable, though at smaller institutions, both could weaken as depositor confidence becomes more fragile due to economic uncertainty,” stated Moody’s.

The agency predicted the Vietnamese economy will face unprecedented challenges stemming from the coronavirus outbreak.

“While domestic transmission of the coronavirus remains relatively limited for now, companies in Vietnam are confronted by both supply and demand shocks as economic activity for their major trading partners is slowing,” pointed out the agency.

The impact on tourism will intensify as the Vietnamese Government has barred the entry of all foreign nationals, while domestic consumption is also waning as residents have been restricted from leaving their homes.

Moody’s noted the unemployment rate is likely to rise, further depressing domestic consumption.

Credit demand in 2020 will be weak as potential borrowers become cautious to ride out economic challenges. The magnitude of the impact of the coronavirus outbreak will depend on the length of the disruptions, which is hard to predict, according to the agency.

Macroeconomic challenges will renew asset stress. The debt repayment capacity of borrowers will deteriorate because of declines in revenue.

“A prolonged virus outbreak will lead to material increases in nonperforming loans across multiple sectors, particularly the manufacturing and trade sectors, given Vietnam’s large exposure and close ties to global supply chains,” said the agency.

It added, “Loan loss reserves at Vietnamese banks, which are still thin relative to those at other Asian banks, will provide limited buffers.”

The State Bank of Vietnam has adopted various measures, such as a cut in policy lending rates in March 2020, while banks have also been encouraged to offer loan forbearance, including reducing or delaying interest repayments, for affected borrowers. This will somewhat soften the negative impact on asset quality.

The contraction of net interest margins and increases in credit costs will weigh on profitability. Moody’s stated that the relief measures for borrowers, coupled with waning credit demand, will depress net interest margins, while deterioration in asset quality will lead to increases in loan loss provisions.

Capital quality will deteriorate because of increases in nonperforming loans, stressed Moody’s, adding that while headline capital ratios will be stable as the moderation of asset growth offsets declines in profit, the quality of capital will deteriorate as these loans increase.

Private banks can conserve capital by reducing cash dividend payouts or by paying dividends in stock. These options, according to Moody’s, could be less viable for State-owned banks that have historically paid high dividends.

Also, the prospects of foreign investment will dim this year, given the impact of the coronavirus pandemic on investment sentiment globally, and this will make it more difficult for Vietnamese banks to raise external capital.

Funding and liquidity will be stable but the risk of deposit loss will grow, according to the agency. Banks’ loan-to-deposit ratios will be largely stable but may rise despite weak loan growth as depositors draw down on their savings.

Moody’s stressed that smaller banks are particularly vulnerable to large deposit withdrawals that could be triggered by negative publicity amid weak depositor confidence. By contrast, for the overall system, slower loan growth will ease pressure to obtain funding from markets.

“The Government will continue to provide support for banks, if needed, mainly in the form of liquidity assistance and regulatory forbearance from the central bank, as it has in the past,” said the agency.