Moody’s Downgrades Vietnam on Bank-Related Weaknesses

Posted on September 28, 2012

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SINGAPORE—Moody’s Investors Service cut Vietnam’s credit rating further into junk territory on Friday, citing risks that the government will have to pump money into the country’s banks and the sector’s limited ability to support the economy.

Moody’s downgraded Vietnam by one notch to B2 with a stable outlook and said risks to the rating were balanced going forward.

It also lowered its view on the eight Vietnamese banks it assesses on the greater likelihood that they will need government support to survive, amid deteriorating asset quality and pressures on their profitability.

The move came as Vietnam’s government, in the wake of a growing banking scandal, pledged Friday to revamp banks weakened by regulatory violations and prosecute anyone found guilty of misconduct.

Moody’s highlighted the vulnerability of Vietnam’s banks, which are facing a growing bad debt problem after years of rampant credit growth and subsequent policy tightening. In August, the country’s central bank governor said the bad-debt ratio was thought to be 8.6% to 10%, significantly above what was previously acknowledged.

“Moody’s believes that there is an elevated risk that the costs of recapitalizing the banking system will have to be borne, at least in part, by the government,” which is likely to have a “material” impact on its finances, the ratings firm said Friday.

It noted that banks’ weakness had curbed the provision of credit to the economy, and said the government—if it is saddled with the cost of bank bailouts—might not be able to provide sufficient fiscal stimulus if global growth slows further.

Meanwhile, a government official said Friday that Vietnam will “revamp” banks weakened by regulatory violations and prosecute anyone found guilty of misconduct.

“The government is serious in investigating violations at every level of the banking system and punishing those responsible regardless of who they are,” Vu Duc Dam, head of the Government Office, said in a statement issued by the State Bank of Vietnam. He didn’t elaborate on how any affected banks would be revamped, which the statement said would happen by the end of 2013.

Earlier in September, the government was forced to deny reports—sparked by what the International Monetary Fund described as a routine visit by its new Vietnam mission chief—that it might seek money from the IMF.

Growth slowed to a three-year low of 4% early this year as a series of interest-rate increases succeeded in taming rampant inflation. On Thursday, a government report showed that stimulus measures helped push growth back up to 5.4% in the third quarter, but consumer prices are rising quickly again as well, posing a delicate balancing act for authorities.

Moody’s said Friday it had cut the foreign and local currency ratings on two state-run banks—Bank for Investment & Development of Vietnam, and Vietnam Bank for Industry and Trade—to B2, and six commercial banks to B3. All were assigned a stable outlook.

It said it had given the same standalone credit assessments across the board due to opacity on the banks’ economic positions and lack of alignment with international financial standards.

That decision also took into account the risk that confidence in some banks could be shaken as bank executives or shareholders are punished for past misconduct, it said.

Jean-Francois Tremblay, associate managing director for South and Southeast Asia at Moody’s, said Vietnam’s proposed banking reforms would be positive if implemented in full.

“For now, reforms are slow, the next steps are unclear and bank shares are depressed, making new capital raisings unlikely,” he said. “With low profits expected over the next few quarters, it is difficult to see how the banks will be able to improve their capitalization for the time being.”

WSJ

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