Issue of the Week: Does Vietnam’s banking system face a catastrophe?

With reports of rapidly increasing non-performing loans and government plans for restructuring, does a major catastrophe loom for Vietnam's banking industry - find out as analysts from BBVA, Fitch, Deloitte and Moody's share their insights.

ABF: Does Vietnam’s banking system face a catastrophe? Following recent reports that the banking industry faces rapidly increasing non-performing loans and government plans to restructure banking sector, is this just business as usual or a major catastrophe in the making?

BBVA: Alicia Garcia Herrero, Chief Economist for Emerging Markets

Vietnam’s banking system obviously needs to go through systemic restructuring after having served as the financing arm of a planned economy for so many years. After a cautious attempt to reform the banking system, right after China started its own bank restructuring, the Vietnamese authorities interrupted their strategy due to the global financial crisis, which dried up investors’ appetite for Vietnamese banks. Four years after, Vietnam is confronted with an even more difficult external environment and a more urgent need to reform the banking system. It is not so much the risk of a catastrophe that is pushing the authorities to react but rather the sense of ever worsening conditions which make a prompt action a better one.

Fitch Ratings: Alfred Chan, Director, Financial Institutions

The challenging operating environment in Vietnam has already weakened the banking sector, and the situation is likely to continue into 2012. Asset quality has deteriorated, and liquidity in the banking sector remains very tight - a trend not seen in other neighboring banking systems. Nonetheless, these challenges may be partly counterbalanced by several positive developments. Firstly, the government has stated its intention through Resolution 11 to bring about economic stability and contain inflation pressures. Secondly, some major banks have been receiving fresh capital, which together with the entry of foreign investors helps to improve banks' balance sheets and management quality. Thirdly, the banking sector consolidation and restructuring helps reduce the insolvency threat of smaller (mostly vulnerable) banks to the broader banking sector and could promote financial stability. It is therefore important that these efforts are maintained, which could help avert to banking sector catastrophe.

Deloitte Consulting: Mohit Mehrotra, Regional Head of Financial Services, Strategy & Operations

Vietnam's banking system is facing high NPL. In light of these broader challenges; the move by central bank to liberalize and restructure the banking system is a leading indicator of a tough situation. In short term small and mid-sized banks are actively looking to improve their valuations in anticipation of consolidation in the sector; the medium and long term will be driven by gradual measures to strengthen the banking system. The primary challenge will stem from bad debt created due to massive loan growth in the last few years. Official records indicate NPL of nearly 3% while the same statistics by non-local agencies estimates it to be a much higher number. Similarly the high demand for short term deposit versus a long term loan book creates a natural need for liquidity. While key reforms will focus on banking system restructuring, capital position improvement, privatization of state-owned banks; the effectiveness of such measures will largely be driven by how soon and how well they take effect.

Moody’s: Karolyn Seet, Credit Analyst for Vietnamese banks

As indicated by our negative outlook on the Vietnamese banking system as well as on the sovereign debt of the country, the operating environment is challenging for banks. Domestic macroeconomic imbalances exacerbate the risks to banks’ asset quality at a time when profitability and capital buffers are already low.

*Graph from Fitch Ratings' 2012 Outlook: Asia-Pacific Banks

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