Moody’s downgrades Vietnam’s banks to ‘stable’ on real estate headwinds
CREDIT rating agency Moody’s on Monday (Jan 30) changed its outlook on Vietnam’s banking system from “positive” to “stable”. The downgrade comes amid growing asset risks from stress in the real estate sector, and deteriorating profitability due to higher funding costs.
The headwinds should however be offset by strong economic conditions within the country, added analysts, as they expect funding and liquidity to remain tight.
Moody’s forecast the country’s gross domestic product to grow between 6 and 6.5 per cent in 2023, supported by continued domestic recovery after the pandemic, as well as increases in government spending on infrastructure projects.
Analysts said the country will remain an attractive destination for foreign direct investment, though the debt-servicing capacity of borrowers could be dampened by high inflation and interest rates.
Nationwide, banks’ non-performing loans are expected to rise to 2.5 per cent by the end of this year, due to their material exposures to the real estate and construction sectors – which analysts noted were facing a liquidity crunch.
Furthermore, the banks’ net interest margins will likely decline due to higher funding costs, as the rate of increase in deposit and interbank interest rates outpace those in loan yields.
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While banks can boost margins by repricing existing loans at higher rates and increasing higher-yielding loans to retail and small and medium-sized enterprise borrowers, the gains may be limited. This is because of a cap on credit growth, as well as social pressure to keep interest rates low for borrowers, said analysts.
In December 2022, the State Bank of Vietnam (SBV) raised its 14 per cent cap on the local banking system’s credit growth for the year by 1.5-2 percentage points after the local property and financial markets faced a credit crunch following increases in the central bank’s policy rate.
SBV added that banks with good liquidity and those offering low interest rates will be eligible for an increase in their credit growth.
However, funding conditions for Vietnam’s banks are expected to remain tight, as credit growth keeps pace with deposit expansion. Private banks, in particular, are likely to face greater funding risks amid stiff competition for deposits because they have weaker deposit bases than state-controlled banks, said Moody’s.
Local-currency deposits will remain the primary funding source for banks, according to the analysts.
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