S&P upgrades Vietinbank to 'BB-' after stake sale to BTMU

Dec 28th at 20:35

28-12-2012 20:35:48+07:00

Standard & Poor's Ratings Services raised its long-term issuer credit rating on Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) to 'BB-' from 'B+'. The outlook is stable.

Overview

We expect Vietinbank's capital position to improve following BTMU's acquisition of a 20% stake in the bank.
We are raising Vietinbank's SACP to 'bb-' from 'b+'.
We are raising the long-term issuer credit rating on Vietinbank to 'BB-' from 'B+'. We are also raising the long-term ASEAN regional scale rating on the bank to 'axBB+' from 'axBB'.
The stable outlook reflects our expectation that Vietinbank will maintain its market position and financial profile.

Rating action

On Dec. 28, 2012, Standard & Poor's Ratings Services raised its long-term issuer credit rating on Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) to 'BB-' from 'B+'. The outlook is stable. We also raised the long-term ASEAN regional scale rating on the bank to 'axBB+' from 'axBB'. At the same time, we affirmed the 'B' short-term issuer credit rating and the 'axB' short-term ASEAN regional scale rating on Vietinbank. We also raised the issue rating on the bank's senior unsecured notes to 'BB-' from 'B+'.

Rationale

We raised the rating because we expect Vietinbank's stand-alone credit profile (SACP) to improve after Bank of Tokyo-Mitsubishi UFJ Ltd. (BTMU; A+/Stable/A-1) acquires a 20% stake in the bank. We revised Vietinbank's SACP to 'bb-' from 'b+'. We anticipate that the bank's capital position will improve to "weak" from "very weak," as our criteria define these terms, after the acquisition. In our opinion, Vietinbank's more moderate loan growth following the Vietnam government's credit tightening measures will support the bank's capitalization in a challenging operating environment. We expect that the bank will maintain sensible dividend payouts.

We believe that Vietinbank will benefit from the acquisition in terms of technical support, mutual cooperation, and opportunities for business partnerships with all the BTMU group companies. Nevertheless, the successful execution of this acquisition remains to be seen. Success hinges on the ability of the two entities to bridge the differences in risk culture and operating norms. BTMU will subscribe to 20% of Vietinbank's shares for Vietnamese dong 15.5 trillion through a private placement of equity.

Vietinbank's capital and earnings are "weak," in our view. Following the acquisition, we expect the bank's risk-adjusted capital ratio before diversification adjustments to improve to 3%-4% in the next 18-24 months from our initial projection of 2%-3%. We believe that margin pressure due to the prevailing low interest rates will constrain Vietinbank's earnings over the next 12 to 18 months. Potentially higher credit costs could also threaten the bank's profitability as the credit cycle unfolds, particularly given its fast loan growth in the past few years.

The long-term rating on Vietinbank is the same as the SACP. We believe that the bank has "high systemic importance" in Vietnam and assess the Vietnam government as "highly supportive." Nonetheless, we do not factor any extraordinary government support into the rating because the bank's SACP is already at the same level as the sovereign rating on Vietnam (BB-/Stable/B; axBB+/axB).

Outlook

The stable outlook reflects our expectation that Vietinbank will maintain its strong market position and its financial profile despite the difficult operating environment in Vietnam.

We could raise the ratings on Vietinbank if: (1) we upgrade the sovereign to 'BB'; and (2) we raise the bank's SACP to 'bb' following a sustained and substantial improvement in its asset quality, profitability, and capitalization.

We may lower the ratings if Vietinbank's nonperforming loans increase sharply, the company's operating performance is poor, or its capitalization weakens substantially.

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