Fitch Affirms 4 Vietnamese Banks' IDRs at 'B'

Fitch Affirms 4 Vietnamese Banks' IDRs at 'B'

Fitch Ratings has affirmed four Vietnamese banks' Long-Term Issuer Default Ratings (IDRs) at 'B'. The Outlook is Stable for Vietnam Bank for Agriculture and Rural Development (Agribank), Vietnam Joint-Stock Commercial Bank for Industry and Trade (Vietinbank) and Saigon Thuong Tin Commercial Joint Stock Bank (Sacombank) while Asia Commercial Bank's (ACB) Outlook is Negative.

The agency has also affirmed Vietinbank's outstanding senior notes due 2017 at Long-Term 'B' and a Recovery Rating of 'RR4'. A full list of rating actions is provided at the end of this rating action commentary. The rating actions have been taken in conjunction with Fitch's periodic review on Vietnamese banks.

Key Rating Drivers - IDRs, Senior Debt, Support Ratings and Support Rating Floors of Agribank and Vietinbank

The Long-Term IDRs, Support Ratings and Support Rating Floors of Agribank and Vietinbank reflect Fitch's expectation of likely state support as both banks are among those most systemically important to the domestic economy. Nonetheless, timeliness of extraordinary support from the government may be limited by its own finances, as reflected in the 'B+' sovereign rating.

Vietinbank's senior notes are rated at the same level as its Long-Term IDR. This is because the notes constitute direct, unsubordinated and senior unsecured obligations of the bank, and rank equally with all its other unsecured and unsubordinated obligations. In line with Fitch's criteria, Recovery Ratings are assigned to entities with an IDR of 'B+' or below.

Key Rating Drivers - IDRs and VRs of ACB and Sacombank

The Long-Term IDRs and Viability Ratings (VRs) of ACB and Sacombank reflect their reasonable standalone credit profiles and risk appetites, including to state-owned entities, but are constrained by ongoing challenges in the domestic operating environment, which have led to weaker asset quality and lower profitability indicators.

The Negative Outlook on ACB reflects a further potential impairment burden on its financial profile from exposure to six companies where Nguyen Duc Kien was either Chairman or a Member of the Board of Management, with one of the companies reportedly under external investigation following Mr Kien's arrest in August 2012. The unreserved amount, equalling a high 54% of the bank's core equity, is reportedly covered by collateral and classified in the special mention category. Mr Kien is one of ACB's shareholders. Losses may also arise from ACB's deposit placements at Vietinbank (another 6% of core equity), the outcome of which is pending legal proceedings.

The Stable Outlook on Sacombank incorporates its lower reported exposure to companies related to the former chairman, to 7% of core equity from an initial 21%. Residual bond and investment exposures to its former securities subsidiary fell to a reported 5% of core equity, after setting aside more provisions over 2011-2012.

Rating Sensitivities - IDRs and Senior Debt

Changes to the Support Ratings and Support Rating Floors of Agribank and Vietinbank would affect the banks' IDRs (see section on Rating Sensitivities - Support Ratings and Support Rating Floors for more details). Changes in the banks' VRs, however, would not impact the IDRs given that the VRs are lower than the Support Rating Floors. Vietinbank's senior debt will be impacted by changes to the bank's IDR.

On the other hand, because the IDRs of ACB and Sacombank are driven by their VRs, changes to the banks' VRs would impact their IDRs.

Rating Sensitivities - Support Ratings and Support Rating Floors

The Support Ratings and Support Rating Floors are sensitive to shifts in the sovereign's own creditworthiness and ratings, which at present have a Stable Outlook.

These ratings may be hurt by any perceived weakening in the government's propensity to support the banks, although such probability is lower for the systemically important state-owned banks, including Agribank and Vietinbank. In contrast, the '5' Support Rating of and 'No Floor' Support Ratings of ACB and Sacombank, reflecting Fitch's view that state support cannot be relied upon, are already at the lowest end of the rating scale.

Rating Sensitivities - VRs

A heightened threat of impairment and reduced loss-absorption buffers, especially in a protracted slowdown, may hurt the banks' VRs in Vietnam. However, improved capital and liquidity buffers at many of the major Vietnamese banks in recent years may mitigate such downside rating risks in the near term. Negative rating actions may also result from event risks, such as hostile takeovers or significant management changes that prove to be disruptive to the banks' businesses and financial profiles.

On the other hand, a less volatile operating environment, meaningful progress in banking reforms (including transparency and bad debt resolution) and reduced asset quality risks which lead to sustainable improvements in the banks' financial profiles, may be positive for the banks' VRs. Evidence that Agribank and Vietinbank are able to run their operations guided more by commercial motivations than by state-driven economic objectives may also be positive for their ratings, although such a prospect is unlikely in the near term.

Agribank's agricultural-oriented policy role is one of the reasons for its poor financial metrics.Earnings and capital remain vulnerable to impairment, and the bank's reported non-performing loans are among the highest of its domestic peers. Agribank has relied on periodic state capital injections to improve capital, as internal capital generation remains low.

Meanwhile, Vietinbank's state-linkage risks are manifested in its able exposure to state-owned entities, which Fitch believes could be a source of impairment under difficult operating conditions. The bank's reserve and earnings have moderated, but its improved core capital may support its loss-absorption buffer and avert downward rating pressure in the near term. The reported tier 1 CAR stood at 14%, up from 10% at end-2012, due to fresh capital injection from Bank of Tokyo-Mitsubishi through a 20% stake purchase in May 2013.

ACB's Outlook may be revised to Stable or its ratings may be downgraded, depending on Fitch's view on the probability of impairment risks arising from its exposure to companies related to Mr Kien - which may become clearer over a longer period - as well as on the operating environment.

The rating actions are as follows:

Agribank

- Long-Term IDR affirmed at 'B'; Outlook Stable

- Short-Term IDR affirmed at 'B'

- Viability Rating affirmed at 'ccc'

- Support Rating Floor affirmed at 'B'

- Support Rating affirmed at '4'

Vietinbank

- Long-Term IDR affirmed at 'B'; Outlook Stable

- Short-Term IDR affirmed at 'B'

- Viability Rating affirmed at 'b-'

- Support Rating Floor affirmed at 'B'

- Support Rating affirmed at '4'

- USD250m 8% notes due 2017 affirmed at 'B'; Recovery Rating affirmed at 'RR4'

ACB

- Long-Term IDR affirmed at 'B'; Outlook Negative

- Short-Term IDR affirmed at 'B'

- Viability Rating affirmed at 'b'

- Support Rating Floor affirmed at 'No Floor'

- Support Rating affirmed at '5'

Sacombank

- Long-Term IDR affirmed at 'B'; Outlook Stable

- Short-Term IDR affirmed at 'B'

- Viability Rating affirmed at 'b'

- Support Rating Floor affirmed at 'No Floor'

- Support Rating affirmed at '5'

reuters