State Bank of Vietnam
State Bank of VietnamReuters

A combination of macroeconomic stability and improved governance in Vietnam has prompted some credit differentiation among the country's banks, but they have to also improve the underwriting and capital generation capacities, Moody's has said.

The rating agency had upgraded six Vietnamese banks on 22 September.

Vietnam's GDP growth had risen to a four-year high of 6.19% in the third quarter of 2014, from 5.42% in the previous quarter. Manufacturing PMI in Vietnam increased to 51.70 in September from 50.30 in August, as per the latest data from the country.

"The recent positive rating actions on Vietnamese banks were primarily driven by the stabilisation in the operating environment in the country, which will support the recovery in their poor asset quality, provide stability to their deposit bases, and improve their business prospects," said Eugene Tarzimanov, a Moody's Vice-President.

"Additionally, some Vietnamese banks have also improved their governance standards and lowered their risk appetites, thereby improving their credit underwriting standards."

Moody's said some of the banks have made more adjustments than others in response to the adverse market conditions since 2011.

Problem assets reduced

These developments, when taken together with macroeconomic stabilisation, have reduced the incidence of new problem assets on their balance sheets, and also improved recovery prospects.

However, Moody's said the banks' credit profiles and ratings will improve only if underwriting standards and capital-generation capacities also improve significantly, and if the banks allocate more profits to provisioning and the writing off of problem assets.

Vietnam's economic growth has recovered somewhat from the trough reached in 2012, and the country has managed to stabilise inflation at historically low levels.

This achievement has allowed the State Bank of Vietnam to decrease its policy rates to promote economic growth. The central bank has cut the main refinancing rate to 6.5% by early this year from 15% in early 2012.

Moody's says that lower interest rates are positive for Vietnamese banks because they decrease the debt burden of their borrowers and lead to some improvements in the real estate market.

Supportive macroeconomic conditions, including stable inflation and exchange rates, and weak loan demand have improved the liquidity for the entire banking system of Vietnam.

"As deposit growth outpaced loan growth, the system's loans to deposits ratio improved to 82% in June 2014, from 87% in June 2013," Moody's said.

Moody's rates nine banks in Vietnam, including two government-controlled banks and seven privately-owned joint-stock banks.