Fitch Ratings has revised the Outlook on Joint Stock Commercial Bank For Foreign Trade of Vietnam's (Vietcombank) Long-Term Issuer Default Rating (IDR) to Stable, from Positive, and has affirmed the rating at 'BB-'.
This follows the 8 April 2020 Outlook revision on Vietnam's sovereign IDR of 'BB' to Stable, from Positive, to reflect the impact of the escalating global pandemic on the domestic economy; see 'Fitch Revises Outlook on Vietnam to Stable; Affirms at 'BB', at fitchratings.com/site/pr/10117510
The pandemic has strained Vietnam's economy, with GDP growth slowing to a seven-year low of 3.8% in 1Q20, from 7.0% in 4Q19. Fitch expects Vietnam's GDP to expand at 3.3% in 2020 and 7.3% in 2021, assuming an economic recovery will begin in the later part of 2020. However, Vietnam's open economy increases downside risk to our base-case forecast, especially if external demand remains weak and virus containment appears elusive. Vietnam's high system leverage, with a bank credit/GDP ratio of 136% at end-2019 (2014: 101%), also leaves the country vulnerable to severe system stress.
Consequently, we have downgraded Vietnam's banking system operating environment factor mid-point to 'b+' in anticipation of increased credit stress in banks' loan portfolios and lower profitability due to narrower lending margins and higher credit provisions. Our expectations for deterioration in bank financial profiles are largely factored into the banks' Viability Ratings, albeit there is downside risk in the event of economic stress, as the shock can have lingering effects for banks' financial profiles. The outlook for our operating environment assessment remains stable, as our base-case expectations are for a strong economic recovery going into 2021.
KEY RATING DRIVERS
IDRs AND SUPPORT RATING FLOOR
Vietcombank's IDRs and Support Rating Floor are driven by Fitch's expectation of a moderate likelihood of state support for the bank, if required. This takes into account the bank's high systemic importance, quasi-policy function and the government's 75% stake in the bank. Vietcombank is one of Vietnam's four largest banks, with market share of about 10%-11% in system assets and deposits. The Outlook on Vietcombank's IDR was revised to Stable, in line with that of the sovereign.
The IDRs and Support Rating Floor are one notch below the sovereign rating, as we believe that the large size of the banking industry relative to GDP and the government's improving but still limited fiscal resources may hamper the timeliness of support.
VIABILITY RATING
Vietcombank's Viability Rating takes into account its established domestic franchise, which helps to support its generally stable funding and liquidity profile and improved profitability. These factors are offset by the bank's thin capitalisation and risks stemming from rapid credit growth in recent years. The ratings also consider the deteriorating economic outlook, which is exerting significant near-term pressure on the bank's asset quality and profitability.
Fitch has revised the bank's asset quality mid-point score to negative, from stable, reflecting uncertainty over the extent of the impact from the economic fallout to the bank's loan quality. The economic shock has extended beyond tourism and is exerting stronger pressure on the broader SME and retail sectors as private consumption plunges. These segments, along with residential mortgages, have been key drivers of loan growth for Vietcombank. The higher retail-loan composition has limited concentration risk to SOE borrowers in recent years, but makes the bank susceptible to rising unemployment and a correction in the property sector.
We have also revised the outlook on the bank's earnings and profitability mid-point score to negative. We see significant profitability headwinds stemming from slower credit growth, lower margins - given the State Bank of Vietnam's monetary easing and administrative guidance - and higher credit charges as loans turn sour. The rise in reported non-performing loans and credit costs would, however, be tempered by regulatory relief that allows banks to not classify restructured loans affected by the pandemic as non-performing for a prescribed time.
Fitch believes risks to capital impairment are limited under its base-case scenario; as a result, we maintain a stable outlook on the bank's capitalisation and leverage mid-point score. Nevertheless, Vietcombank's capitalisation is thin, as reflected in its Fitch Core Capital ratio of 8.2% at end-2019, and provides limited loss absorption buffers in the event that stress in the system becomes more pronounced.
Vietcombank's funding and liquidity profile is a rating strength. This takes into account the bank's largely deposit-funded balance sheet, which offers a degree of funding stability. The bank's loan/deposit ratio also remains satisfactory, at 79% at end-2019. We believe Vietcombank would benefit from depositors' flight to quality under a stress scenario, given its state linkages and established franchise.
ESG - Governance: Vietcombank has an ESG Relevance Score of 4 for Governance Structure. This reflects our view of a moderate risk of government influence that negatively affects its Standalone Credit Profile, in light of the state's controlling stake.
ESG - Financial Transparency: Vietcombank has an ESG Relevance Score of 4 for Financial Transparency, incorporating our view that Vietnam banks' financial statement disclosures are generally lacking relative to other jurisdictions.
RATING SENSITIVITIES
IDRS AND SUPPORT RATING FLOOR
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
The Long-Term IDR and Support Rating Floor are sensitive to perceived changes in the state's ability and propensity to support the bank. Evidence of a higher ability of state support, as may be reflected in upward revision in the sovereign rating without an increase in system leverage, would be positive for the ratings.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
A downgrade in the sovereign rating would be likely to lead to a similar downgrade on the bank's IDRs. Significantly reduced state ownership would also indicate a lower propensity to support the bank and negatively affect the bank's IDR, though we believe this is an unlikely scenario in the near term.
Viability Rating
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
The Viability Rating could be upgraded to 'b+' if the bank demonstrates a significant and sustained improvement in its capital buffers, with a Fitch Core Capital ratio that is closer to 12%. This assumes that we see improvements in the operating environment - with Fitch upgrading its assessment to the 'bb' category- and the bank's risk controls, while the bank maintains steady performance in its other financial metrics. However, near-term upgrade prospects are dim given the deteriorating economic conditions.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
The Viability Rating could be downgraded to 'b-' if the deterioration in operating environment is significant enough to weaken the bank's asset quality and profitability to levels that exceeds our base-case forecasts; that is, if the problem loan ratio rises to above 5% and operating profit/risk-weighted assets trends closer to 1.25% or lower. Such scenario could transpire from a protracted economic slowdown.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Vietcombank has an ESG Relevance Score of 4 for Governance Structure. This reflects our view of a moderate risk of government influence that negatively affects its Standalone Credit Profile, in light of the state's controlling stake.
Vietcombank has an ESG Relevance Score of 4 for Financial Transparency, incorporating our view that Vietnam banks' financial statement disclosures are generally lacking relative to other jurisdictions.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONS
ENTITY/DEBT RATING PRIOR
Joint Stock Commercial Bank For Foreign Trade of Vietnam LT IDR BB- Affirmed BB-
ST IDR B Affirmed B
Viability b Affirmed b
Support 3 Affirmed 3
Support Floor BB- Affirmed BB-
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
COMMERCIAL BANK FOR FOREIGN TRADE OF VIETNAM 
