Low capitalisation levels are likely to remain a credit weakness for rated Vietnamese banks, says Fitch Ratings, as rapid loan growth will make it challenging to raise capital adequacy ratios (CARs) in the next two to three years.
The capitalisation of Vietnam’s banking sector has improved gradually in recent years amid rising profitability and banks’ capital raising efforts. Fitch estimates that the banks that are still to become Basel II compliant need only about USD0.6 billion of new capital to meet the local Basel II minimum CAR requirement of 8% before the implementation deadline in January 2023.
However, Fitch calculates that the banking system's additional capital needs would rise to as much as USD10.7 billion (2.9% of GDP) if banks were to raise their loan-loss reserves to cover potential losses from all problem loans, while simultaneously maintaining average CARs at 10%. State banks drive much of the shortfall, due to their lower capital positions.
Fitch expects Vietnam’s capitalisation levels will remain thin. The average CAR of Basel II compliant state-owned and private sector banks stood at 9.2% and 11.4%, respectively, at end-3Q21. Thin capitalisation will partly reflect rapid credit growth, which we expect most Vietnamese banks to pursue in the medium-term, given their heightened risk appetites. Sustained high loan growth could eventually exacerbate asset-quality problems, especially in the event of a severe economic downturn.