In its latest report on Vietnamese banks titled ‘Banking System Outlook - Viet Nam: Economic growth and improving asset quality support stable outlook’, Moody’s says that strong economic growth in Viet Nam will support the banks’ operating environment.

"Economic growth in Viet Nam will remain robust, and the banks’ asset quality will improve, helping to strengthen their profitability," says Eugene Tarzimanov, Moody’s Vice President and Senior Credit Officer.

However, in the report, the rating agency also changed its 12-18 month outlook on the banking system in Viet Nam (Ba3 stable) to stable from positive.

According to Moody’s, the stable outlook is based on its assessment of six drivers: operating environment (stable); asset risk (improving), capital (stable); funding and liquidity (stable); profitability and efficiency (improving); and government support (stable).

Rebaca Tan, a Moody’s analyst, says that asset risks in Vietnamese banks are still evident after years of rapid credit growth, and negative spillovers from the escalating trade tensions between the US and China will see Viet Nam vulnerable to slower trade growth.

According to Moody’s, domestic credit growth will moderate to about 16 per cent in 2018 from 20 per cent in 2017, as the Government seeks to control inflation in the country to less than 4 per cent.

On asset quality, Moody’s says that Vietnamese banks will show improved asset quality over the next 12-18 months, because strong economic growth will translate into improvements in borrower repayment capabilities and enable the banks to accelerate the write-offs of legacy problem assets.

However, rapid credit growth in recent years can result in a deterioration of asset quality as new loans mature, although this situation is unlikely to occur during Moody’s outlook period of the next 12-18 months.

The banks’ capitalisation will prove broadly stable. A moderation in asset growth will ease pressure on the banks’ capitalisation, while internal capital generation will continue to improve, along with profitability at most rated banks.

Funding will stay stable as loan growth slows. In particular, Moody’s points out that the banks’ deposit growth has been strong, reducing their reliance on market-sensitive funding sources, such as interbank borrowings. As loan growth moderates to the pace of deposit expansion, the banks’ loan-to-deposit ratios will remain largely stable.

As for profitability, the banks will show better profitability because interest margins will continue to improve, as the banks boost loans in the higher-yielding retail and small and medium-sized enterprise segments. At the same time, credit costs will decline, as more banks resolve their legacy problem assets.

Moody’s says that the Vietnamese Government will continue to support the country’s banks when needed, mainly in the form of liquidity assistance and forbearance from the central bank.

Moody’s rates 16 banks in Viet Nam, which together accounted for 61 per cent of total banking system assets at the end of 2017.