Hanoi (VNS/VNA) - The profitability ofVietnamese banks is strengthening as robust economic growth fuels credit demandand supports an improvement in asset quality, but challenges are also apparent, Moody’sInvestors Service said in a recent report.

"Credit growth is outpacing internalcapital generation, weighing on capital ratios, and the State-owned banks –unlike their private-sector counterparts – have been slow in raising externalcapital even as their capital ratios slide," said Rebaca Tan, a Moody’sanalyst.

"Against such a backdrop, a continueddeterioration of capitalisation will weaken the competitiveness of theState-owned banks and ultimately their credit profiles," said Tan.

Under the report ‘Banks – Vietnam: Deterioratingcapitalisation will weaken state-owned lenders’ credit profiles’, Moody’s saidthat the average return on tangible assets (ROTA) at the rated Vietnamese banksrose to 0.97 percent in 2017 from 0.70 percent in 2016, while theirasset-weighted average ratio of problem loans declined to 4.7 percent at theend of 2017 from 5.9 percent a year earlier.

Looking ahead, Moody’s expects profitability andasset quality metrics to further improve in 2018-19, although rapid loan growth– at 21 percent in 2017 – could mask asset risks.

Specifically, the banks have increased theirlending to retail and small- and medium-sized enterprises (SMEs), a positivetrend for their margins due to the relatively high rates for such loans. At thesame time, the shift away from lending to State-owned enterprises (SOEs) ispositive because many SOEs remain in poor financial health.

“However, internal capital generation will beinsufficient to cover this rapid pace of loan growth, and the rated Vietnamesebanks will need an additional 7-9 billion USD in capital to achieve Tier 1capital ratios of 11 percent in 2018 and 2019, while sustaining current loangrowth rates,” Moody’s said.

Without external capital, Moody’s estimated thatthe Tier 1 capital ratio of the rated private sector banks will drop to 8.0 percentby the end of 2019 from 9.4 percent at the end of 2017, while that of the ratedState-owned banks will drop to 6.1 percent from 6.9 percent over the sameperiod.

These concerns are somewhat mitigated for theprivate sector banks, which have been actively raising equity capital from themarket through a series of successful new share offerings since 2017 that havehelped increase capital ratios.

By contrast, state-owned banks have been slow inraising external capital even as their capital ratios slide – primarily becausethe government prefers strategic investors. Their asset-weighted average TCEratio declined to 6.89 percent at the end of 2017 from 6.92 percent a yearearlier, and could continue to weaken if the banks fail to raise capital.

With their larger capital buffers, the privatesector banks will be able to increase investments in business growth, whichwill lead to stronger profitability and internal capital generation.

Conversely, Moody’s views the state-owned banksas caught in a cycle, with capital shortfalls impeding growth, resulting incontinuously inferior internal capital generation and ultimately weakercompetitiveness. As a result, Moody’s expects their credit profiles will fallbehind those of private sector banks.-VNS/VNA