Fitch Ratings: Vietnam bank consolidation is much needed positive step

CA - Fitch Ratings views yesterday’s announcement by the Vietnamese authorities of a State-supported merger of three small privately owned banks as a positive step towards strengthening the local banking system.

The three banks being merged are First Joint-Stock Commercial Bank, Tin Nghia Joint-Stock Commercial Bank and Saigon Joint-Stock Commercial Bank.

This should be seen in the context of the recently announced road map to restructure the banking system.

The fact that these banks are being merged as a result of liquidity problems does, however, highlight the pressures being faced by the banking system as a whole.

Macro policies such as the deposit interest rate ceiling to bring down persistently high inflation have partly contributed to these pressures. Banks, and in particular smaller institutions, have increasingly relied on short-term price-sensitive funding and other inter-bank funding to support growth, increasing the liquidity risks. This comes on top of the risks attached to rapid loan growth and asset quality issues already highlighted by Fitch, raising concerns at the adequacy of capitalisation.

Recent trends of raising new capital for some banks as well as consolidation and foreign banks’ participation should help strengthen their defense against an environment that is likely to remain volatile and challenging. However, the prospects for economic growth in Vietnam over the longer-term remain good.