Moody’s responds favourably to Circular 06

08.06.2016

On May 27 the central bank issued Circular No. 06, aimed at tightening its regulations on asset-liability management and real estate loans.

“The new rules, while milder than those proposed in February, are credit positive for Vietnamese banks,” Moody’s analysts wrote in a June 2 report, “as they will support liquidity and limit the banks’ exposure to the higher-risk real estate sector.”

Circular No. 06, replacing Circular No. 36, contains some major changes, among which is the central bank’s approval of banks using a maximum ratio of 50 per cent of short-term funding used for loans longer than 12 months by the end of 2016, from 60 per cent currently.

This ratio will be then by reduced to 40 per cent by the end of 2017.

This transition period, according to Moody’s, gives banks time to adjust to the new rule and is longer than that initially proposed in February, which suggested that the maximum ratio be lowered to 40 per cent by the end of this year.

As a result, Moody’s analysts believe, banks with a sizable share of longer-dated loans will have to slow their credit growth or shift their focus to shorter-term loans, which will benefit their liquidity.Alternatively, “the banks can attract longer-term funding to finance longer-term loans, but success in such an endeavor is unlikely because of higher funding costs and intense competition for deposits,” the report stated.

Moody’s also pointed out that among ratios of short-term funding used for loans longer than 12 months, VPBank has the highest, of 43 per cent, followed by VIBank with 40 per cent.

“This suggests that these banks have weaker maturity matching of their assets and liabilities than their peers,” Moody’s wrote.

Vietnamese banks: Ratio of short-term funding used for loans longer than 12 months

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Source: Moody’s Investors Services and the banks, June 2016

The short-term funding ratio for loans longer than 12 months for State-owned banks and joint stock commercial banks were 34 per cent and 36 per cent, respectively, as at the end of March, according to the SBV.Circular No. 06 also raises the risk weights for real estate loans to 200 per cent by end of 2016 from 150 per cent currently, an increase that is lower than the 250 per cent suggested in the February proposal.

“The increased risk weight is credit positive for the banks, as it will help limit their appetite for lending to this high-risk sector, given their already weak capital ratios,” Moody’s commented.

But it warned that the Vietnamese banks most affected by the higher risk weightings are VPB and SHB, due to their sizeable exposures to the real estate sector.

“Their already weak capital ratios reflecting both higher credit costs and rebound in credit growth mean the new guidelines will exert additional pressure,” its analysts noted.

“These banks will have to either lower their exposure to the real estate sector or significantly slow their credit expansion.”

The short-term funding ratio for loans longer than 12 months for State-owned banks and joint stock commercial banks were 34 per cent and 36 per cent, respectively, as at the end of March, according to the SBV.

Circular No. 06 also raises the risk weights for real estate loans to 200 per cent by end of 2016 from 150 per cent currently, an increase that is lower than the 250 per cent suggested in the February proposal.

“The increased risk weight is credit positive for the banks, as it will help limit their appetite for lending to this high-risk sector, given their already weak capital ratios,” Moody’s commented.

But it warned that the Vietnamese banks most affected by the higher risk weightings are VPB and SHB, due to their sizeable exposures to the real estate sector.

“Their already weak capital ratios reflecting both higher credit costs and rebound in credit growth mean the new guidelines will exert additional pressure,” its analysts noted.

“These banks will have to either lower their exposure to the real estate sector or significantly slow their credit expansion.”

Increase in real estate risk weights will negatively impact rated banks TCE % RWA

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Source: Moody’s Investors Services and the banks, June 2016

Source: Vietnam.net

Photo: CBR Investment AG