Bad debts could take its toll on Vietnam banks: S&P

These could erode banks' capitalization and profitability.

Increasing bad debts could significantly undermine the resilience of Vietnam's banking sector, according to a report, titled "There's No Easy Fix For Vietnamese Banks' Bad-Debt Woes," that Standard & Poor's Ratings Services has recently published.

According to a release from Standard & Poor's Ratings Services, the report states that Vietnamese banks are facing heightened asset quality risk as companies find it difficult to repay loans in a slowing economy, with some segments faring worse than others.

"Bad debts could erode Vietnamese banks' capitalization and profitability over the next 12-18 months," said Standard & Poor's credit analyst Ivan Tan.

"This is because banks' nonperforming loans continue to rise as local companies--the chief recipients of bank credit--suffer from slow sales, high inventory, and weak cash flows."

Here's more from Standard & Poor's Ratings Services:

It also notes that the government intends to adopt more stringent standards, clean up bad loans, and encourage consolidation to fulfill its vision of a transparent banking system dominated by a few strong banks. But few concrete steps have been taken to take this vision forward.

"We estimate that the banking sector's actual nonperforming loans are substantially higher than reported, due to a lack of consistent classification and reporting standards for banks," said Mr. Tan.

"In our view, the government has yet to deliver on its intent to strengthen the banking system through consolidation and cleaning up banks' balance sheets.

Nevertheless, we maintain our stable outlook on Vietnamese banks because our ratings already factor in asset quality risks and sluggish profitability."

The report acknowledges that while domestic statistics consistently underplay the likely scale of bad debts, the government's macroeconomic stabilization measures have begun to yield some results.

These measures reflect the government's policy choices, which emphasize stability and the need to address structural shortcomings in the banking sector in particular.