Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Military Commercial Joint Stock Bank (MB) at 'B+' and revised the Outlook to Negative from Stable to reflect ongoing pressures that the coronavirus pandemic is exerting on the bank's credit profile.

The pandemic has strained Vietnam's economy, with GDP growth slowing to a seven-year low of 3.8% in 1Q20 from 7.0% in 4Q19. Fitch expects Vietnam's GDP to grow by 3.3% in 2020 and 7.3% in 2021, which assumes that economic recovery will only begin in the later part of 2020. Vietnam's relatively open economy implies that downside risks to our base case forecast are high, especially if external demand continues to be weak and if sustained signs of virus containment remain elusive. Vietnam's high system leverage (bank credit to GDP ratio of 136% at end-2019, compared to 101% at end-2014) also leaves the country more vulnerable to severe stress in the system.

Consequently, we have downgraded Vietnam's banking system operating environment factor mid-point to 'b+'. This is in anticipation of increased credit stress in banks' loan portfolios and lower profitability due to narrower lending margins and higher credit provisions. Our expectations for deterioration in the banks' financial profiles are largely factored into their Viability Ratings, although there is downside risk in the event of economic stress as the shock can have lingering effects for banks' financial profiles. The outlook for the factor is maintained at stable as current base case expectations are for a reasonably strong recovery going into 2021.

KEY RATING DRIVERS

IDRS AND VR

MB's IDRs are driven by its standalone credit profile, as reflected in its VR. The bank has a growing franchise as well as profitability and capital ratios that are higher than those of domestic peers. However, capital buffers remain thin and we assess the bank to have a relatively high risk appetite, which would be exacerbated if it came under pressure to support weak borrowers. The current adverse business environment and significant uncertainty are putting significant pressure on the bank's asset quality and profitability factor scores.

We have lowered the bank's asset quality factor midpoint to 'b' with a negative outlook to account for higher credit risks amid the deteriorating economic environment . MB's rapid growth in retail lending and the unsecured consumer sector in recent years has increased its credit exposure to these segments and makes it more vulnerable to a spike in unemployment and lower consumer incomes.

Fitch also expects MB's profitability to weaken as a result of the authorities' drive to reduce lending rates, which would lead to margin compression, as well as from higher credit charges from soured loans. Therefore, core earnings will come under pressure even though the announced regulatory relief on debt classification will temper any increase in credit impairment and provisioning in the near term. As a result, we have maintained its earnings and profitability factor midpoint at 'b+', but changed the outlook to negative from stable.

We see limited risks of capital erosion under our base case of slower growth and continued profitability. This led us to affirm MB's capitalisation and leverage factor score at 'b' with a stable outlook. The bank's Fitch Core Capital ratio of 9.0% at end-2019 was higher than that of state-owned peers, but remains low relative to global standards. This gives the bank limited buffers to withstand more severe credit stress should the environment deteriorate more than we currently expect.

Fitch affirmed MB's factor midpoint for funding and liquidity at 'b+' with a stable outlook. We believe smaller private commercial banks like MB would be at a funding disadvantage against larger state-owned peers in times of market stress as depositors seek refuge in implicit state support. Lower deposits rates may also drive depositors to seek higher yielding financial assets. However, the bank's largely deposit-funded balance sheet and focus on retail banking offer it a degree of funding stability. Its loan-to-deposit ratio at end-2019 was also acceptable at 86%.

SUPPORT RATING AND SUPPORT RATING FLOOR

The bank's Support Rating of '5' and Support Rating Floor of 'B-' reflect Fitch's assessment that state support may be possible, if needed, but cannot be relied upon. This takes into account the bank's modest market share of about 3% of system assets, large banking system relative to GDP as well as the sovereign fiscal flexibility, as reflected in the sovereign's 'BB' rating.

ESG - Governance: MB has an ESG Relevance Score of 4 for Governance Structure. This reflects our view of a moderate risk stemming from its corporate governance framework, for example due to its low representation of independent directors on its board, which is a common trait of many Vietnamese banks. This has a negative impact on the rating in conjunction with other factors.

ESG - Financial Transparency: MB also has an ESG Relevance Score of 4 for Financial Transparency, incorporating our view that Vietnam banks' financial statement disclosures are generally lacking relative to other jurisdictions. This has a negative impact on the rating in conjunction with other factors.

RATING SENSITIVITIES

IDRS AND VR

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

MB's rating outlook could be revised to Stable should Vietnam's economy recover according to our base expectations, leading to key financial profile metrics, such as the impaired loan ratio and operating profit to risk-weighted assets ratio, returning to the pre-pandemic peak.

Its VR could be upgraded to 'bb-' and its Long-Term IDR to 'BB-' if Fitch upgrades our assessment of the operating environment to 'bb-', the bank's asset quality remains stable near current levels and its FCC ratio rises close to 12% on a sustained basis. In the current environment, we think this is a high bar to clear.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

MB's VR could be downgraded to 'b' and its Long-Term IDR to 'B' if deterioration in the economic environment exceeds our base case projection, leading to significantly weaker asset quality and profitability. In quantitative terms, we may downgrade the bank's ratings if its problem loan ratio were to rise closer to 5% (end-2019: 2.3%) or if its operating profit/risk-weighted assets ratio deteriorated below 1.25% (end-2019: 2.4%).

Higher concentration in higher-risk sectors, such as the unsecured consumer sector, would also put pressure MB's VR, especially if there is no commensurate improvement in capital buffers. However, unless there are government pressures to do so, a heightening of risk appetite in the current operating environment seems unlikely in our view.

SUPPORT RATING AND SUPPORT RATING FLOOR

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

MB's Support Rating is sensitive to perceived changes in the state's ability and propensity to support the bank. An increase in the state's ability to extend support, as may be reflected in an upgrade of the sovereign rating without system leverage increasing, may lead to an upgrade in the bank's Support Rating and Support Rating Floor.

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

We may assign a 'No Floor' on the bank's Support Rating Floor if we see evidence of deterioration in the state's ability or propensity to provide support.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG CONSIDERATIONS

MB has an ESG Relevance Score of 4 for Governance Structure. This reflects our view of a moderate risk stemming from its corporate governance framework, for example due to its low representation of independent directors on its board, which is a common trait of many Vietnamese banks. This has a negative impact on the rating in conjunction with other factors.

MB also has an ESG Relevance Score of 4 for Financial Transparency, incorporating our view that Vietnam banks' financial statement disclosures are generally lacking relative to other jurisdictions. This has a negative impact on the rating in conjunction with other factors.

Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

ENTITY/DEBT	RATING		PRIOR
Military Commercial Joint Stock Bank	LT IDR	B+ 	Affirmed		B+
ST IDR	B 	Affirmed		B
Viability	b+ 	Affirmed		b+
Support	5 	Affirmed		5
Support Floor	B- 	Affirmed		B-

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

(C) 2020 Electronic News Publishing, source ENP Newswire