Fitch Ratings has revised the Outlook on Vietnam Joint Stock Commercial Bank for Industry and Trade (Vietinbank) to Stable from Positive and affirmed its Long-Term Issuer Default Rating at 'BB-'.
The Outlook revision follows the revision in the sovereign rating Outlook on 8 April 2020, which reflects the impact of the escalating coronavirus pandemic on Vietnam's economy. For more details on the sovereign rating action, please see 'Fitch Revises Outlook on Vietnam to Stable; Affirms at 'BB' at http://www.fitchratings.com/site/pr/10117510. At the same time, Fitch has downgraded Vietinbank's Viability Rating (VR) to 'b-' from 'b'.
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 at 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 risks to our base-case forecast are high, especially if external demand continues to be weak and sustained signs of virus containment remain elusive. Vietnam's high system leverage, with the bank credit-to-GDP ratio rising to 136% by end-2019 from 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+' from 'bb-'. 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 bank financial profiles are largely factored into their VRs, although risks may intensify in the event of economic stress and the shock can have lingering effects for banks' financial profiles. The outlook for our operating environment assessment is maintained at stable as current base-case expectations are for a reasonably strong economic recovery going into 2021.
KEY RATING DRIVERS
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
The revision in the Outlook of Vietinbank's IDR is in line with the revision in the sovereign rating Outlook, which takes into account the potential economic fallout from the coronavirus pandemic. Vietinbank's IDRs are driven by our expectation of state support, taking into consideration its high systemic importance, quasi-policy roles and majority state ownership of about 65%.
The IDRs and Support Rating Floor are one notch below the sovereign rating as we believe that the large size of the banking industry relative to GDP and the government's improving but still limited resources may hamper the timeliness of support.
VR
Fitch downgraded Vietinbank's VR as we believe its standalone credit metrics are likely to be considerably weaker than our previous expectations, and that of its peers, over the next 12-18 months. This takes into account its weaker starting fundamentals relative to its domestic peers, reflected in its higher problem-loan ratio, thinner capital buffers and modest profitability, which face further pressure amid the challenging operating environment.
We have lowered the bank's asset quality score to 'b-' from 'b' and assigned a negative outlook on the score to reflect the deteriorating economic conditions and its relative weakness against its similarly rated peers. Fitch expects Vietinbank's asset quality to come under pressure amid the slowdown in the economy. Vietinbank's problem-loan ratio, which includes special-mention loans and Vietnam Asset Management Company bonds, of 3.1% at end-2019 was already the highest among Fitch-rated Vietnam banks. We expect the bank to face greater pressures than its peers due to its higher exposure to the combined SME and retail household business loan sectors, and the wholesale retail segment, notwithstanding regulatory reliefs on debt classification.
Fitch has also assigned a negative outlook on Vietinbank's earnings and profitability mid-point score. The deteriorating operating environment is likely to result in higher credit costs, adding pressure to the bank's already weak profitability. This is in addition to heightened pressure on its revenue in light of the slower credit growth and narrower margins from lower interest rates.
We have also assigned a negative outlook on the bank's capitalisation and leverage mid-point score on the back of the potentially higher capital impairment risk as a result of the worsening asset quality. Vietinbank is the only Fitch-rated Vietnam bank that has yet to comply with Basel II requirements, and we expect the bank to face greater difficulty in complying with them on the back of the weaker growth and profitability prospects. Its thin capitalisation, reflected in its pre-Basel II Fitch Core Capital (FCC) ratio of 7.7% at end-2019, also offers the bank limited room to withstand severe credit stresses.
Fitch has not seen material signs of stress in the domestic liquidity environment, and we believe that Vietinbank would likely benefit from a flight-to-quality scenario given its state linkages and entrenched domestic franchise. Vietinbank's loan-to-deposit ratio of 105% at end-2019 was higher than the Fitch-rated average, but customer deposits accounted for around 79% of its funding, offering a degree of funding stability.
ESG - Governance: Vietinbank has an ESG Relevance Score of 4 for Governance Structure. This reflects our view of a moderate risk of government influence that negatively affects its standalone credit profile, in light of the state's controlling stake.
ESG - Financial Transparency: Vietinbank 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.
RATING SENSITIVITIES
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Vietinbank's Long-Term IDRs and Support Rating are sensitive to perceived movements in the state's ability and propensity to support the bank. An upgrade in the sovereign rating without an increase in system leverage is likely to lead to an upgrade in the bank's IDRs.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Conversely, a downgrade in the sovereign rating would likely lead to a similar downgrade on the bank's IDRs. We may also take negative rating action on its IDRs if we see evidence of lower state propensity to support, such as if the state loses its controlling stake in the bank, though we believe such a scenario is unlikely to occur in the near term.
VR
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Vietinbank's VR could be upgraded to 'b' if it significantly raises its capital levels on a sustainable basis, reflected in the FCC ratio rising closer to 12% under local Basel II requirements, and its operating profitability/risk-weighted asset ratio is in excess of 1.25% over a longer period. This assumes that we see similar improvements in its asset quality and the operating environment, with Fitch upgrading our assessment to the 'bb' category. Upgrade prospects, however, are unlikely in the near term amid the deteriorating operating environment.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Vietinbank's VR could be downgraded to 'ccc+' if the deterioration in the operating environment exceeds our base-case expectation, leading to a problem-loan ratio that is in excess of 5%. Under such a scenario, the bank is likely to face higher capital impairment risks, exacerbating the capital shortfall needed to meet Basel II requirements.
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
Vietinbank has an ESG Relevance Score of 4 for Governance Structure. This reflects our view of a moderate risk of government influence that negatively affects its standalone credit profile, in light of the state's controlling stake.
Vietinbank 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.
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
Vietnam Joint Stock Commercial Bank for Industry and Trade LT IDR BB- Affirmed BB-
ST IDR B Affirmed B
Viability b- Downgrade b
Support 3 Affirmed 3
Support Floor BB- Affirmed BB-
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
VIETNAMCOMMERCIAL BANK FOR INDUSTRY AND TRADE 
