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 Vietnam's banking system faces turbulent conditions

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lynk2510
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PostSubject: Vietnam's banking system faces turbulent conditions   Sat Apr 23, 2011 4:37 am

Vietnam's banking system faces turbulent conditions
Reuters 14 March 2011

Rising inflation, if not managed properly, may become the fly in the ointment for Vietnam's banks. Recent inflationary pressures, in conjunction with several years of high loan growth and rising borrowing costs, are threatening to undermine the credit quality of the country's banking industry. Although the banks were shielded from the banking crisis in advanced economies, Standard & Poor's Ratings Services believes that a combination of these three factors might result in a rapid deterioration in asset quality, if not properly managed. As mentioned in our reports on the three Vietnamese banks we rate-- Bank for Foreign Trade of Vietnam (Vietcombank; BB-/Negative/B), Bank for Investment and Development of Vietnam (BIDV; BB-/Negative/B), Vietnam Technological And Commercial Joint Stock Bank (BB-/Negative/B)--our ratings have factored in these and other heightened credit risks that could hurt asset quality.

Growing bank credit has increased the system's risks. We believe Vietnam's government is likely to lower the target for bank credit growth to 20% in 2011. In our opinion, however, the target is still too high, given our estimate of the country's bank credit to GDP of 120% as at Dec. 31, 2010, and the rudimentary nature of credit risk management systems and the country's still-evolving regulatory framework. Bank credit already grew about 28% in 2010, exceeding the government's target of 25%. In addition, Vietnam had several years of high credit growth, especially in 2007 and 2009, including loans to large state-owned borrowers, such as the shipbuilding industry group Vinashin.

Adding to the system's credit vulnerabilities, inflation in the country rose to above 12% year on year in January 2011 from 7.1% in 2009. The government's loosening monetary policy in the second half of 2010, to support economic growth, and rising global commodity prices were responsible for the soaring inflation. If inflation remains high, rising business costs will hinder borrowers' debt servicing ability. On the other hand, overzealous measures by the government in tackling inflation could have a destabilizing effect and undermine confidence in the banking system, like in 2008 when inflation hit a high of 28%.

Borrowing costs in Vietnam have risen sharply. Vietnamese dong (VND) lending rates have increased to 18% for a 12-month loan, from 12% one year ago. In contrast, U.S. dollar lending rates are notably lower at 6%. The wide differential has prompted many businesses to borrow in dollars. Such borrowers, especially those who generate revenues predominantly in dong, increase their exposure to foreign exchange risks. High inflation in Vietnam in the past few years has also weakened confidence in the dong. As a result, residents seek safer haven in gold and dollars. The central bank devalued the dong by 8.5% in February 2011, which is likely to further fuel inflationary pressure.
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