Fitch downgrades Vietnam’s Asia Commercial bank; off RWN

Fitch Ratings has today downgraded Vietnam’s Asia Commercial Bank’s (ACB) Individual Rating to ‘D/E’ from ‘D’ and removed it from Rating Watch Negative (RWN). Fitch has also affirmed ACB’s support rating at ’5′.

The downgrade reflects ACB’s substantially weakened balance sheet, given excessive strong loan growth. Fitch estimates that, by end-September 2010, ACB’s capital adequacy ratio (CAR) would be lower than the new regulatory minimum of 9% (with effect from 1 October 2010). ACB plans to raise equity capital of VND1.6trn (16% of equity at mid-2010) and issue subordinated bonds (VND3trn) by end-October 2010 to restore its capitalisation.

However, Fitch expects the bank’s capitalisation to be insufficient in maintaining strong loan growth for a higher market share, and to adequately cushion against potential high credit costs. Also, the timing and success of such capital raisings could be tested by strong demand from the entire system seeking additional capital. Furthermore, Fitch notes that ACB’s excessive strong loan growth would continue to pressure its liquidity and its underlying loan quality.

ACB maintained its excessive loan growth in H110 with a 42% yoy increase in loans. Fitch notes that the bank’s target for 2010 is 54%, which implies a likely acceleration in lending in H210, and that, if achieved, would equate to growth of 464% over 2006 to 2010). ACB is currently expanding credit much faster than its rated state-owned banks; its CAR under Vietnamese Accounting Standards (VAS) weakened substantially to 9% by mid-2010 (end-2008: 12.4%). This is despite the conversion of convertible bonds of VND1.3trn (13% of end-2009) by the bank’s single largest shareholder, Standard Chartered Bank, and all other bondholders/shareholders, and earnings retention through issue of dividend shares in 2009.

Exceptionally high growth of 125% in foreign currency loans by mid 2010 (34% of total loans) since end-2009 increased the vulnerability of the bank’s liquidity and loan quality to inflationary pressure and market confidence on the Vietnamese dong. Also, the bank’s excessively strong loan growth resulted in its loan-to-deposit ratio rising to 74% at mid-2010 (end- 2008: 54%), although it is still lower than its domestic peers.

ACB’s reported NPL ratio under VAS at mid-2010 was low at 0.37% (with 94% of special mention loans and below covered by reserves). Also, the bank has minimal exposure to property development projects and the troubled state-owned Vietnam Shipping Industry Group. However, Fitch considers ACB’s reported loan quality to be understated, given quite generous loan classification under VAS, continued excessive loan growth, and the interest subsidy program. Fitch expects provisioning charges to increase, given the inherently volatile environment the bank operates in, and subdued demand from the US and Europe.

The bank reported an annualised ROAA of 1.17% in H110 (2009: 1.61%), due to margin pressure and closure of its gold trading floor in February 2010. Fitch expects the bank’s profitability to remain under pressure in H210 and 2011, given high competition for deposits, likely increase in provisioning costs, and closure of the gold trading floor (the latter had contributed a sizeable amount of trading income to its profits).

Fitch may downgrade ACB’s Individual Rating if there is a material deterioration in capitalisation and its underlying loan quality. ACB’s rating could be upgraded if the bank is recapitalised well above the new regulatory minimum mainly through core capital on a sustainable basis, if its underlying loan quality substantially improves, and concerns on ACB’s vulnerability to inflationary pressure and market confidence on the dong substantially subside.

ACB is Vietnam’s largest private bank with about 5% system-wide assets at end-2009.-Fitch Ratings

Tags: Vietnam banking industry, Vietnam credit rating, Vietnam finance, Vietnam financial

Posted by VBN on Sep 1 2010. Filed under Banking-Finance. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry