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Should we worry when banks’ credit ratings fall?   2010-09-08 - Tuoi tre

A lot of people are troubled by recent reports that Fitch Ratings lowered the credit rating of two big banks, state-owned Vietcombank and the nation’s largest private bank, Asia Commercial Bank (ACB).  A top Government economist says Fitch’s rating is of doubtful merit for many reasons.



Tuoi Tre newspaper asked Dr. Le Xuan Nghia, a deputy chairman of  the National Finance Supervision Council, his thoughts on Fitch’s move.


Fitch is one of the ‘big three’ firms that specialize in evaluating the financial stability of companies and governments, Nghia explained.  The other two well-known credit rating agencies are Moody’s and Standard and Poor’s.  Their information aims to serve investors. 


However, judged Nghia, the figures Fitch relies on for its assessments about Vietnam’s finance capability and commercial banks’ finance capability are not always accurate. The rating agency sometimes does not update information or uses out-of-date figures.


When assessing Vietnam’s economy before issuing a negative report in mid-August, Fitch relied on inaccurate figures about Vietnam’s sovereign debts.  The data Fitch used was much higher than the actual figures, Nghia explained.


Vietnam’s budget deficit in 2009, for example, was just 6.2 percent of GDP, and the Government aims to reduce the figure to below six percent. Similarly, the ratio of public debt to GDP in 2009 was 41.8 percent and the Government aims to cap the figure at no more than 45 percent of GDP.


Meanwhile, Fitch published a claim that Vietnam’s budget deficit climbed to 8.7 percent in 2009 and would stay high, 7.6 percent of GDP, in 2010.  Fitch also exaggerated Vietnam’s public debt ratio, saying it was already 45 percent of GDP in 2009.


Because Fitch has lowered the credit rating for Vietnam, it is hardly  a surprise that it has also lowered the credit ratings of Vietcombank and ACB, the nation’s  leading banks.  It is considered that the credit ratings of businesses cannot be higher than the ratings of the countries where they operate.


Nghia said that before the crisis, the National Finance Supervision Council rated ACB as Vietnam’s best joint stock bank.  He has seen nothing to change that judgment.


Banks operating in Vietnam are under instructions to meet a nine percent capital adequacy ratio stipulated by the State Bank.  Almost all must increase their capital in order to meet the requirements. ACB and Vietcombank, which have large capital holdings, also plan to increase capital in order to meet international standards.


Nghia explained that when Fitch lowered the credit ratings of Vietcombank and ACB, it cited ‘overly hot credit growth.’ In theory, when banks provide many loans, i.e., they increase credit too rapidly, they will have to face higher risks.


The average credit growth rate in 2008 and 2009 was 28 percent, which was not overly high for an economy that has been growing as rapidly as Vietnam’s. The pace of economic growth here depends particularly on the availability of bank loans, and only a little on capital raised in the stock market.


In fact, in the first quarters of 2010, credit growth was fairly low, the Government economist emphasized.  Credit has begun to expand strongly only recently, responding to a decline in lending interest rates.


In principle, Nghia explained, experts worry about the solidity of the banking system where the stock market is not well developed. However, the  ratio of outstanding loans to Vietnam’s GDP has not passed 105 percent. Compare that to a nearby country with similar political and economic structure, China, where the same index is over 160 percent.


“Fitch has its reasons to give such assessments of Vietnam’s economy and Vietnam’s banking system,” said Nghia.  “However, it has ignored some solidly positive factors.  In general, the economy has been growing well, with bright prospects.  The banking system has been stable.


“Credit agency rankings and assessments should be seen as reference, not as definitive.  They are one of the factors that investors consider as they evaluate long term economic prospects.  Foreign investors and foreign institutions all have affirmed that Vietnam’s economic prospects are very good. Many international investors are getting ready to return to Vietnam, making both direct and portfolio investments.”


A banking expert commented that in the global financial crisis of 2008, the institutions gave very high ratings to real estate securities, while the securities themselves were the main reason that led to the finance crisis.


A lot of companies and banks which then got high rankings have fallen into difficulties, while the companies and banks which were forecast to go bankrupt have become prosperous.


In 2008, many foreign investors, after hearing negative assessments from credit rating firms, dumped Government bonds at a heavy loss. Meanwhile, Vietnamese banks collected the bonds and made a fat profit

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