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Fitch Ratings has downgraded Home Credit Vietnam Finance Company Limited's (HCV) Long-Term Issuer Default Rating (IDR) to 'B', from 'B+'. The Outlook is Negative.

Fitch Downgrades Home Credit Vietnam to 'B'; Outlook Negative
The downgrade reflects the probable pressure the coronavirus pandemic will place on HCV's credit profile, as well as rising challenges to the finance company's business model and profitability as a result of increased industry competition and new regulations finalised in late 2019.
Vietnam's open economy is exposed to a global demand slowdown as a result of the coronavirus. GDP growth had already slowed to a seven-year low of 3.8% in 1Q20, from 7.0% in 4Q19. Fitch expects GDP growth to remain muted, with the assumption that the economy starts to recover in the latter half of 2020. However, our GDP forecasts remain subject to downside risk.
Fitch views Vietnam's unsecured consumer finance companies as being at risk of asset quality deterioration in the current environment, as they are typically exposed to less affluent borrowers with more limited resilience against financial distress. The slowdown will weigh on consumer spending and consumer loan growth, affecting volume and profitability.
HCV's IDRs are driven by its Standalone Credit Profile, and reflect its franchise strengths and business risks as one of Vietnam's leading consumer finance companies. Its management team, strategy setting, operations and risk management capability benefit from a close alignment with that of the Dutch-based Home Credit group. However, the Vietnamese market is less developed - with evolving regulations - while also becoming increasingly competitive. This will challenge the company's strategic execution from time to time.
Vietnam's consumer finance market has seen a number of new entrants in the last few years, and we expect rising market competition to continue to exert pressure on sector profitability. Business models are also likely to undergo meaningful change in light of the State Bank of Vietnam's (SBV) incoming limit on unsecured cash loans - a significant and high-margin lending segment for Vietnam's consumer finance industry - although a transition period over the next four years provides a reasonable amount of time for businesses to adjust; see Vietnam's New Consumer Finance Curbs to Challenge Business Models at www.fitchratings.com/site/pr/10109823
Profitability has been a strength of HCV's rating profile, but is likely to be dampened by sector headwinds in the near to medium term. A shift towards better-quality borrower-risk grades and digital channels may improve credit costs and operating efficiency in the longer run, but in the near-term Fitch expects the pandemic-related slowdown to weigh on volume growth, raise provisioning expenses and add to the existing structural drag on profitability.
Fitch expects asset quality risk to rise as the economic slowdown continues. The key risk to HCV's consumer-focused portfolio will be if recent manufacturing and business shutdowns are prolonged and become more widespread, leading to a loss of borrower income. HCV's loans are all unsecured; credit costs have been high and will come under greater pressure in the current environment. An SBV directive to provide some forbearance to borrowers affected by the coronavirus may also crimp loan collections, depending on its implementation.
Fitch believes impairment costs could spike in a credit crunch, leaving HCV at risk of capital impairment if severe. Leverage, as indicated by a debt/tangible equity ratio of around 3.8x at end-June 2019, would deteriorate in such a scenario, pressuring regulatory capital buffers. HCV's total capital adequacy ratio of 18.5% at end-1H19 compared well against the regulatory minimum of 9% under SBV regulations. 
Fitch believes the higher-risk nature of the company's loan portfolio implies the need for larger capital loss-absorption buffers relative to lenders with more stable, well-secured loan profiles. This is balanced against our view that the company's full ownership by the Home Credit group would support access to capital, if needed.
HCV's funding profile demonstrates acceptable funding market access and its liquidity profile appears well-matched. However, the company's balance sheet is wholesale funded, which renders it susceptible to any weakening in market confidence. Funding markets in Vietnam are less developed than in higher-rated jurisdictions, and funding conditions may be less predictable in times of market stress. HCV's profile as a subsidiary within the Home Credit group strengthens its ability to access international funding, but this advantage may not hold in times of heightened risk aversion.

DIEP NGUYEN