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The upgrade of Vietcombank's VR is driven by Fitch’s assessment that Vietnam's banking system operating environment (OE) factor score has returned to a pre-pandemic level of 'bb-', as business conditions have been substantially less severe.

Fitch Upgrades Vietcombank's Viability Rating to 'b+'; Affirms IDR at 'BB-'; Outlook Positive

Fitch Ratings has upgraded Joint Stock Commercial Bank For Foreign Trade of Vietnam's (Vietcombank) Viability Rating (VR) to 'b+' from 'b' and affirmed the Long-Term Issuer Default Rating (IDR) at 'BB-'. The Outlook on the IDR is Positive, in line with Vietnam's sovereign rating of 'BB' with Positive Outlook.

Fitch is withdrawing Vietcombank's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of our updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, Fitch has assigned Vietcombank a Government Support Rating (GSR) of 'bb-'. A full list of rating actions is at the end of this commentary.

The upgrade of Vietcombank's VR is driven by Fitch’s assessment that Vietnam's banking system operating environment (OE) factor score has returned to a pre-pandemic level of 'bb-', as business conditions have been substantially less severe than Fitch had expected at the onset of the Covid-19 pandemic in April 2020. Vietnam's economy underwent notable deceleration in 2020 and 2021, but Fitch believes its medium-term fundamentals remain intact and growth prospects remain strong. A higher OE score, combined with the bank's steady financial performance amid supportive business conditions, has thus led to an upward revision of its financial profile scores as well as the VR.

This is the second upgrade of Vietcombank's VR, after the last one in February 2018, as the bank's standalone credit profile has improved over the years.

Vietcombank's Long-Term IDR is driven by our expectations of a moderate probability of support from the sovereign, if necessary, mainly because of uncertainties about Vietnam's ability to prevent the default of banks' senior obligations given the large size of Vietnam's banking sector relative to GDP. Fitch rated the IDR and GSR at one notch below the sovereign rating to reflect Vietcombank's high systemic importance, with 9%-10% share of system deposits and loans, and the State Bank of Vietnam's ownership of 75% of its shares.

The Outlook on the IDR mirrors the Outlook on the sovereign rating as it reflects Fitch's view of the sovereign's improving ability to provide extraordinary support.

Fitch affirmed the Short-Term IDR at 'B', which corresponds with the 'BB' category Long-Term IDR, consistent with Fitch's Bank Rating Criteria.

The upgrade of the OE to a higher rating category has led us to reassess the other key rating drivers and the VR more positively, as financial profile scores are significantly influenced by a bank's OE category score under Fitch's Bank Rating Criteria.

Fitch believes improving economic prospects in Vietnam have reduced downside risks on Vietcombank's asset quality, with positive effects on its profitability. Recent improvements in the bank's risk management and controls framework have also enhanced its risk profile. The upward revision of these key rating drivers has, collectively, prompted us to upgrade the VR. Vietcombank's standalone credit profile continues to be anchored by its strong market position within the domestic banking system and steady profitability, which is offset by a capitalisation level that is low relative to prevailing risks in the operating environment.

Vietcombank's non-performing loan (NPL) ratio rose to 1.2% by end-September 2021 (end-2020: 0.6%), as a 6.2% contraction in GDP in 3Q21 and lockdowns across large parts of the country drove an increase in loan impairments. Fitch believes the NPL ratio would have been higher if not for regulatory forbearance that permitted banks to restructure loans affected by Covid-19 without downgrading them. Nevertheless, Fitch expects the NPL ratio to remain steady by end-2022, and total loans under stress - which includes restructured loans and "special-mention" loans - to remain manageable.

Vietcombank has buttressed its credit allowances over the course of the pandemic, with loan loss coverage at 243% by end-September 2021 (end-2019: 191%), to accommodate additional write-offs and buffer against the expected increase in NPLs. The pre-emptive credit provisioning is partly driven by the central bank's Circular No. 03/2021, but the bank also booked provisions significantly above the minimum amounts stipulated by the regulator for end-2021. Fitch believes Vietcombank's more conservative positioning against potential adverse scenarios reflects a more balanced appetite for risks, even as it continues to pursue rapid loan growth. Qualitative improvements in the bank's risk controls and underwriting, as well as higher financial buffers against unrealised risks, led us to raise the bank's risk-profile and asset-quality scores to 'b+' from 'b'. The outlooks on the scores are stable.

Robust loan growth of 19% yoy, a higher net interest margin and a healthy increase in fee revenue drove operating income 22% higher in 9M21. Loan impairment charges were higher, but credit costs as a proportion of loans was steady at 1.2% during the period compared with 1.2% in 2020. Fitch believes Vietcombank's revenue outlook remains healthy, as it is poised to expand its loan book at a similarly fast pace in 2022 amid a stable net interest margin and a ramp up in economic activities. Credit costs should decline in view of the advance allowances already booked, which should drive continued modest improvement in its profitability next year. Fitch revised its earnings and profitability score to 'bb-' from 'b+', with a stable outlook.

Capitalisation, as measured by the Fitch Core Capital ratio, improved to 8.8% by end-September 2021, from 8.2% at end-2020. This is likely to be augmented by a private placement exercise that the bank targets to complete in 2022, which Fitch estimates will improve the bank's capital ratio by about 1.3pp. Stronger profitability should continue to buoy the bank's capitalisation and narrow its gap against private-sector peers, but improvements are likely to be gradual as retained earnings are largely consumed by rapid balance-sheet growth. Fitch has revised the capitalisation and leverage score to 'b+' from 'b', in line with the higher OE score. The outlook is stable.

Vietcombank's funding and liquidity profile remained steady amid ample liquidity in the domestic banking system. Its loan/deposit ratio rose slightly to 84% by end-September 2021 (end-2020: 81%) and its current and savings account deposits as a ratio of total deposits ticked up to 34% from 33%. The funding and liquidity score remains at 'bb-' with a stable outlook.

Diep Nguyen